of the warehousing people, the logistics people and the like. all of which held information as a source of power and created division within the organization. removing those human beings is hugely beneficial but also removes gatekeeperss guardians, somebody who is happening. wait a minute, somebody is exfiltrating this financial information. i got a request for a new password but for 50 new passwords. i had all these changeses that human beings might observe. finally systems are amazingly flexible. we value the fact that computers and laptops can do different kinds of things, word processing, communications, spreadsheets, whatever. comes back to the title. talk and title of the paper and the graphic i showed you before. this is poison fruit this is not a ludite position i'm taking.

there is no way to turn this clock back. i don't want to turn it back. we need to recognize inherent in each virtue, and i summarized them on the side, is the risk. to the degree that i concentrate or communicate or take people out of the loop, et cetera, to the degree i buy the benefits of this technology and each and everyone of those steps i introduced security consequences that are, give risk, give rise to greater risk, the virtue of the system is intertwined with its limitation, its liabilities and its risk. that is fundamental. it is not just that the complexity of the system gives me these problems. one reason technology fixes just don't get me there, every time i buy more security i tend to do so in ways that are involving sacrifice of virtues. i want to spend a minute having talked about software to say a

little bit about hardware because the hardware insecurities are quite, quite real as well. you're aware of that. easy example i can give is just people tend to think about supply chain in all kinds of sophisticated ways. what is being made in china goes into the f-35, our latest fighter aircraft, et cetera, what i am struck by even if you preserve your whole system. if it turns out something you use to give more power for your iphone, as for example, simply a plug-in a adapter is made with a device in it enabled hacking to your iphone, that connection is a fundamental problem. so the range of issues is extraordinarily great here. and from a espionage standpoint, you're all familiar with the stuxnet experience. what is less talked about the

iranians moved to a particular set of frequency converters and the like because they became convinced some foreign power had hacked into what they were buying to install in their nuclear establishment from, from abroad. they had to begin to produce their own stuff. which then of course set them up for the vulnerabilities of some of their own stuff, and also introduced a variety of kind of inefficiencies. so the global supply chain gives us a chance to, forget more vulnerability associated with the hardware world. i want to show this sophisticated audience this point by just giving you a chance to reflect for a moment on a statistic you're not often probably exposed to which is, i want to ask a very simple question, which is, with respect to the question of transistors. there is a nice little cartoon that says, this guy says, it is

time for to us begin to spend more time with our children, he says, to his wife. how many do we have? if you think about that as a problem, think about our transistor world and imagine the question, how many transistors are manufactured globally every second? i just want you to think about this answer. i'm not going to embarass anybody by having you stand up or embarass me by having one of you already known the answer. let me tell you when i first began to think about this a couple years ago i spent a fair while and did sort after back of the envelope calculation and the number was so unnerving to me i managed to get some friends at intel to work on it and they eventually commandeered the intel research department, they came up with a number so disorienting that we had a couple hours of phone calls and we finely agreed on a number.

how many tran sistores are manufactured worldwide for a second, just as measure how well you understand this? got the number in your head? every second 14 trillion transistors. the complexity of this system, the difficulty of policing it on hardware side needs to be appreciated. the human side, this is nice picture of snowden. before snowden we had manning. the openness of the system to third parties is pretty striking. one of the leading theories about stuxnet, that the iranians thought they had system air gapped, there was distance between centrifuge system and software, physical difference and outside world. all things happened. patches need to be updated. contractors come in. one theory about the stuxnet, a

contractor got infected and brought in a virus. if you're running a aerospace corporation you have to integrate with all kinds of suppliers from all kinds of portions of the world and that then causes you to share information, large numbers of people have access to this information. huge problem. and even if those people are not malevolent, the ability to manipulate these people is pretty great. if people have not read mitnick's book, or i encourage them to do so. impossible to read that that realize you could be fooled by mittnick and clever social engineering. everythings that configurations inside and outside of the hardware. i've given you my password example already. you're familiar with many of the efforts to deal with this the counter measures are a long

history. we know that we tried barriers in training but we had fundamental problems with these. they leak very badly. the screening and anti-virals, you're familiar with the set of issues associated with that, dependency on preexisting signatures. the way the anti-virals lag the attacks. the way in which many of them actually import vulnerabilities themselves and can be used as bases for exploits. we have done a lot of hunting for vulnerabilities. nice to see the rise of that effort. i think, as i show you in a second, produced some benefit. so is active defense. but that monitoring the situation and the like yields also limited benefits. we can create enclaves and encrypt to greater degrees, very useful kind of thing. again information needs to be shared. soon as we get into the sharing we get into all kinds of vulnerabilities that are

described and inherent software vulnerabilities that may exist. hard for me to believe. when you talk with a sophisticated inside operators, and it is hard for them to believe they can't get into most anything, if you really cared enough and had enough resources. i talked to somebody that makes a career of it. goes around dealing with complex industrial systems. i asked him how many times he is unable to penetrate his client? he said it might have happened once. it is so unusual. the vice president for security at google has said in a public context, that when google organizes red teams they succeed in getting in 60% of the time. they're thwarted 40% of the time. that is google defending itself against its red teams. i think we overstate the degree to which we can defend these systems and what happens is corporations like to hire red

teams that affirm the qualities of the people who hired them. so you don't wind up getting good penetration analysis ultimately about what serious attackers would do. i will come back to the the deterrents point. i would note a lot of what we're doing is raising cost for attackers, not actually preventing them from ultimately penetrating. i began to try to think about ways to document that. one of the things i do was to get a company that has done some, involved in vulnerability, huntings exploit development. i asked them to go back through the records and show me just rough indicator, i don't want to make too much of this, it is just illustrative, what happened over time in terms of their production function for vulnerability discovery? how many researchers of medium-quality, do they need to find major vulnerabilities? and basically this chart from

