going? >> i'm sorry. we don't analyze budget resolution as they are green and i don't remember what was in that resolution from a few years ago so i just can't speak directly to the. >> what did cbo estimate its effect at the time for you to go? >> way to estimate the effects of budget resolution. they are statements by -- >> to our spending and the reforms that were enacted in the budget were called for in the budget had actually come to pass, where would we be today? ..

deficits in the out years. i remember our health care costs coming back under control. i learned that the projections of the balanced budget within ten years which would be six years from now. do you have no recollection of those? >> payware that kennedy is projections. cbo doesn't do projections of resolutions only of bills that are being considered and under the current law. on the estimates we've done sometimes they are putting the assembly of them as the bottom line for the resolution that doesn't come from us. >> the last time we had a high

percentage was during world war ii. in fiscal year 1945 -- >> we grew out of that it be not? >> what happened after world war ii is the budgets were more or less balanced. >> in fiscal year 1945. truman abolished the tax and in fiscal year 194016 produced the income tax rates. he took in fiscal year 46 the federal spending from $85 billion down to $30 billion in a single year. he fired a 10 million federal employees in the deep mobilization and projected unemployment in the second great depression but instead we got the postwar economic boom; is

that correct? kennedy also slashed the tax rates and produced an economic boom and ronald reagan and clinton did the same thing with the same result. why wouldn't we want to do that now? >> if they were to cut tax rates right now that would produce a short-term economic activity but if there were not other changes made on the budgetary impact the death would be much larger. >> the president certainly ronald reagan and clinton and truman cut gdp as well as the tax rates. >> we have to be careful of comparisons looking at the fiscal state of the economy so part of what is happening now and happened in the 1980s was the economy recovered -- >> look at the percentage of gdp growth in new spending and debt relative to growth. >> we draw the network in what we do so for example, we wrote a

set of reports a year or two ago summarizing the evidence on the effect of changes and deeper income tax rate of people to work efforts and it's from that review that we draw the drove te parameters in the estimates in the literature. >> i'm pleased you are helping my friend from california remember you don't score resolutions and that was the committee's reservation. it would be interesting to see what they were but with access to that rapid deceleration. there was massive investments in infrastructure. the government under president eisenhower the interstate

highway system and i would like to come back to that in a moment but one thing that struck me you revised the life expectancy increase. that is the trust fund and we think that it will last about five years longer than we said in february and i think that is an illustration you make the point you do the best you can implementing based on new information. my colleague from maryland pointed out my friends are proposing in the neighborhood of $800 billion of unfunded tax benefits that are going to have the effect of substantially increasing the deficit. you didn't have that information available to you.

in the tax avoidance and compliance i noticed my friends in the republican slashed the tax enforcement for the irs. with that on balance would that increase or decrease the deficit over time if we can't enforce the tax law clerk to go? >> we have concluded that reductions in funding for enforcement would reduce revenues by more than the savings from cutting the number of people and if you devote more resources you would reap extra revenues that would outweigh the cost of the enforcement. >> so slashing the accounts receivable reduces the revenue and would increase the deficit.

>> the proposal in the past, i don't know this detail. >> i think the irony -- some see the hypocrisy of professing the concern about the long-term deficit while increasing it through tax policies and making it harder to collect the taxes that are due and by the way it is the middle-class person that's not going to be able to evade taxes its people with more complex forms, more money, more businesses, more that they can forget or whatever. but i would like to turn it around because i share my friend's concern about employment opportunities and growing the economy. at the beginning of the hearing i grew an economic report which i'm going to ask unanimous consent to put into the record from standard & poor's rating service that talks about the impact of infrastructure investment.

it says $1.3 billion investment in real terms in 2015 would likely add a 29,000 jobs. it would add $2 billion in economic growth and reduce the deficit in constant dollars or that year. i know you haven't examined this in detail and i didn't want to ambush you, but is this sort of finding consistent with what the cbo has done in the past in looking at the benefit of the infrastructure investment? >> when we looked at the activity on a number of occasions the past several years we've identified increases in infrastructure investment as something that would add to the activity and jobs in the short term and could also pay longer-term dividends in terms

of facilitating the flow of commerce. >> if the republican budget which has no federal projects in the next 15 months and a 30% reduction in federal infrastructure spending over the next ten years were enacted with the potentially depress economic growth. less infrastructure and investment would hold that economic growth in the long term that is one of the factors in the report but we haven't studied that resolution. >> only does this follow the baseline. >> thank you for joining us today. i would like to shift gears just a moment in the early part of my questions to talk about the cost estimate for hr 3230 having to do with the va health care issues that are facing the nation today.

in your estimate in a nutshell you said, the cbo said it would cost about $22 billion in fiscal 16 for hr 3230 and that if the bill was fully implemented it would be about $38 billion. the question that arises is the current cost today in the va for the younger release are about $37 billion how can we have a more than doubling cost when we just have a slight potential increase in the number of people we can use. so i beg the question with two parts and this is about hr 3230 and we will talk about the senate bill next so for those that are enrolled in the veterans health care how does the cbo estimate the bill would affect the utilization by veterans? >> the detail that we provided is for the bill passed by the senate that adopted a house member into the estimate says 30 to 30.

the key issue that surprised me is that for the veterans enrolled in va health care today they get only about one third of their care through the system. they get two thirds in other ways and with the legislation would do is enable the veterans who couldn't get into the facility to have the care they are getting the doctors outside of the va paid for and because the system has low copayments relative to the private health insurance there is a financial incentive for them to have more of the health care they are already getting to the doctor so we think there would be an increase in the share of health-care spending for the veterans enrolled it would go about one third of the care paid for in the va to having 55% paid for through the va.

they would start to get healthcare. >> but they are a smaller part. it's almost double. was it -- help me out here. we have empirical evidence that the difference in copayments with people into paying out of pocket versus others and there's a body of evidence about how people responded to the cost of health care in their decisions about where to get the care or pay for the care but i'm not aware of evidence directly about a change in the opportunity for the veterans enrolled in health care. this is a new approach and so

there is a great deal of uncertainty and i wouldn't pretend otherwise but there is basic evidence in general about how people respond to changing the cost of care. >> but it does sound like there is a substantial uncertainty because we don't really know and we don't have a fact pattern that we can rely upon historically. >> it is as close to the questions. >> what's the impact on the healthcare utilization by veterans who are eligible but not enrolled in the va health-care? >> we think that only a small percentage about 15 to 20% of those who are not enrolled in the health care would choose to enroll under the program eventually and we don't get the 15 or 20% and a couple of years the program is scheduled for. we are working to try to get the numbers up. it's hard for many of us to think that it's credible that the costs are going to double so

we are not really talking about a very big expansion in the population or the utilization. i have a question for the record running out of time. one of the things that came out earlier is the impact of immigration reform and i think you're language was increase the size of the labor force so since we are talking about the size of the labor force as it was said earlier in the conversation the labor force participation is in a long-term low and based on the analytic side seam, the difference between the labor force participation today and the labor force participation expressed a number of workers about 4.7 million workers i would like for you to answer the impact on gdp if we put those americans to work and if we have those policies into the impact n the deficit. thank you very much. i yield back.