2006, to 2011, shows you the production function and shows you that in fact it has to then harder to -- gotten harder to find vulnerabilities as we get things like fuzzing and different kinds of vulnerability hunts out there. but if one researcher could find one or two significant vulnerabilities in a year back in 2006 and only find as half, that is to say, takes him two years to find a vulnerability on average in 2011, we've significantly raised the cost for attackers. it is now four times as difficult as it was before by this rough illustrative measure but just means if you hired four times as many people you can produce the same number of vulnerabilities. i'm simplifying but i think you see the illustration. another manifestation look at the vulnerability market, look at government productions. here is a cert report. every week we get a description

of substantial vulnerabilities. look at successes enjoyed at it by the top level people or, or the even the people who don't win the, who are not at the very end of the distribution of top prices. hopefully this is a way of conveying the problem. i want in my closing minute to talk about my own things of we could use to improve the situation given where we are. first of all fundamental proposition that emerges from this is presumed vulnerability. presume that digital vulnerability. and in critical systems treat this as contested territory, a phrase of mike assante's, he used in some congressional testimony. create lean systems, that is one with fewer attack surfaces and recognize if this is poison fruit, go on a diet.

ask yourself do i really need this functionality because it is introducing vulnerability? that doesn't just mean enclaves and the like. an easy example pour knee is print ir. mess people think they want a print tour print. seems pretty evident. they don't think enough about what marrying up the fax capability with that print capability does in terms of communicativety and connection with the outside world. what about the fact that my printer has bluetooth capability that enhances its vulnerability? how do i feel about memory in my printer. most people buy memory in the printer and don't want it. i come back to the example of snowden. he could steal 1.7 million documents. i don't understand why he would copy them? as a administrator he could get access but nothing as administrator there was no need to take the stuff out. as far as i can tell from the

outside the answer to that the nsa people are not dumb. they disabled the computer capability that would enable replication. but snowden is not dumb. and he, with a screwdriver, reenabled it. so my question is, why did it have the capability to begin with? the answer is because we buy standard kind of computers in these contexts all the time. they come equipped with a huge range of capabilities. what we should do is more about buying leanness and slimming down our systems. i think we also ought to think of virtues about systems and analog. let me come back to stuxnet. one of the striking things about stuxnet, it was not just penetration of the systems that controlled the centrifuges. it was, and we know this from the public documentation, a system that also deceived the

iranian operators as to what was happening by playing back to them simply standard operation of centrifuges when in fact the centrifuges were spinning out of control. fundamental design implication of this is, do not convert your situational observation capabilities and your safety systems to the same modality as your operating systems. if the iranians had had a plain old analog system, that measured vibration of centrifuges. when the vibrations began to get out of control, sound ad physical alarm that rang, no digital attacker from a distance could have thwarted that system. maybe somebody gotten in the room, to disable one or five or 10, but centralization and concentration of digital system and communicativety would be

offset by a plain old analog system. i have a friend coming out of the central intelligence world. he is paranoid. his paranoia leads him to have video cameras everywhere in his house but being a smart guy he is paranoid about his video cameras and worried that people from the outside world might tap into his cameras and observe everything in his house. so what does he do? he puts an index card next to the video cameras, when he goes out, so that if the camera is swivelled the index card false over. an analog system. all i'm suggestings is, where systems are critical, we ought to be going through our safety and control systems particularly and where possible inserting analog capabilities or creating resilience in the operating systems by having analog stand alongside. this is back to the future kind of prescription, but if you believe that, as i do, that the

digital systems are inherently insecure, you want this comply men territy here. you can't to separation of systems so contamination of one doesn't lead to the contamination of others. you want to decrease the amount of coupling, the degree of integration. so i like having an apple system alongside of a microsoft system simply because i've gotten in some diversity of vulnerabilities or to use a phrase dan gear repeatedly used and made famous, i want to avoid a monoculture. i want to create resilience in the system from a public policy standpoint, i ought to be saying hey, there are some systems out there, the power system, the financial system, that this country depends on so fundamentally that i'm going to impose some degree of requirement on them that they measure up in security terms. they are what we recognize in other arenas, to big to fail.