>> mr. elmendorf how would your projections for the federal health-care spending change both from before the enactment of the affordable healthcare act and since it has been in play. >> as we've shown the report between the 2010 long-term projections and 2014 long-term projections, we reduced a projection of federal health-care spending as a share of gdp in 2039 by 1.5% and that is a substantial reduction relative to the 8%. i don't have a comparison of the long-term from before 2010. essentially the affordable care act raised certain kinds of federal health-care spending and paid for that by cutting some other kind of federal health-care spending. what happened since the point of

everyone has observed the federal health-care costs and in private health care costs as well and we and others have done a great deal of analysis to understand the sources and it's hard to know what's happening but we think it's been appropriate to substantially reduce the federal health-care spending in the next ten years by more than a trillion dollars and by quite a bit also in the more distant future. >> would you say the affordable healthcare act itself is part of the reason it's gone down because we had a recession? >> we don't think it's because the recession and the consensus view. the importance probably played a role. but there isn't a consensus around. the affordable care act did some specific things to slow health-care spending in some programs so it reduced the rate of payment updates and medicare that's typically holding down

medicare spending that as i see it also pushed up health-care spending by expanding eligibility for federal subsidies. so whether it is a matter for the national cost beyond these direct pieces, we don't know. >> and it does reduce the debt deficit clicks >> by our estimate, yes. >> how much wealth reductions in discretionary spending -- we are doing inappropriate process right now and lots of reductions in the spending. given the graphs and the sources of the deficit in the future, what a substantial role cutting the discretionary expenses will make -- especially given the graph on page 23. >> under the current law, the federal defense spending and federal non- defense discretionary spending will be smaller shares of the economy by any point at whic of which is ar

back as the report. and those cuts will depend on how the congress tries to meet those caps but the actual appropriations have been on a year by year basis. relative to the size of the economy we will be devoting a small share of resources to a large collection of federal services and if for example the federal investment stays the same share of non- defense discretionary spending which is about half the night with the following to the smaller share of gdp and that would slow economic growth to the infrastructure and education and development to contribute to economic growth and reduction. >> very good. >> your discussion on the aging of america a good point was raised by the ranking member

that we need to remember a lot of our problems and the social safety net programs which are very real are not the result of outlandish spending but various presidents over time. could you reiterate those figures and how much of the increases are a result of the aging, just a simple aging of the population? >> for social security and the major health-care programs the growth and spending is a share oas a shareof gdp over the nexts 55% will be the aging of the population. another quarter is due to faster growth healthcare cost per beneficiary into the remaining fifth in the expansion of the federal health-care programs. i would hope the committee next time might entertain an actual budget resolution that we would

make the wall so that we can hold ourselves and appropriators and authorize the committee to account that would help us substantially. >> i would encourage the gentleman to look at the bill that does that. >> thank you mr. chairman and mr. elmendorf. i haven't had an opportunity to go through the report entirely but i want to go to the line of questioning from a colleague from california having to do with comprehensive tax reform and i know that all the folks in this room knows the house passed budget proposed we would have a revenue neutral tax reform where the top rate on the businesses and individuals would be sent at 25% and most of the tax breaks and loopholes would be ended. this would follow the recommendations we have heard from economists and it would

follow the president's fiscal committee recommendations for defining the effective tax code that would have the loopholes and also the low marginal rate so in contrast what is the economic impact of the tax code with high marginal rates, complexity and distortions through the credits and preferences? >> as a general matter, congresswoman, moving from the current tax code to the tax code that has a broad base and low rate would strengthen the economy. how much would depend on the details of the reform. so as you know the devil is on the details but the general matter we share the opinion among analysts that the lower rate and a broad base would

encourage more work and savings and expand the economy relative to the current tax code. >> if the economy is expanded and begins to grow what would be the effect of the revenue on that? >> that would increase revenue relative to what would happen in the current gdp, and we offered when the joint committee deficit reduction we offered the macroeconomic effects that they were considering doing as part of their packaging to end up concluding with the package so there was no analysis to be done but we do an analysis every year to do that macroeconomic analysis we have almost completed our analysis and that takes on board the effect of

changes in the marginal tax rates that we can do that analysis to congress would bring to us. >> i see that shamefully and alsalso probably that i'm a memr of the ways and means committee that we do have a copy out there for people to look at that does just that and if we could get good conversation going bipartisan and the president would come on board i do think that we would see the change in the economy as he wen you and ae folks that have talked about this since. i don't have much time left but i am going to send a letter to ask you to give me ideas on this. what i would like to know is as you are giving all of these analysts us and especially on the aca could all of the changes that have been made -- and i

don't know if they are in this report i haven't read through it i would like to know the economic impact of the changes of the delay is there are not going to put penalties in place and what will that mean for the long-term as they would be sustained or short-term the difference on the collections that would take place on the changes that have occurred. i would like some information on that. >> we are happy to do what we can but the report didn't touch on that. the report takes the current projections and they always incorporate whatever has been done administratively if it might have changed the way it is implemented when it was first put into the law and that's true for all government programs

including the -- including the affordable care act. what we cannot do readily and we tried to explain this in the answers from the hearing on the senate side, we can't go back and see what effect the affordable care act would have because we have no baseline for that. what would be the effect of the law relative to one that doesn't have that law and it? we have the affordable care act in the baseline with medicare changes in the salon that are based on what is in that acts so we don't have a projection of the baseline that we can compare the affordable care act. the one exception to the statement is thathisstatement ie coverage provisions because those are really just getting started now the baseline for the last four years, so that peace turns out we do the baseline starts with the data that don't have those provisions and build the baseline.

for everything else the revenue provisions in the medicare provisions and medicaid provisions we have a baseline that includes all of those provisions as they are unfolding so we can't go back and do an analysis would affect those provisions would have to make sense. but i'm happy to provide information that would be helpful to you. >> thank you mr. chair and doctor elmendorf. several times this morning you and others in the discussion have said that you've got basically two options for addressing this long-term debt and deficit problem. one is reducing cost and the retirement and health savings programs and the other is increasing revenue through taxation but it does seem to me there is a third way we are not talking about enough today and that is growing the economy and

reducing the efficiency of the health care system central to some of those projections. and they need to exist but you continue to assume in your projections the healthcare cost will rise at a rate faster than the economy will grow, correct? >> that's right, congressman. i would suggest they would be crazy to allow that to address that and if we are able to get medicare the chance to negotiate for better prices it would get ahold of thahold of the rampantn medicare part d. if we continue payment reforms to make people healthier instead of reform more and more procedures there are all sorts of things we can and should be doing to address that side of the problem we can do that and bring healthcare cost increases below the rate. what does that do to your

projections? >> i think you're right there are important opportunities in those areas but obviously health care providers and insurers are pursuing to try to push the healthcare sector along. if you could find ways relative of the projection that would be good for the budget outlook and would reduce the need to make other sort of changes, but i would say that in medicare for example, the rate of the excess cost growth not saying that it's bad that this early but the healthcare costs exceed the growth in gdp the cost to medicare is very low over this coming decade because the changes the congress has already put in the law and that means pushing it down further would be harder than the progress made so far. >> even a little bit would translate. >> if you push it down a long

time that can make a big difference in the numbers and again it doesn't have to be a conversation only about slashing benefits it can be about making health care more efficient. >> it certainly can be whether you make enough progress to avoid the other conversation, we are very doubtful of that but every part helps. i don't mean to discourage the direction i'm just emphasizing the gap between spending and revenues in the current law is quite large and you need to make tremendous progress. it's not the tremendous improvement that can be made in the healthcare system. it are there provisions you can put in the law with colleagues that would accomplish those beyond what will already have been in the work of people in the healthcare system. >> you're surprised by the efficiencies we have already seen if we could rewind to 22008.

here you have dramatically reduced the projection for the cost due to the reforms we put in place if you assume we stand still and are standard your point but if you assume to continue down the road lowering the healthcare cost isn't it fair to say that we could see some similar upside improvement in the numbers? >> we have been surprised by the efficiencies as i said whether they are because of the affordable care act we and others don't know that we've been surprised if we could be again. that's why in the analysis we look explicitly at the scenario the healthcare costs grow much more slowly in medicare and medicaid. >> i want to ask you generally about the middle-class. as you know democrats are concerned about the loss of middle-class opportunities into the growing concentration of wealth and income disparity. what does this do for the next 25 years both if we don't address this and also if we do create middle-class opportunity

and address the wages and if you could in your naming time are there any assumptions about climate change in your projections and if not, why not? >> for any given level of gdp the distribution of income has budgetary effects so for example more income for high income people, decreases because they don't pay on the high incomes. income distribution matters for the cost of the federal benefit programs so the variety of the budgetary effects you're more interesteof your moreinterestedc issues and we have seen for a few decades now very pronounced widening of the income distribution and they incorporate over the next few

decades and i think that has consequences for the economy and society that we have not tried to quantify directly. on the climate change there's no specific affect the built-in to the projection for the next 25 years. >> try not to ask a long question with four seconds left to go because we have all these other members we are trying to get to. >> thank you mr. chairman and esther elmendorf for being here today. i want to call your attention to page three and also page 13 and beyond. the sections i'm calling your attention to address some degree the consequences on the path we are on referred to as unsustainable and i want to give you an opportunity to respond to my conclusion. i've only had a cursory review of the essay you have running

room to know that i am a businessman and i'm surprised and disappointed. i've been serving three and a half years in public service and in the business sector is much wrecks are quite well known. the bank can look at the liquidity ratio and entities and know where you are and to tell you if you are in a green or yellow or orange range and here it seems like you are struggling to articulate the real impact of our failure to address the fiscal situation. it does remind me just a little bit of the kind of lukewarm or the room temperature oatmeal. i don't think you're doing this intentionally but i don't think you're helping us connect the dots with going to happen on a practical level to the hard-working american family if we stay on this path and i'm

going to give you an opportunity to kind of unpack that. >> we tried to quantify the effects of the fiscal path we are on but overall gdp and on the income for each family on average. so in chapter six, and i recognize that as a long and complicated report, in chapter six we talk about the effect of the current path and alternative scenarios on the gnp per person, so the real income in 2039 and we report for example under the current law we think it would be $76,000 in 2039 and if the deficits were smaller it could be up to the $80,000.

>> as time goes on the severity of the impact on the hard-working american family is going to increase and i think that each and every report i hope we are going to give you some good news but each and every report i think the assessment of the risks the country is taking on needs two -. it troubles me greatly democrats and republicans alike. i.e. here for the balanced approach i was a strong advocate but as i see the last three and a half years but i think of as the unaffordable care act and then we had another 800 billion that came at us as a fiscal cliff so is there anything in the recollection that float like

a balanced approach on the reforming of the mandatory spending side? all i see is the increase in taxes and as i look at them they os about 1.8 billion or 1.8 trillion in the mandatory reforms for dollar for dollar which is a balanced approach means nothing less than dollar for dollar. >> you are right there hasn't been substantial changes in the mandatory spending programs. as you know the congress has agreed on the discretionary spending going forward and that sequestration in the budget control act. >> we have had about a trillion in the affordable care act so 800 billion correct? >> we are supposed although the current law so the congress in 2012 was to expend -- it's a lot

more revenue as a result so we have $1.8 trillion over ten years we didn't have just a few years ago so we haven't had any equal protection of mandatory spending and i think you for being here and for what the reports you provided and i yield back the balance of my time. >> thank you mr. chairman. let's see where we are act and correct me as i have some thoughts here. we have the most deficits since 2008 correct or incorrect? >> correct. we have the fewest amount of

federal employees in nine years, correct or incorrect? >> i don't know offhand. >> above report that came out last week in "the wall street journal" that's what it said. to those that are talking about the fact that -- and you said yourself the general growth is not a major problem when you see general growth i take that to mean everything but entitlements etc.. am i correct? >> that's correct. >> the general growth looks like it's not a major problem right now. >> we are reducing spending relative to the size of the economy. >> if we were to cut anything else in the future since the general growth we have under control we have to look to the entitlements in order to make further cuts, correct? >> that logic is why most focus

on changes in the mandatory programs. >> i like what you're a port does to link the amount of growth in terms of revenue coming out much revenue the government is bringing in and how much, how many bills we have and that seems to be borne out the latest reports to us. now, aside from the decrease in spending and federal health programs not a whole what has changed since september. it's not for the lack of trying. i'm a member of the ways and means committee and over the past few months we have reported 14 separate bills that would make various temporary permanent

and we have had that refer to before this morning at 825 billion still counting. none of this was paid for. >> unlike the preferred version for the tax reform dot single dime of the spending has been offset. the extended baseline of your report is based on assumed that all of the tax extenders aspire or stay expired, correct? >> that's right so the total deficit projection of $7.6 trillion between 2024 does not include that 825 billion of

additional ratings still counting that would have been added to the deficit if the majority had their way plus any other. >> these tax cuts are not just extended. they are made prominent, completely unpaid for. can you talk a little bit about what kind of impact that policy choice would have on our deficits and economic growth over the 40 year period that the report refers to? if they were enacted into the law to deficit outlook would get worse and the debt that we project would lead to further reductions in future income relative to the numbers we have here in the report.

stick you will work your projection for the gdp in 2039 and i understand part of that is due to the lower inflation expectations. but part of that is a reduction on the inflation adjustment gdp. can you explain your reasons for the lower projections of the economic growth? >> that reflects the change we made in our projection and what we published in february and it was a combination of the data about productivity growth and capital investment that caused us to bring down the projection of the inflation projected gdp. >> thank you mr. chairman. i would like to follow up on my colleagues last question and it's if you could please compare the growth of the economy since

the 2007 recession and compare that to the growth in the 80s both in the time of recovery and in the rate of the recovery. >> this recovery has been quite slow relative to all of the post-world war ii u.s. experience. we end others have concluded that most of that flow and slow pace reflects the nature of the housing bubble and financial crisis that led to this recession although there are other people that reach conclusions. >> do you see any other policy differences with recession back in the 80s versus here that has contributed to the slow growth of it and what you say the additional cost was that the

housing bubble's? my colleague said that there is a capital investment so what are some of the policy differences and act in the 80s versus what you have seen here or not hear that might have contributed to this. >> we haven't tried to quantify the policy directly. people that have looked at the experience of other countries that have gone through the financial crises that we went through have generally found slow recoveries and we think that the initial actions by the federal government to stabilize the financial system to boost spending and cut taxes to the federal reserve to provide stimulus we think the action helped boost the economy related to what would happen without some but there wasn't enough to overcome the other forces.

the business owners in my district have capital. they want to expand and grow their business. but including the affordable care act, the high-energy cost of over regulation they were to not grow and expand so has that been taken into account. there have been efforts including the panel of economic advisers to try to quantify the effect of the policy uncertain uncertainty. it's hard and we've tried to not do it ourselves but we've talked about that issue and we think that is a factor. >> switching gears we have the

fort base in my district is home and agreeat homeand agreed elute national security of the rising death. i'm concerned with that as well but could you explain your concerns? >> the issue is as you and your colleagues look for ways to take an unsustainable path and make it sustainable one of the things you might push on his federal spending for defense and we can't speak to how much money is required for what defense you and your colleagues think is appropriate but the concern is the amount of money we spend on the defense may create a folder abilities on an ongoing basis and also if the debt is high having so much debt they make it difficult for us to then take the actions you would like to take under those circumstances.