we regulate the airplane systems and alike, demand safety standards. we need to do similar kinds of things in my view in the internet world. tough recognize the speed of change. so you can't, in my view, regulate it by saying you must do, x, y and z. when you do, x, y, and z, it becomes too straitjacketing and limiting. there are too much variation between two many different systems. i would delegate this regulatory kind of requirement to relevant cabinet requirements. i won't have some overall cyber czar impose it. i would encourage them to use persuasion, subsidies, everything possible, including ultimately regulation, to get companies to the point where they provided a convinces case they have done what they could to reduce these vulnerabilities, they dediversified and the like. disaggregating the problem is very important. we need, i think to recognize

the fundamental differences between different industries in these contexts. for example, the finance and the power industries are dramatically different in their business cases. come back to this point about the infer action between -- interaction between technology and business culture. if i run a finance company i'm being attacked all the time, every day, millions of times. i'm constantly refreshing my software, policing my boundaries. understand that my fundamental assets are digital. they're not physical. and, i'm, at the very cutting-edge of software and the like. what i want from government is information about attacks and by and large i want them to help share that kind of information. and i want them to leave me in the a high degree of freedom. if i run a power company, i'm not as used to these kinds of frequencies of attacks. i have much slower sigh quill of

operation. i might, my financial base is regulated. i can't pour money in at annual period of time. i will is act much more slowly. i have a whole different set of requirement. s. i need a lot of basic education from the government what is out there and some raising of my standards with regard to it and my attention with regard to it. and that is just an example of therefore, i'm very inclined to push this problem within washington to each of the relevant government departments. i'm, very much an enthusiast about longer term research and development in this arena. i have sketched why it is i think the problems are inherent in the technology but there are opportunities in terms of making encryption easier to use, something we talked about here, use of formal languages to scale

up our capabilities to provide more protection and the basic upgrade of systems with security focus will have a lot more benefit. for example, i'm a former secretary of the navy so as the navy develops the next generation of submarine or destroyer, make it a national goal to say, how will i design this system so as to reduce its vulnerabilities, to minimize amount of poison fruit it consumes, max my use of analog and out of band systems and maximize use of formal language at key junks et cetera. when i design the system something very different from a battleship or change the context of the power industry. for example, in the navy world i want integration of information at bridge. historically the captain on the ship to see it all but of course in a digital age, that create as

particular comprehensive set of vulnerabilityies. so how would i design my ship fundamentally different conceptually if i take in account of this? that is project worth doing over course of a decade while we evolve another system. or i talked recently to the iaea, international atomic energy agency, and my basic theme pushing analog notion, you guys are really good historically at safety analysis and regulation and the like, so you say, for example, we need, i will make up number, 10 different cool be capabilities, if one, two or three fail i have the ability to bring in the others. and when you get some significant number you think you have built in resilience and safety. now you go ahead and improve the modernization and digital systems that will control these and you have created one single

failure point in previously 10 different failure points. you need regulators recognize that but also as we design new systems you need to create good thinking about how we build in better protection against those vulnerabilities. i also, because i care so much about the business culture and the like, i would suggest it isn't just a technological problem and tendency overwhelmingly in washington is to invest in the technology and the r&d money in technology dollars. i would, i would like many more investments in the sociology and anthropologie associated with the use of these systems. it is why john any doesn't use encryption but it is applied to the larger system as a whole. we need to understand better what is going on within these systems. we need, and, a number of people have recognized this, better pooling of attack information. and i've suggested in that paper a year ago, there is nice

example of how this done, a private corporation, mitre, in the federal aviation world, recognized that the faa collected all data on aerial accidents but didn't on near-misses. there was big issue, how do we share information about near misses? i don't want faa regulating it. they set up a private entity. initially one or two airlines cop rated. every time, several others did and covers the whole industry. faa has a seat on the board but doesn't control the information. but that information is anomized but shared broadly. that is readily achievable model. i don't need all the information and the like but can move forward. power companies need to do this with ferc and other kinds of

activities. i would like to add that i'm very concerned about the federal workforce. this is a good example of how we have might move in this context from the traditional ways of doing business, which historically those legacy systems are so embedded, the past is not dead, it is not even past. we have a whole set of federal hiring a3d training standards and methods of organizing that are very ill adapted to the digital world i just described. my suggestion we create a federally funded research and development corporation, ffrdc. there are several that exist. i'm on board of one. i'm not pushing this for them but just as general proposition we could create a new one that would be a place for people who were cyber skilled to come together and be hired. how would you hire them?

well, i don't really care. in the arena you all work in, so much about degrees and traditional credentials. what i care about, skill, actually finding vulnerabilities or dealing with other people's exploits maybe i should hire by tournament and winners who achieve in these contexts? what do i want to do in training and the like? i want to put these people together in a pool because so much of what is learned is from on-the-job training, not just being in one agency but moving between different federal agencies and they learn from each other as peers. i want somebody cyber skilled to run this i want to put it in silicon valley. why do i need it in washington? suddenly i draw a different kind of talent pool which i tell you i think we desperately need. finally i want to conclude by talking for a moment about norms and deterrents. then i want to invite your questions. a lot of fuss now about the

challenges of our conflicts with the chinese. people indicted in pittsburgh from the pla, peoples liberation army, in china. we have obvious sources of conflict over espionage and ip theft. the point i want to make we have areas of strategic stability. we haven't yet seen states attack one another to speak of in the context of, shutting