there are so many potential conflicts and it needs to certainly protect our citizens into the current projection continued with the sequestrati sequestration. the smallest arena before 9/11 and before world war i. i don't think we want to go there. i think we need to get our priorities right and look at the budget we have done and appreciate your raising that concerned. >> we wrote a report a year or so ago that quantify for you and your colleagues how much the structure would need to be cut for that discretionary spending if you didn't make other changes so we are tracking to provide information as we make those decisions. >> i want to return to

immigration for a second because we talked about social security and the long-term prospects. when you did your nls i analysif the immigration bill, did you discuss the impact of that proposal when the social security specifically? >> i don't recall that we did but i might be wrong >> in the immigration reform you would have a significant number of younger people in the workforce who would be contributing to social security and not medicare and collecting benefits for 35 to 40 years for the lon long-term at least the intermediate terms of the impact of immigration reform should be positive on the social security fund is that correct? >> the cost estimates did break out the increased revenues into those that are off the budget for social security and on budget meaning the rest of the tax revenue but i don't think we

put that together and there isn't much change in the outlays over the coming decade because of immigration reform so i think you must be right that we put those pieces together. >> from time to time, i've raised my concerns about how the methodology not being critical of it but the methodology combined with the restrictions prevent us from doing things that are in the long-term the benefit of doing them both for the country and the taxpayer. there are strong bipartisan support for those. i want to make sure we have the tools necessary to take advantage. it's potentially a lot of money. it's my understanding there is a piece of legislation now that would extend the goal for two years and to trigger the score

that you and cbo and when have a different perspective so that we can move forward? >> we are working hard right now on doing another set of his work persuasive and how we reached the estimates we reached because you are one of a large member dissatisfied in the correct approach. there are some substantive issues and budget procedural issues to touch on the substantive issue is the way the contracts work. the savings upfront meaning for a number of years past the ten year budget window go to the people that are installing the new equipment so that the substantive issue of the savings

tend to come in long-term and you are right to be concerned that the focus on the budget window may be distorting and we try to give you information about the longer-term. if the government signs the contract now that has made a commitment from now for the full cost of that to basically appear and the savings would be on the discretionary side because the way the budget committee works and they don't get put together very readily but we are working on this issue and we will be in touch. >> we have a number of opportunities like this that the long-term well say the country and the taxpayers money and we need to figure out how to do that. thank you very much. >> let me ask you a couple of quick questions. one is some background. how does cbo score or evaluate $4.4 trillion in assets that

they said they are going to unwind. how does that figure into your long-term look on with the whate federal reserve is going to do with $4.4 trillion in assets quick >> and effects than over the coming decade because as you know it is turned over to the government and the extra money that it earns on its portfolio. beyond the coming decade it doesn't matter because we basically take the federal reserve receipts and hold those constant going forward. >> there is no assumption i should say it this way your assumption is the federal reserve holds the 4.4 trillion. >> we presume they will be changing the size and composition of the portfolio over the coming decade and in the update that we will do in

august we try to be explicit about what we are presuming about the actions. it's also the actions affect the economy. >> the report will have the assumptions on how they are going to move the portfolio. >> there is a change in what the interest projections are but not in the nominal dollar actual change of what that would be. is that for the reserv further e general budget quick >> the report was $880 billion. how does that change with the updated numbers? >> we don't change anything in the first ten years. we only think about the projections beyond that but in

the updates of this work is underway and we are revisiting all of the projections for the next decade so we will be specific about what the new estimate i don't know what direction it will go or how much but we will be explicit about our projection in th of the intt payments in nominal dollars. >> and that will come out when? >> we released a repor release n august but we haven't picked a date yet. >> of the social stability you said the funding exhaustion rate under the cbo extended baseline that this insurance trust fund would be exhausted in fiscal year 2017. has that date changed from previous estimates? >> know it has not. we don't change anything in the window in this report. >> on page 104 and 105, you have some time frames here.

i want you to walk me through this number. another dealing with disability. another demographic variable that affects the budget is the rate of disability incidence defined as the rate people become eligible for the programs and cbo projects the people that work long enough to qualify for disability benefits who are not receiving them are an average of 5.6 or 1,000 will qualify after 2024. coincided with the number 5.6 on the chart that greeted the disability rate at 1.2. so kind of wall me to those numbers there. >> the 1.2 is the rate of mortality decline at which people will be we think people will live longer over time. below that it is the rate of disability incidence is and that is the 5.6 number that we report

in the text. the projection of the ability is a little higher than the rate predicted by the social security trustees and the social security trustees report. the change we made last year this is the same projection but it was different than before that. the evidence suggested the rate would be higher than the trustees were using so we moved away from the projection and established separate ones of our own. >> thank you. good to see you, doctor elmendorf. appreciate your report and your diligence in trying to be as straightforward as possible. when it comes to raising the debt limit what may be there in the vacationthe remusoccasions d global credit markets?

>> we think a failure to raise the limit when we are up against it poses very significant risks. we don't know what would happen because we haven't done that before. but if it were to happen, then there could be ramifications for the financial system and the u.s. economy and the global economy. is it a cause they were the largest economy on the planet? >> of the economy is connected and we do play a particular role especially the treasury debt because it is viewed as such a safe asset and if that were called into doubt the significant way that would be very disruptive to what a lot of financial institutions around the world and investors are out of the world are doing as well as potentially very costly for

the u.s. treasury. when it comes to healthcare somebody asked a question about the projections, etc.. in 2009 cbo estimated that spending for medicare and medicaid would reach 10.5% of the gdp in the year 2039. this year cbo estimates that combine federal spending for medicare, medicaid and the affordable care act coverage expenses will reach about 8% in 2039. that looks like it is a 24% increase -- decrease. i'm sorry, thank you, decrease. how is it going to decrease from today's level as a result of the population of the rising costs per beneficiary? is the outlook for a federal spending much improved from the

pre- affordable care act? >> i don't have the projections with me in the projections. it's relative to those beyond what is a good deal greater. we have seen slow growt growth d affordable health care spending and natural health care spending for a number of years. there are structural changes going on and we've taken some of those on board for the projections out 25 years. >> that's a significant reduction and what were the main factors in this report and why it's come out that way? >> the projections are similar than last year the federal health care spending as a share of gdp. the factors are primarily the data that has come in both in the federal government and the programs in part a of medicare into b. and d. but also in the

private sector we look very closely with what happened in medicare and other analysts have looked more with what happened to -- >> we are going to leave the last few minutes and take you live to the bipartisan policy center for a discussion on military personnel costs. this is live coverage on c-spa c-span2. >> i'm the senior director of economic policy at the bipartisan policy center. did not come for you to hear me but i want to remind you that you have a joint product of the american enterprise institute and the bipartisan policy cent center. ..

he ended up in new york at the columbia school of journalism, and, which is pretty good for us guys in texas. one of the reasons we wanted andrew was his story on july 1 of this year in which he featured bob hale, the comptroller, saying that personal costs were declining. and since that was opposite everything that budget analysts have looked at over the last 25 years, except in the most kind of, kind of constraint way, we

thought this would be interesting to have andrew come here and tell us what is it is after all of his reporting. our view is per capita costs have gone up dramatically that has led to obviously reduction in forces, that is continuing to lead to further reductions, slowness in operations and maintenance, readiness, and decline in modernization. we hope to begin to show you, most aei and bpc will do, we hope to show you why we make those contentions. i will remind you all that in 1985 we did something called -- that is the question. i was staff director at that time. bill hoagland was my deputy who is here today. yes, we invented the sequester but we never wanted to use it so don't blame us, is the way i believe at that. i'm going to turn it over to

andrew. [inaudible] >> i want to thank the bipartisan policy center -- i think i he really gives a good summary of a lot of the real basic issues and personal compensation today. i also want to thank them because i had two main competition reports in my inbox this week. this one also went from the military compensation commission which was 450 pages. so this was much easier to digest. with that let me start by introducing our panel. to my left is professor linda bilmes who teaches at the harvard kennedy school. charlie holy -- charlie holy who is now retired but was staff director at the senate appropriations committee. scott lilly to his left was a

former staff director of the house appropriations committee, and on the end is ann sauer it was staff director with the senate armed services committee. so we've got a lot of good perspective today. i just want to start before i turn it over to some of them and say i've been covering this for many years and i want to start with a little bit of historical perspective. we will talk today about the run up in personnel costs from 2001, to the present which is the wind we freakily talk about. just a little background. as many of you know, the all-volunteer force is about 40 years old. in 1973 when it started a basically just ended the drought with the stroke of a pin and they did make a whole lot of changes to military compensation picks all of the structures are carried over from the '50s, second world war, even before. when reagan came in in the