command-and-control networks with our espionage tools. why is that? because we have recognized that we have systems that have gone somewhat under the name of mutually assured destruction, mad, that say it is better if the chinese have a second strike capability than if they don't because if they only have the ability to strike first, and we threaten destroying their missiles, they need to launch. but if they know they have the ability to survive and attack us even if we attack first, the situation will be more stable, there will be less likely to attack in a hair trigger way. if the whole system depends on cyber system and the system is inherently insecure and we're out there probing them and they're out there probing us and same tools i said that could be used to espionage can be used offense i introduced security from that world. i moved from the world of mad, i

call a world of mud. mutually unassured destruction. you see i still retain the fondnessing acronyms. mutually unassured destruction is more stable. we can reach virtual norms that there are things we won't do. there are a lot of problems and negotiating it and enforcing it and the like. we he can talk about if you want, but reality when we enter the nuclear age we had no idea about arms control or how to do it. slowly over time as an emergent characteristic of the systems we began to find our way towards some stability and we found out about them and began to articulate them in norms and arms control agreements and so forth and we need in my opinion to do the same thing in the cyber world. i've given you a real soup-to-nuts thing and maybe i've dumped the whole load on you too excessively but i want to suggest, we all admire the

problem. we all see that it's a brave new world. that these changes compressed into decades are the equivalent of gunpowder over the period of centuries. that we can't think as fast as the situation demands. but we need, i think to move beyond that sensation to really try to analyze the core of our problems. i tried to give you a little summary of that today. and to thinking not just about the kinds of incremental defensive kinds of activities that i made reference to, but also most fundamentally to try to structure institutions and our programs and our norms in light of our analysis in ways that can make us stronger. will we ever be completely protected and okay in this area? no. but we can improve our batting average quite significantly. i can't guarranty performance or success in every single pitch that is thrown at me but i know

how it is that i could get to better world with much higher success rate, a better batting average. boy, i would extraordinarily value that. so i thank you all for not having gone out for haircuts and i invite your questions. thanks very much. [applause] former federal reserve board chair ben bernanke talking this morning with two brookings institution senior fellows about the impact of the defense industry and military spending on u.s. prosperity and u.s. economy. live coverage coming up shortly here on c-span2.

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my job this morning as moderate as first was but a couple of the broad considerations for introducing the children. that asking each of your questions. wheelspin have the time doing that and then coach you for your questions. i think you all know beyond the broad interest in this question the importance of the subject right now, congress is soon to

return home to washington to face the question of how to reverse the potential sequester or even shut down, and defense spending as part of the conversation. we are all watching presidential candidates, and for those of you who are watching a lot of c-span these days this is not the iowa state fair. [laughter] none of us are running for president although perhaps one of us should be. we're going to talk about defense-related broad economic research and broader national competitiveness in an era when the although these issues, front and foremost in voters minds as they should be. let me before it introduce ben and mark, let me say couple more words they put defense spending and perspective. i'm going to try not to overdo the statistics. you can hear out loud without visual, not wanting to conjuring

numbers, a couple of them would be useful. as you probably know, some of you, defense is now representing the defense sector, is representing a little less than 3.5% of our gdp. just under 3.5%, that's a downward slope from about 4.5% at the very end of the bush years, early obama years when the washer at the peak peak and are headed downwards now to perhaps 3% of gross domestic product at the very end of the obama presidency. projections would have it to slide further after although who knows what the world will bring, but the next president and congress will bring. by historical standards this is a modest burden on the u.s. economy. certainly compared to anything in the world war ii our post-world war ii era. in the clinton years we're also around 3% in the reagan years we been up close to 6% of gdp, defense as a function of overall national economic activity. in much of the '50s and '60s

the figure was often 8%-10%. defense spending is to very big. it's still almost $600 billion per year. so about 15% of the federal budget, much reduced from earlier periods us to a large fraction of the overall budget to be clear and to be sure. and, therefore, this is certainly one of the main ways in which the federal government interacts with the broader economy. if we frame things in those terms i think he began to get a sense of the importance of the sector. a few more statistics and then for the real show. even the defensive zone all the more than 3% of national gdp it can be a lot more in certain parts of the country. that's one of things i know mark is going to talk about, and i will say why in just a moment. we're just across the river from virginia. virginia is the highest defense concentration or dependency of any state. 13% of virginia's growth state

output is defense spending of one sort or another. when i say defense in this context i'm including intelligence community and i'm including also and nuclear weapons activities of the department of energy. not including veterans affairs, not including homeland security, just to be clear on definition. although you can bring those into the discussion if you wish a little bit later on. here in d.c. and maryland defense is more like 6% of state or local economic output. it substantial. another way to look at it is in terms of defense role in high technology. in promoting manufacturing in research and development. antigen hear the defense sectors make sure of the national economy than that 3% gdp number would imply. so, for example, a national manufacturing, military procurement is a 100 billion a year. national manufacturing output around 2 trillion, so 5% of national manufacturing output and a lot more in certain