'80s, he told mr. gore job -- mr. gorbachev to tear down the wall and he threw a lot of money at the pentagon but mainly that was hardware in ships and missiles and fighter jets. does not a whole lot of money from the military compensation, which is why by the time the clinton years came around there start to be talked about the pay gap. the resistance military compensation had fallen behind, the private sector wages. the pentagon was turn to worry about having retention and recruitment problems. so in the late '90s, there was a number of efforts on hill to begin to close the pay gap. although we tend to talk about the window of 2001 to the present, a lot of the things we're talking about really began in the late 90s in terms of pay increases that exceeded the normal unemployment cost index, increasing and housing allowance, things like that. and i will also just that i talk

a lot of servicemembers over the course of my job and this is a personal issue for them. this is not just their families financial security now and maybe in the future, that they're thinking about but also it really gets to the heart of what they feel the social contract that they have with the rest of the country. and this is causing a lot of angst, a lot of handwringing in the rank-and-file about what may or may not happen. a lot of these guys from fort hood in texas don't understand how washington works. they have no idea. they say this will never pass. all they notice all these things are on the table and it's causing a lot of anxiety. with that let me start may be on the end with ann sauer. if i could ask you to give us a brief summary of the period of, starting in 2001 to the present, as this shows there's been a massive increase in the per troop cost of compensation, and

that goes far beyond just pay increases. what is it that's really driving some of the charges were seen in the first few pages of this book? [inaudible] >> better? thank you. thanks, andrew, very much. happy. i want to say before we get into any of these issues that i think all of the panelists share the view as andrew mentioned the angst amongst the active duty military, that this is a broad bipartisan issue. it's a political issue but it's a bipartisan political issue, one of the few bipartisan political issues in washington. and we all strongly support the war fighter, our military personnel, and understand that their job and their sacrifice is nothing that we should take

lightly. however, in the longer-term i think we need to look at defense budgeting as having sort of for lovers, if you will, for ways of managing defense budgeting. there's or structure that which again can be very political but those can be dialed up or down, tunable. modernization, another tunable lever of defense budgeting. readiness, again, adjustable up or down. compensation especially in these last 12 or 13 years has only been a lover that is gone upward. granted were in the midst, in the midst of having wars around the world and i think the congressional and administration approaches to making sure our wounded warriors after active duty military have been a can broadly bipartisan supported. however, going forward we really need to look at this in a bipartisan fashion and we need to look at the tune ability of

compensation because there are really only two solutions to the problem. one solution is increase the defense budget and allow these personnel costs and the programs and the benefits to stay the same. i think in light of the last several years of budget deals, budget agreements, i get concerned and concerned, continue concerned that deficit and debt that's not likely to be the answer. we're not going to see a large increase in defense budget, regardless about elections go in the next couple of cycles. the other way to approach this is to look abroad structural reforms in military compensation. in the near term because of the angst within our all-volunteer force and because of the requirement, for example, of a split for the military compensation committee, commission, to grandfather in all active duty members, even if we enacted from abroad structural reforms and a lot of the benefits, particularly pension and compensation, you wouldn't see any near-term savings. it would be five to eight years

before you saw anything significant in terms of savings. so i think in order to accommodate the desires of congress and the administration and military leadership to ensure that our military are well compensated and are taken care of, their families in particular also, i think that the next step in this approach, and it's even mentioned in the interim report of the military compensation commission, is to look at domestic entitlements as well as military entitlements. i think politically the only way you can start to address what i will call military entitlements, and i don't mean that in a negative sense, compensation and benefits, is to have a similar look at the domestic benefits that people are entitled to. the mandatory side of the federal budget. with deficits increasing per cbo's long-term budget outlook, almost doubling, the debt almost doubling as a share of gdp over

the next 25 years, both of these areas need to be looked at and i think that's a potential solution or approach to take in a bipartisan way to look at both domestic and military entitlements, and manage those issues in a fair and equitable manner. is that going to happen? i guess i ge could say talk to e in november, or maybe talk to me in january of 2017. we will see. >> okay. thanks. let's look at this for a few minutes from the pentagon perspective. ann talked about the levers that we have to change some of these things, and right now the sequestration, the budget appears to be capped, and although military personnel costs have been a relatively -- -- for the past 12 years, everything has grown, cost of operations is gone, acquisitions, personnel. now that things are capped,

personnel will continue to grow as it is under the current law. some other things will get squeezed. scott, could you tell us about what you think, dod has to work within the law. if they are told they have to continue to give pay raises and continue to provide retirement and that sort of thing, yet their topline budget is capped, what to do? where do they find that money? >> well, i think people assume that there's a lot more, there are many more options than they really are. and as ann pointed out, modernization procurement is seen as something that you can go up or down on. and that's true, but the problem is that we have so many legacy weapons systems right now that you can dial that down, but you

end up paying more in maintenance on those old ships and planes down the cost of replacing them. there's a point in time, just like the family car, that if you don't replace it, you're going to have big costs associated with it. there's an assumption that you can do something on readiness our operations of maintenance, but that really is a function of your pace of operations. and as the events of the last several weeks have shown us, the congress really doesn't have any way of controlling that. there are going to be things that happen in the world that dictate what we do in that area. and so in many respects, as a tractable this issue of compensation of personnel costs

seen, and i haven't seen one proposal in this area that looks like it's got a ghost of a chance getting through either house right now, but the only thing that leads us is and reducing the number of people that we have. and that's fine as long as we live in a peaceful world, but we don't and it doesn't seem to becoming more peaceful. and so i think, you know, we are faced with a situation where we have very unrealistic projections about how much we are going to have to spend on both the defense and nondefense side of the budget. and as ann points out, i think it's the end of the programs in both defense and nondefense that are driving the increases.

so we have to raise taxes to pay for those, or we have to find some way of cutting them back. i don't think they will probably get cut back very much on either of the nondefense or defense side, which means at some point i think will have to face up to taxes. >> thanks. as you point out that not a whole lot of options but i think there's a general sense that particularly with a lot of the contracts on the acquisition side being in stone that ultimately a lot of this in the short term will come out of what they call readiness. but i know as a reporter i find it a little bit difficult to track readiness across a force so large that this only different things. charlie, do you have any thoughts on what does that really mean? if they're going to states cut in readiness, how does that translate into the real world and what should we be looking

for in terms of maybe a red flag that the readiness is being cut too much? i think the next few years we're going to start to see that. what should we be looking for? >> isn't on? it is on. doesn't light up like some do. readiness is a tough thing to understand. we know what it means when the force is not ready are not able to do the job that it needs to do, but in terms of how the budget share works, how the readiness is always a tough thing. i was thought of the operation and in its account when i worked on the progression committee was kind of like a black hole. you put money in but you're not quite sure what comes out on the other end. i think it was gordon england to describe this great river of money that flows through the pentagon that they don't really know what it's for. they can track some weapon systems, you can track personal costs but a source readiness, how you track it, it's a very

tough thing to do. but if we find ourselves in a situation that we now face, which is we have the budget control act that's in place. it reduces the rate of growth in defense spending over the next nine years or so which was initiated, and so the pentagon is to longer going to have a large increase in funds. i think that's a given. the question though, as the sequestration goes on top of that i would go find somewhere to get rid of sequestration burden, that's where you really start to see problems come to the defense department. the 31% per year for military personnel is not that alarming to me, having watched this over the years, but there is an important factor that is hidden in a 31%. and that is its 31% in the period of relative growth. and now we're going to reach a period of stagnation or even decline, and at that point and you start wondering what happens

to personnel. they will probably go a. when you're shrinking budgets the first thing that goes by the investment accounts. that's just kind of hard work. the second thing that goes is the readiness account because there's not much you can do about personal costs. they are fixed. basically the chickens have come home to roost on this issue. all-volunteer force now in place for 40 years as you mentioned. that means you have two copies of individuals who are retiring and a growing number of individuals are retiring. we have a much higher quality force today than we had in the early 1980s when they first started to address the issue of petty officer shortfalls, individual in the army, basically that means people scored lower on the army aptitude test. today, you have 98% high school graduates. you're well over 50% that are in the upper categories, not tacked four, maybe three, two and one but all of that means you're

going to have to pay a price for her i saw study that was done recently that indicated a high school graduate who joined the military would make more money than in 90% of the of the jobs that they were eligible for. that's, that means we have a large amount of resource there's going to build their personal costs. is it to write about? it's hard to say. you need to hire trained force because you have very high technology weapons systems need to be operated and maintained. the military leaders certainly like a higher capability force because of what it means to them and their ability to carry out their mission. we no longer talk about a hollow army that we talked about in the late 1970s. we have an effective if not the most effective fighting force in the world. and so as look at this, you see some of the issues that have taken place over the years, high quality, all-volunteer force. i think also there's a third thing that is deferred compensation and in the state,

local and federal we have a tendency to look at kicking the can into the future, kicking cost into the future. that's one of the things we've done with military personnel as well with a robust retirement program with things like tricare for life, so many of the benefits shown on the last page of this chart. so all of those things kind of elitist to this issue where maybe in fact if we don't solve the sequestration, readiness, whatever that means in the very sense, i'm sorry, to be effective. but the bottom line to me on this issue is we have a very small segment of the american population that is willing to serve. they are willing to sacrifice their lives. they are willing to endure long periods of family and separation. they are adhered to strict code of conduct that most of us in civil society don't happen to a due to. so they deserve to be compensated fairly. that's something that needs to

be considered as a look at military cop in session and would look at what it means for investment budget and what it means for the readiness budget. we need to make sure we can take care the men and women who are, in fact, willing to serve to protect the rest of us. >> charlie makes a lot of really interesting points there. one thing i'd like to highlight a little bit which i personally having poured over the to a long, i personally found the most interesting was on page 11 where you start to see, you know, most of this talks about the defense budget and how things are changing and shifting inside the defense department budget proper, but there's also, a source taxpayers are concerned and the long-term, the federal budget, there's a lot of costs that are found outside the defense department budget that accrue overtime. i know linda, you've done a lot of research in this area.

can you help us understand a little bit about from the taxpayers perspective, what should we be looking at is outside the defense department budget proposal? >> sure, thank you. thanks for inviting me today. i also wanted to shou shout outa few must endure in the audience from the kennedy school. in particular robert bell, a very decorated navy fighter pilot -- am i on? robert, stand up. you can be a c-span. i believe robert is the only person in uniform here in the room today. and robert is 19 years into the navy. so he's exactly the kind of person that we are talking about theoretical your, but rob, who some of you who are journalists i want to talk to after senator specific perspective on these issues but also want to say to all of you young people in the audience here how wonderful the kennedy school is.

if you think about your graduate school, and for all of you not so young people how wonderful to people how wonderful the kiddies go is if you're thinking about hiring young people. so i want to make a couple of points and i will get to the point, important point you're asking. first of all i think it should be noted that this situation is in large part due to the wars in iraq and afghanistan, because during these wars, never and extensively on the linkage, and the pentagon has expanded tricare to reservists and guard who made it so much of the force. with increased compensation and benefits the troops, particularly in changing the way pay scales were indexed at a time when recruiting was a big issue for the army and number rings. we have paid some of the highest profits in the war to the companies that manage tricare. and my own analysis of where

does the money go for iraq and afghanistan, if you actually look at who earned the highest profits it was not that halliburton's and the other companies that roll off the tongue but it actually was the tricare companies. and we've also had a huge surge in the number of claims within tricare, the number of troops and families who are having medical visits, for example, 65% increase in children of military personnel who are seeking mental health care counseling, a 150% increase in family members seeking counseling of the various kinds, huge increase in the number of claims for musculoskeletal issues, and other health care issues related to the war. however it's important to note that some of these increases are due to exogenous factors that are not related to the war, which are difficult to control.

for example, the cost, the price of health insurance and the private sector during this period for a family of four has doubled from about $2000 a year to about $4000 a year. and at the same time the price of health care with inside tricare for family of four has stayed the same. so the change in that differential has not surprisingly driven it's very high increase in to tricare for those who are eligible. so over the period, percentage of people who are eligible to go into tricare, who actually are in tricare has gone up from 29% to 52%. at the percentage of those people who have private health insurance has decreased from 44% to 19%. so we are seeing all of these trends which are putting enormous amount of pressure. all of this has been paid for up

until now on the national credit card because all of the iraq and afghanistan senators have been paid for through the day. it's as if we've had a giant credit card and all of a sudden we've maxed out, reached the limits an issue is not so much sequestration but the issue is the ending of these massive iraq and afghanistan war expenditures which have been massive and not terribly thoroughly vetted which is enabled is really to surpass through and fudge and have a lot of money washing around the pentagon which could be used to pay for various kinds of things. sequestration can be considered sort of on top of that, as if we now have a payment plan. we now have a cap in order, because of all of the debt we racked up. i think it's important to think about it that way. secondly, and to your question, i think we need to consider the increases in military personnel, particularly tricare costs, together with the increases that

we've seen in department of veterans affairs and social security and elsewhere. the va has increased in real terms in the period from $60 billion a year to $160 billion a year request and issue but that is an enormous increase. and yet problems abound as we are familiar with, and some of the proposals on the hill right now would add up to another $50 billion a year. yesterday, two days ago, the new secretary was requestinrequestin g another 17 billion for next year. we've already spent tens of millions on trying to harmonize the disability claims process and the health care system between the altavista, between the va and the dod system which is still not worked. and so i can talk about this more, i can talk about this all day and night, but it's important to see these things together. in addition to social security

disability budget, which is also increased significantly, is also related to the wars. the number of veterans from iraq and afghanistan who are 100% disabled is over 30,000. those individuals are automatically eligible for full social security disability insurance. those who are 70, 80, 90% disabled and service-connected are probably eligible for that as well because it's a binary system related to whether or not you can work. so all of these things, the health care system, the tricare system, the va claims, are all part of a massive cost, sort of a hangover legacy cost from the iraq and afghanistan wars which we have not figured out how to pay for. which leads me to my third point, which is in many ways the most important and the most boring, which is the accounting

system. now, as charlie mentioned we have a way of sort of taking these long-term costs down the can and not actually accounting for them. if this were a private sector company and they work with both public and private sector organizations, all of these benefits that we have promised that are accrued would be written up in the financial statements as deferred compensation. most of these costs, however, that are promises that are accrued promises in the military and in the va don't appear anywhere on the financial statements of the united states. the actual capacity to even estimate some of these things is pretty weak, and when he compared the amount of time and attention and effort and knowledge in the social security and medicare system to what we know about these accrued liabilities for personnel, health care in the va and particularly and the pentagon,

it's extraordinary how weak, how weekly really really understand the label and have accounted for them. and it's difficult, i mean, i've argued for years that bad accounting actually matters. if you don't know what it is that you of, you can't even begin to come up with a sensible way of financing them. so i have my own views on how we should go about trying to fix and solve these problems, but i'll defer that to my next turn. >> okay. sounds good. we're going to start a q. and a. here in a few minutes, but before we do that i wanted to talk a little bit about things on a hill but and, obviously, a lot of this comes down to what congress is going to do, you are what sort of authorities they're going to grant the pentagon for dealing with this, whether they going, a lot of these decisions on what your competition are

really not for the secretary of defense to me, which is a really important point a lot of people are not always aware of. let's talk about the marie ryan deal from late last year, early this year when they come as part of this broad sweeping deal that affected every aspect of the federal government there was a clause that said and, by the way, we're going to take alternate military retirees, even guys who left the navy in the late '80s, you know, and we're going to scale back their retirement increase, the cost of living adjustments minus 1%. i personally, we thought this was a huge deal that insinuation talk about. everybody has talked about we'll talk about these things that we're a grandmother at once a don't worry about it. all of a sudden not only was a great entities force that grandfather but the there was this change to retire 10, 20 is go. that was a political disaster because congress promptly