sectors like aerospace, space launch, some others will talk about today. one last week looking at it, research and development. research and development spending isometrics defense-related activities are 20% of all national research and develop a. that's probably overstates things are not going to bore you with all the details right now but it's probably fair to say as if much of overall national research and development, defense sector attributes, can be a tribute to maybe 10% of total activity in this domain. that's largely government money, also to some extent the money a defense contractors as they're looking to promote new ideas to the future. so what you can see there's a lot going on. the technology better issue could not only aerospace as i mentioned, cyber, propulsion, advanced materials, nanotechnology, a number of other things that are going to be central in a future national competitiveness more broadly defined. that's why today's subject are important and again we are

grateful you have come out on a hot august morning to join us. mark, you've been a brookings tougher but a jewish. like ben he is a harvard grad in which a berkeley for his graduate work and spent time in arizona. sort of one of the up-and-coming states by many measures of advanced industry and i would wonder think we talk about today. he worked as a journalist and as a scholar in arizona before joining the metropolitan studies program. one of my favorite studies he's worked on a brookings is called launch explanation mark that it's about colorado and mutual in a space launch industry in ways in which national government, local government, public and private sector, universities can work together to further the competitive candidate for colorado already has. that's just a case study of the broader dynamics we will be talking about today. is also didn' the good deal of g on advanced industries more generally have attended and on green technology and a few other

things. ben bernanke needs no introduction. we are very, very grateful to have them at brookings what he has been a scholar and i think studies at city. he was chairman of the federal reserve from 2006-2014. he and i were both born in augusta, georgia. i won't claim i intended but i've known since the 1980s when he was a professor at princeton when i was a graduate student and he was one of the most supportive, collegial and encouraging professors back then and is personally has not changed in the slightest, despite the thing is achaemenid since that time. he was on the council of economic advisors prior to being chairman of the fed and% of the roles in the pedestal. he was a princeton -- to the 1990s essential as chairman of economic studies, economics department but also at the woodrow wilson school. his ph.d was at mit. for those of you who also have not yet discovered it you should check out ben bernanke's blog. is one of the most entertaining

and sometimes even picture into learning macroeconomics along the way so i would national i was reading to do his usual with alexander hamilton should be taken off the $10 bill and other a lot of fiscal policy and monetary policy in the process. by the way the answer is no country can say more later on. he blogged about the washington national back in july and they shall have more to say about the subject as well. [laughter] but maybe not. before we launch into questions let me, we have the opportunity to thank ben force of his. let me ask you to join me in doing that right now. [applause] >> i'm going to begin within. this is not a sneak preview of his book which will be i think, he wrote economic textbook and an essay on the great depression when it was a professor in an

earlier. and working with the fed here and to the local, on october 4 and it would be unsure much watched but to be different events about that. today is not one of them. today i'd like to begin my personal thinking again for joining us with this discussion and ask you initially just have to think about the size of the defense budget and the appropriate, from an economic perspective? >> thanks for inviting me to speak on this important topic today. we have known each other a long time. but at princeton and i followed mike's work ever since then. ipod and to be one of the most thoughtful and all is right about national defense. also full disclosure, i'm not a defense expert i'm an economist and hope to build the brink of perspective to help us understand rules of the military of defense in u.s. economy. you asked about the size of the

military and you said before whole bunch of numbers, total spending. those numbers are important, resources been used in the national defense. i guess i want to start by being at the economic and saying those dollar figures on a message of a good measure of capability and potentiality. one number just to take the opportunity, one number that bothers me a lot is a journalistic tendency to say the trend extends more than the rest of potential competitors combined, therefore we're military secure. i think that's a mistake from a lot of ways. we have different goals, different needs. but in particular there's a problem of making comparisons across the country using exchange rate to try to evaluate qualitative distances. if i'm comparing the living standard of the united states to china, i do want to look simply

at exchange rate adjusted gdp per person. instead of what to do what economists call a purchasing power parity comparison, which is what you take into account that labor is much cheaper in china, there for haircuts, for example, are much cheaper and country much less to gdp but nevertheless any attempt to compare the standard of living of the united states and china need to take into account those differences in cost. the same thing applies to the military, at the comparison of labor costs between yes and china is a case in point. did a little bit of work before the session to try to figure the relative numbers. we worked on this a little bit. we could find the u.s. military calculates that we spend a $110,000 for each active

military member. we talking now pay and benefits, not talking about training or equipment. just talking sort of the personal cost. we spend about 90,000 per person for each civilian member of the defense effort. in comparison, per worker, and urban worker in china earns about $9000 a year so i don't know exactly what the chinese personnel costs are but obviously a less than 110,000. such as an example of how looking at dollar figures, these figures can be deceptive. this is something, by the way this is something the defense industry that specials understand, the pentagon, state department, you find for example, under ppp comparisons between 45% of world military spending, he was military spin is more like a third of global spending.