repealed it. what lessons did we learn about this topic and how it's going to play out in the real world from that experience? i will open it up to any of the panel members. ann? >> i think that's a prime example of what i was talking about earlier, that you cannot approach major changes in the military retirement system unless you look across the board at domestic entitlements. i think the inequity of focusing on military retirees without touching any of the domestic entitlements was a major flaw in that approach. i was there as a private citizen, not speaking as any former affiliation, i thought it was a step in the right direction to get people talking about the issues. unfortunately, in the final process on the bill it was in limited to the military and did not open up the other entitlements. and i think just ask i was mentioning, force structure

reduction for thing like that could help ease some of the budgetary problems with military personnel cost. those are just as politically charged as a bright round, for example. so again i'll go back to my comment that where i think the ryan-murray deal got us through a very difficult spot, and laid out a framework from which, a framework for working together from which broader reforms could take place, we have a lot of work to do because these personal cost after 30% of the personnel budget they will only increase without structural reform, just like so security, medicare, medicaid. >> okay. >> murray-ryan was a huge solution for congress, for the country in terms of getting rid of sequestration for a couple of years. minimizing the pain associate with sequestration. and they, politically it was in the calculation for them to come

up with that. we have seen this in the past. i ble believe those 1985 we pass military retirement and we gave ourselves 15 years to grandfather in everyone and to we got to the point -- congress repealed it under great pressure from the leadership of the military. it's very difficult to go in and change, especially the same set of in deferred. it's easier to put -- [inaudible] than say we will nickled and dimed these things that people think have already earned. whatever approach people take in the future, i don't think it will be successful to we reach the point where your organization thanks congress is acting in the right way and out onto the military leaders in today's force the it's right thing that needs to be done, the military of associations have to agree with that, and the people that are military retirees today, something needs to be done in order to preserve

security as we have these concerning budgets in the future. until that happens i don't think there will be a lot of success. i have a funny feeling they will not be coming forward with this kind of proposal again if they find themselves in the situation that you're trying to do with this spent i think that's a safe bet. anyone else on murray-ryan? >> i think it's completely true that you cannot understand this problem outside of the context of the entire budget. and if you look at, we have a budget process and i don't want to get into it with steve. we have this argument all the time. but we have a budget process that's intended to inform our decision-making and i think it's done just the opposite everything the budget control act is a perfect example of that. the budget control act, which

acts as discretionary spending and defense discretions been is going to declined by 3% in real terms over the next 10 years. and in a world where our trade with the rest of the world doubled in the last 10 years, is probably going to more than double, the world population is going to grow by a very substantial amount over the next year. and the idea that we're going to substantially cut our pace of operations or somehow unburden ourselves of the legacies of iraq and afghanistan is totally unrealistic. we have at the same time i think a totally unrealistic notion of how easy it would be to cut entitlements on either side. all of the growth in the federal budget -- budget over the last 25 years in terms of real per capita spending, how much they spent in real dollars per person, all of that growth has

been three programs, social security, medicare and medicaid. and that's basically our retirement system. the defense and nondefense discretionary programs have basically stayed the same in real per capita terms. and yet we look at a future in which we're expecting all of those things to decline in real per capita terms, and our spending, even under the decline come is going to rise to 23% of gdp with revenues of only 19%. so it's about 4% gap. what's the deal that closes that 4% gap? and if you have that deal than you can sort figure out what we may or may not do with military spending. but we can do anything draconian in military spending unless we're willing to do they think with all the other inputs into that 4% gap.

>> if i could add one quick comment. i must distance myself from any conversation about increase in taxes, except as a result of economic growth or revenue increases by virtue of greater employment, better trade with allies, et cetera. and businesses making additional profits which we tax in a fair fashion. in arms control world with something called confidence-building measures. and i think economist, wall street, businesses are looking at what the congress and the government in general is doing on the overall budget issue of debt. deficits are climbing to a decline, are manageable. i still think they're too high. but in the long run looking at cdos long-term outlook, debt goes up to 106% of gdp. that's public debt. that's not off the bulk debt.

i.t. debt, social security for example, the money we part from social security. so when gdp is x. and debt is more than x., we are essentially bankrupt and that is the projection if we don't do anything. confidence-building measures as far as improving our economic outlook which would raise revenues can be a structure of looking at and title but and looking at other mandatory spending which was not touched and i think all indications are that at least what i've written people i've talked to is that that would help as far as confidence in our economy, increasing revenue by virtue of simply a better economic situation. and that could help close that 4% gap pretty easily. >> i think that's a really interesting point and it kind of shows how the discussion of these issues in the military, as well as in the was talk about health care, this discussion can be very specific to the military and defense department but it quickly veers into the broader discussion of entitlements at large and the ris rising healthe

costs and reining them in somehow. i was talking to someone the other day who was sort of talk about what it might show and he said he thought know this would be addressed until those bigger things are addressed which i thought was even a higher bar, if that's possible. linda, do you have any thoughts, i know you've given a lot of thought to what potential solutions are. did murray-ryan and the way that played out change what you think is possible? >> well, i guess i look at it from a very different perspective, and i think that being in academia you tend to be, you know, a little bit further away from the sort of everyday situation here on the hill. but what i see is the solutions that have been bandied around have fallen, had either been around stuff, cutting the price

we pay or the quantity of stuff, or around people, cutting the price we pay or the quantity of people, or both. and that's where all of the conversations have been. and when i see the solution or at least the major gains that could be made that have not been tackled is in the 30%, gates' estimate of overhead in the pentagon. if this were a private company, we would be looking at the overhead which 30% according to gates, and i think they're even higher, which really has not been scrutinized, particularly has not been scrutinized in the huge era of growth over the past decade. and just to kind of give you a little anecdote to think about this, i worked somewhat with ben cohen who was then from ben & jerry's ice cream, and in talking to ben about what's the sort of secret success there, he

says look, the way we keep our costs low is we scrutinized every single penny around logistics and rent and distribution and refrigeration and manufacturing and sales and marketing and finance. we never cut a flavor. we never got a flavor but it seems to me in a military we're talking about cutting the flavor, cutting weapons systems, that we sort of going there first because those are big and easy. it's easy to get cherry garcia. it's hard to act, to go to the real pain and suffering of getting into the overheads. now, what would be involved in actually getting into overhead? what's involved is, i mean, two or three things. first of all, effectively restructuring major parts of the pentagon budget into a managerial accounting system,

which means instead of just looking at everything in terms of salaries and inputs, looking in terms of activities. because the savings are not these contracts%. the savings are the whole process -- contracts%. planning the awarding, the bidding process, the monetary process. the evaluation process. the legal costs. all those indirect cost for every single rsp. so sort of cutting a couple of people and procurement staff is not getting it. that's easy but that's the flavor. but restructuring the budget into a managerial accounting kind of budget in the pentagon, that's a four or five get estimate. i mean, you have to really get religion on this. everyone i know who looks at this and has been there, including dates and rumsfeld and others feel this is very

important. but it has not been tackled because it hasn't had the sustained leadership. and together with that there needs to be sustained leadership around the financial accounting. the pentagon has flunked its audit every year for 20 years. now the only department in government that continues to flaunt its financial audits -- flunk. itself to be an end-all to be all, they contribute to an enormous amount of frustration up and down and throughout the forces where people can't count stuff and i don't know what it's worth and some people were talking about before. i feel, and do all are the political expert, that a way to approach it that really has not been tried is to really seriously try and prove back on the overhead costs. >> that's an interesting point about reminding the dod is only

agency that really doesn't, i don't even think they can be audited let alone pass. their books are so skewed. reuters wire service had a great series on that a few months ago that really was just jarring, even to the people who are tracking it. people in regional offices crossing things out and penciling things in. it was really eliminating. let me go ahead and open it up to a q. and a. what's the drill for them i guess? would anyone like to approach a question for the panel is? [inaudible] >> if you talk to senators come and assume representatives, they are counting a lot on what this commission is going to come up with. i'm not naïve enough to think that everything they proffer will be implemented, but the

fact what was striking to me was nobody mentions that as even part of the way forward. >> i think that's interesting. the questioner asked about the military compensation and modernization commission, which congress created about 18 months ago and said basically study this. they have a remarkable step of 60 some people, study this for a year or so and come back with a very detailed set of recommendations. theoretical that's going to be presented to the hill and will spark new discussion and we will build a clear some of these political hurdles. you're right, we haven't talked about that much. can anybody offer any thoughts on why? is their low expectations for that? >> i have looked at the interim report which is compendium of data, good sort of survey aboutf what the issues are, what the programs are, statistics. and again goes with what aei and

bpc have put together as a good reference material. and it would be up to the fabulous in the political arena if the commission were to come forward with some substantive, well-thought-out, balanced suggestions about what congress and the administration might do to address this problem. but i've seen a lot of commissions in my time and i've seen a lot of, actually i've seen a lot of very good reports from commissions that don't go anywhere. rules commissions, base closure commission, things of that sort. so i would love to see that commission come forward with some great, strong, bold and brave recommendations. but even if they do, i think the political reality of the 2015-16 congressional cycle leading up to a presidential election makes

it not terribly likely that there'll be a lot that gets done unless it gets done in the very early part of 2015. so it's a good point, that we really need to see some thoughtful, independent, bipartisan recommendations from these folks, but to my earlier point about equity and fairness between military and private reform and domestic entitlement reform, there's no commission on sources could and medicare, medicaid that is coming forward either. again, i hope but i leave the rest of you out to be bold and brave politically. >> i would say ultimately there are a finite number of proposals to change compensation, and the people that worked on this know those numbers, and they have added those -- vetted of those proposals with members on the hill energy try to get how many votes there are.

and it's possible that it could be a future congress that would support some of those, but i would agree with ann. this congress, or anything that's likely to be seated in january in either house, is very unlikely to support the kind of pain that any effective reduction in personnel spending would inflict. >> i've looked at the report. they do a nice job of laying out, in essenc a sense the layof proffer. in a sense they lay out the problem. they talk about all of the different aspects of what's in the package and where it came from in sort of a historical context and where it is today and where it's going. but i didn't see a lot in there in a cursory reading, this 400 page document, i had not seen the news that has come out.

that was yesterday afternoon. i did not think they came out something is it okay, this is the model we're going to use. just laying out what the situation is today. maybe the commission will come up with something that we've got a lot of commissions over the years, and other than like a brac commission worry have to vote on this, it's usually not a lot -- [inaudible] i showed the use of my colleagues here that congress is not likely to address military compensation in a vacuum. they will only do in some sort of larger agreement like mandatory spending spent if i could just add one more point on this. i agree with what everyone has said, but this is a systemic problem so it needs a systemic solution. the problem includes the fact that military retirement, compensation, as you know, apply

to those who stayed in for 20 years. so we have rob, my former student, 19 years in staying in for the 20 year. buddies and% of the iraq and afghanistan veterans will not stay in for 20 years. but for the young person who comes back after two or three grueling tours of duty, where did they go? they don't have military compensation. they end up, in my opinion, going into the va system claiming for everything they possibly can claim for. they end up in the medicare system. they end up in the social security disability system. so we are by sort of fixing just one piece of it, we are just transferring the cost effectively to other places. i haven't been through the whole report either but my criticism is that we have a systemic issue, and it's very difficult to just fix one piece of it without looking at the other aspects. >> that's a really interesting

point that i think the number 83% of service members leave the service before 20 years and end up with no retirement. the system, problems are so deep that despite the costs, we saw so many people that arguably are leaving the service without benefits. in the back. [inaudible] >> former hill staffer is to react to the professor's suggestion, is overhead a pot of gold that could be easily tapped, or is it why we have three military services, military departments, and why we have people checking to be sure contracts aren't improperly used? is there a pot of gold? >> a couple of gold. >> question for the panel was, to elaborate on this point that maybe there's this great pot of

gold in the overhead costs and wondering he asks the former staffers could comment on whether they think that's really a viable place to find some big savings. >> i would just offer that there have been some, although not perhaps as well-informed as they should be if there were a managerial accounting system in place, there have been since significant overhead costs in the last soviet but i think the pentagon complaint, claim something in a grid of 150-$200 billion worth of overhead. and overhead includes people, people costs are part of overhead. having worked for a large corporation and work through these cost-saving exercises, the are still very, very hard decisions that have to be made, no matter how much data you have and how much clarity on exactly what those costs are. you still have to make the hard decision. are you going to cut people? are you going to consolidate activities, which means you will cut people, or bases, for

example, facilities that are in a congressional district? so i would say, charlie, short answer no, it's not a pot of gold. it's an area that needs to be looked at, but it's not going to solve the problem. >> i think, is there any question our procurement system is, if not broken, pretty badly messed up? i don't really understand, i'm all for years in terms of how somebody is going to fix that. in my mind it's a pretty fundamental issue. i think we really lack the talent, both in the uniform and the civilian side of the pentagon, to know what we want and to know how to buy it at a reasonable price. and one reason for that is the people that are able to make that kind of sophisticated

decision in this country are making huge amounts of money in the private sector. and we are trying to hide them on the cheap. we end up -- hire them on the cheap. we end up basically fairly low skilled the relative to the top. we do not have the top business minds in the country inside the pentagon, and we try to hide that expertise in contractors. and that really doesn't work. you've got to build the personnel capability who are government employees and whose entire loyalty is to the government and the taxpayer. inside the pentagon if it were to really change that decision. and no management is going, no management system is going to change the expertise of the people that we have if we don't do something about the compensation that allows us to hire those people.

>> in the back. [inaudible] >> there's been a lot of debate about moving if we're living in a secure world, moving, active force to the reserve force although my pillow so to call up a lot of personal cost about that and begin another commission called for to examine that issue. but i'd just like to get your take on that and any reaction, thank you. >> thanks, tom. tom asked about basically the active and reserve force next which is a question that comes up a fair amount as the budget pressures mount, especially there's some people say the reserve components are cheaper and they come with reduced readiness obviously but what do you all think what you all think that question might emerge to the top of the list of things to address? or maybe not?

>> i'm not sure we are seeing the discussion of compensation all that much but every time we do have constrained resources we have a view that there is a view that is expressed by some that we should ship more costs or ship more of our force structure to the reserve component. generally there's reluctance on the active side of house to go along with his. this. politically it becomes very difficult when you talk about specific districts, specific states that have to be curtailed when you make these kind of change that i think there's a battle going on right now in congress on the active and reserve force nex mix and whethr certain reserve units and guard units should be disposed of, at least downsized. i think it's kind of a question that you always have when you come to this period of constrained resources. i don't think there's a long-term solution. i think there's a proper role for the guard and reserve but you can't have too much of a force in the military or you will lose readiness in the for

force. >> you know, i think that the question gets at an issue that i don't think we're talking about, and a really think we need to. i have looked at the discretion of budget on the domestic and the defense side. and on the domestic side i think you can say, you know, the pace of government activity, the amount of government that we need is driven by the growth of inflation, the growth of population, the growth of the economy. sort of those three things but i think it's either somewhere between we'll per capita growth and -- we'll per capita growth and gdp growth. if you wanted to have relatively the same level of government in terms of the same number of people manning passport identification stations and airports when you come in, or across the board bureau of prisons, whatever, you are going

to be in between that. what's the pace of operations for the military? we worry about iraq and afghanistan, and i think particularly iraq was just a necessary squandering of resources that we got little or nothing out of, in my view. but before that we had, you know, we had bosnia. we almost went to war with serbia. we were just about close. and i think the idea that now that we're out of iraq and afghanistan, the world is going to be a better place is already fallen apart. so what do we need to plan on in terms of future pace of operations? and i think it's somewhere between the growth of global trade and which are interests become more complicated, and the growth of the world economy and the growth of the world population. ..

military expenditures relative to the size of the world of it. okay i think we are running out of time, but maybe one more question. from -- i'm sorry? yes, go ahead in the back. >> i am a native fellow for the