these comparisons are important to ultimately i think we should understand and i'm the right person to say this, economics can only take us so far. in the end, thinking that size of the military and a resource expenditures we need to think about our foreign policy goals, the threats we might face, adult with of course long run budget constraints we boldly to face. but this is just a small pitch but think about things personal power disparity terms, utilitarian terms rather than $10. i think that's an important initial point to make. >> thank you. i'll come back to the defense budget a little bit later but let me ask you first about something you have to deal with in the last five, six years, which is defense spending, to add time when you're trying to figure out a way to get the united states out of the recession. how would those dynamics linked,

defense cut complicated task, how much did they affect the we look at the problem? >> so defense spending, military spin is connected to growth, and you are thinkin thinking thinkif what you call the keynesian demand side, how much does spending on military functions, how much does it affect the total content of the economy. particularly in a situation where you unemployment, high unemployment, a recession. standard textbook macroeconomics as increased spending will increase activity, by adding demand for goods and services. generally speaking i think it's best to keep the military preparedness goals separate from the short run cyclical considerations, not to say they are not sometimes important. the most obvious example is of course world war ii with this enormous national effort in

world war ii brought the u.s. economy out of the great depression and had enormous impact on total output and lasted even beyond the war. a more negative examples would be the 1960s when the vietnam effort contributed to the overheating of the is economy and lead to inflation that we saw 1970s. so it can be important but there's no sense necessarily that the changes in defense spending will be, move in the direction you're from a clearly cyclical point of view. recently military spin is not a much smaller share of gdp than it was in the '40s or in the '60s. the effects are much smaller but they were mildly negative i think in the last few years, starting around 2010 the decline, the drawdown in military spending were and negative in u.s. gdp growth up to a point of three or

four-tenths of growth in gdp. not enormous but noticeable. that was in turn partly due to the drawdown of the wars in afghanistan and iraq, but also in part due to the deliberate budget cut that took place in 2010. in fact, the worst year in terms of adverse effects was 2013 which was a very negative year in terms of fiscal contraction and the effects on our economy. i guess i would summarize by saying, first, the effects on the demand side, growth, have been mildly negative. part of it was completely understandable. certainly you wouldn't want to determine the resources devoted in iraq and afghanistan to anyway by cyclical conditions. but the other part i think some was a self-inflicted wound.

all these cuts were made for economic reasons which led most in the wrong direction that they were a mild negative economy that was kind recover. we'll come back to it i'm sure but that many other connections between military spending and defense establishment and economic growth. but this particular narrow case of their demand is less than just be because defense spending as a small part of the economy, but i think unwisely the cuts in military spending which were not motivated by defense needs the last few years were actually a negative in terms of our economic recovery speed imaging specific sectors and didn't into that in more detail of the national research and development. i wondered if your specific thoughts on which technology sectors were most important where defense does contribute or does this, we're talking earlier

many people remember of course in previous areas defense had a huge role in creating advanced technologies, promoting everything from nuclear technology in the 1940s, helicopters, advance of jet engines, a number of other technologies, invention of the internet, many other things. defense was crucial and, of course, nasa contribute as well. think more generally about the government role. today it is much more smaller faction just as a smaller fraction of gdp. do you think those areas are of particular importance? >> broadly, talking about the connection to demand, most important in meeting a long-term the most important effects of military spending on these supply-side of the economy. that works to a number of different mechanisms including training and other things but by far the most important serving in the united states the linkages between defense,

military, appropriations and broader trends. it's one of the major source of u.s. growth over time. we remain technological leaders from our national strength, and so, for sort of important is to understand the relationship between what the military is doing and what's happening in terms of what it could and technology. let's specify that is a critical issue we need to understand. from an economist point of view there's a standard argument which says that the government ought to be conducting basic research. and that goes back to the nobel prize winner, larry summers uncle, another qualification he has, the argument basically is that those basic research, scientific research, made a tremendous economic returns but they are very hard for the site is, the engineers to capture because it's a basic, broad basic search. so there's a case for the

government to subsidize that kind of basic research through grants or through direct activity and so one. so that's kind of the electoral case for government research. the fact is though if you look at the competition of federally response research, most of it is not basic fundamental science. of evidence which michael mission related research. that is, rather than studying the basic properties of atoms, most of the federal funded research would be about how to incorporate our understanding of nuclear forces into a missile system, or whatever it might be. that's a more subtle question. given that we've much more focus on mission related research, as opposed to basic research, with the government does and what the private sector does. you pointed out federal united

states is big, about 40% of total u.s. r&d, about half the military. it's been coming down but it's still a big component. if you look at this area, a lot of what you get is the anecdote, but a lot of great stories going bacback to the manhattan project insulin in many examples of military r&d which has been very productive on the private sector site. example i like is laser technology, which was begun as a military application but there is has been something like 55,000 patents related to laser technologies. the things that come out of that include laser surgery and bar codes and dvd players and whole range of things that come out of the. everyone is aware of the nuclear component, the winner of the internet, darpa and so when. obviously, there are plenty of

examples where military technology has been extremely important for private sector growth and technology. that being said, because have tried identify channels and there's been work in different directions. on the one hand, destiny by the government can create capacity in the economy, create more training for scientists and engineers who can work both in military and nonmilitary areas. pay the cost of underlying research. and a lot of compliments between -- on the other hand, you can think of ways in which military research is counterproductive. for example, a lot of it is secretive for classified reasons that can't be shared easily with the private sector. in some cases it uses up scarce

resources, specific scientific resources and obvious if they're used up by the military that are not available for the private sector. so it goes in both ways. a fair summary would be the studies that have looked at the empirical relationship between r&d spinning of the military and r&d spinning outside still a positive relationship your somewhat stronger than a substitute affects. every dollar of extra military y r&d not going to stop this place a dollop of private-sector r&d, they probably add 20 or 30 cents because of the things i learned in the military application. i think that you want to make a case that u.s. military preparedness and spending have made a positive impact on u.s. growth, it would probably be through the r&d linkages and spillover which seem to be

positive, simpl soon be benefic. i think that's important finding and one that probably aren't as innocent particularly more basic research which can the economic case is very strong. but i'll just wrap up up on the i think though whatever you talk about the effect of some, then the program does have asked us to watch the counterfactual? instead of spending money on military purposes at the same money was spent on basic science of plate be a better strategy. but all else equal the evidence, the best thing to do for military r&d spinning has had positive spillover on the private sector speed related subject, manufacturing. closely linked in with research and development but i want to ask your thoughts on the defense secretary jewell of national manufacturing as we all know and please correct me if i'm summarizing incorrectly that u.s. manufacturing output has

been kind of small upswing lately, due to the shelf into revolution and president abbas but over time certain number of manufacturing jobs have gone down because of robotics and automation. throughout our adult life decline americans compared this in some industries and mark writes about that. to what extent does defense played into this? does it help counter the trend, is only going to be helpful in certain specific areas like aerospace? how do you think about the potential for the american manufacturing-based? >> is important to understand why manufacturing jobs are going to get touched on the robotics comment you made. the amount, the share of u.s. output that is manufacturing is actually not changed all that much over time. we remain every big manufacturing economy and exporter. but the number of manufacturing jobs has gone down a lot because

order to be has grown so quickly that it is essentially takes far fewer workers to build an automobile today than did 20 years ago or 40 years ago. as a result with a lot of implications, the number of particularly lower skilled manufacturing jobs has been greatly reduced. think about the relationship of the two defense, other than of course defense is indeed a major industry, one has to be onshore or most of it has to be onshore, i think that it's important understand again what's happening to his manufacturing is not some sense in being gutted out. what's happening instead is that we are increasing productivity with a lower number of jobs created and also moving up the value-added chain. so we don't make a lot of simple manufacturers anymore. we make more sophisticated machine tools and specialized equipment and so on.

that is a couple of consequences one is we are not heading back towards the manufacturing factor to provide jobs for low skilled people. it's much more so that in the past and industry to provide jobs for higher skilled workers and higher paid workers. what that means is that the relationship between defense and u.s. manufacturing is probably mostly a complementary one but for the same reason i was talked about in terms of r&d, the extent that defense manufacturing leads to more sophisticated products and technological advance, it's going to probably support u.s. manufacture more broadly to some extent but it's not going to take us back to the world of the 1950s when you had assembly lines with hundreds of workers building a car. it is probably a mild positive. is less a question of what the

counterfactual is, what is the money going otherwise but it's not taking us back to the pre-technological revolution of days, much more labor-intensive manufacturing. >> back to the broader question about potential in the labor market. you just touched on the have concerning manufacturing and production equipment or there's the direct employees of the department of defense to begin n those people in this room know a quick reminder, there are three broad categories about -- active duty, unless, the 1.4 million. they are almost 800,000 full-time civilian employed by the department of defense, old time government workers but not in uniform and then there's about 900 some thousand in the broader reserve component of the us military, part-time soldiers sailors airmen and marines. so those three categories

together represent a couple percent of the u.s. workforce. and, of course, how to think about defense role in the labor market? >> well, we are used to thinking of job creation as a good thing which, of course, it is, but you want to avoid the mindset of your carpet monster that is an associate. the creation of jobs for expenditure by the government, is creating jobs, yes, but the output of those workers in some sense, a second shooting to the standard of living. is contributing to a different set of outcomes. clearly the fact that we have whatever 1.4 million active duty soldiers is in some sense a cost. their services, they are important there, anyway saying they are too many or too few, but their services are being used for defense purposes that

are not contributing to the private economy. we shouldn't be confused and say the more people we employ in a military the better. on one integrating jobs. on the other in the output of those jobs are not contributing to private-sector standard of living. it is a real cost and we have to bear the physical and economic burdens of a large military. may be good reason but it's a cost not a benefit. a related question, one that is important goes back to this issue by the linkages between defense spending and r&d this, when you see the army ads on television a common army, we will train you to get a computer scientist or something and to go out and so there's an important question, one look at, to what extent does army or military experience and to training and skills of those workers so that when they go back to the private sector do they bring with them skills and earning potential

that otherwise would not have had? the extent that's the case for individuals, as a bit of an offset for the fact their services were not available to the private sector while they were in the military. there's been a lot of interesting studies that this than of course in economics nothing is ever finally settled, the evidence appears to be to that there will is not an advantage. if you or, if you go into the military at age 18 versus identical person who stays in the private sector and takes a private sector job, 10 years later if you leave the military your skills and wages are public not going to be quite a sight on average as the private sector person. one of the great studies, one of our colleagues at princeton who i talked in graduate macro, he did a great paper where he looked at people based on their

draft lottery number. mine was 335 by the way, thank god, so if you had a very low draft number divide high chance of being drafted. drafted. united for high number do not going to be drafted. so by using that as kind of an estimate he was able to figure out how otherwise similar people fared in terms of their long-term labor market each grievances. what he found was, people who went into the army and then came back out, that their skills and they were a little bit below their counterparts for a while that overtime they would move back towards average. to several benefit. it could be well pashtun from the vietnam era was different from an all-volunteer military, and probably is some difference between having, being trained in combat versus being trained in

electronic. there is some difference there but, unfortunately, there doesn't seem to be much evidence that the training implications all the positive from the military. over all the labor market, the people who go in the military have similar or maybe slightly worse outcomes. for example, who are a veteran who left after 2001, your current unemployment rate is about 7.1, 7.% as opposed to national 5.3%. if you're a veteran of any age or unemployment rate is lower than that. i think the best way to think about it is military takes our young people and uses them for the purposes but it's not adding much to the private sector through training or other experiences. last comment, there's an interesting very which is not see much research which is worth looking at this irrelevant

express of reservists versus longer-term, permanent station people. reservist on the one hand they don't leave the private sector so they can continue to keep network experience. on the other hand, their work experience is disrupted by being called to duty. i think it's an important question that probably has not gotten enough attention, what's the right combination of an economic point of view? what's the right combination of active duty versus reservist, you know, military marks i think that's a question we don't know the answer to yet. >> one last question for you this round. inet escalator or let others in the crowd get out the issue of comparing the roles of fed reserve chairman to military and chief chairman for some of the sensitivities. we'll save that for later but before going to work want to ask you one more question draft economic session together, which is when you think about the

nation's deficit which, of course, has come down but perhaps only temporarily and our debt is the big compared to gdp, and defenses role within the. what are your brought observations? >> it's important to start with a couple of general observations. one is that deficit soared during the recession. of course, because tax revenues went down by so much. so the ratio of national debt held by the public through our gdp went from about 35% before the crisis and recession to about 75% today. a big increase. that has longer implications for our ability to service any kind of government provided expenditures included of course military. but the other thing, a couple of effects understand her point is that while there's a lot of talk

about long-term problems of the deficit, they are long run, not the short run. a debt-to-gdp ratio entity is about 75% congressional budget office projects in about 10 years they will be 77%, to 35. deficits are down now to about 2.5% of gdp, pretty low. we are not looking at a big increase in deficits over the next 10 years or so. jan that time in the cbo has increased more significantly. the answer to the question why that's the case, one of the great aphorisms about federal government is the federal government is facing an insurance company with an army. -- basically. if the insurance part -- the projections of big increase in deficit 10, 20 of denver are mostly tied to the health care costs, medicare and medicaid, and are based on the projection

that help the cause will continue to rise with a rapid rate we've seen over the last, 30 years. that turns out to be the keys in terms of long run deficit planning. if health care costs are not grow so quickly in recent there's been some good news on that front, and deficits will not be a problem within our lifetime anyway, myself. but if health care issues continue to be severe thing that's going to be a constraint on long-term ability of the government to provide various services. but i think the bottom line to draw from this is that i think it was wrong, it was a mistake with the sequestration of those things that inefficiencies, there were these steps taken to correct the deficit in a very short run that probably had long run cost in terms of preparedness, in terms of systems that were midway. i would just conclude by saying there's nothing in our deficit

prospect that should make us distort our defense planning in the near-term and we should be making our decision based on medium-term considerations, what makes the most sense in terms of efficiency for of achieving our objectives. there's no reason for taking draconian steps right now that will have long run costly complications our defense posture just for deficit reasons. has longer an issue. >> very helpful. mark, i want to ask you a couple of questions. you have listened to ben and there's a lot on the table and i just wanted to ask you to react but also specifically to again bring back your interest on advanced industry and on some key geographic sectors in the united states where somebody partnerships are written about me and i'll defense as a player, just how would you observe some of the things a special issue of

research and development, advanced manufacturing. >> thanks for having me. great to be here with ben and the whole foreign policy and economics study. so write up i was just really appreciate the focus on what defense actually is here rather than some of the bumper stickers. i would just add to begin with, no doubt it's an important component everywhere, for the most part but i do want to make the point that those are 4000 bases out there and hundreds and hundreds of communities across the country, defend itself varies widely from place to place. i'm with you metropolitan policy program. we are very interested in national variation, and you touched on it but if you look at the projected defense purchases detail but industry and state, dod publication, you do get

quite wide variation of the local importance of this economy. i think you touched on this a little bit. we don't think where defense doesn't matter very much to often but, in fact, new york, oregon, minnesota, michigan, west virginia it's less than 1%. and then as you alluded to virginia, hawaii, maine, mississippi, d.c., alabama, kentucky, alaska, it's six-6.5%, so we're having a complication. we need to have multiple conversation, talk about economics. it's not a uniform, it's not flat across the state. it's spiky, hugely important in a short list of places, massively crucial in places like virginia, for instance, our

kentucky, colorado. so many places absolute right to be thinking about, very concerned about the local economic impacts, but many places not so much. i'm less worried about these aspects of the economy, defense economy, and the extent to which u.s. military expenditures in the absence of systematic thinking about our economic base remain the nation's main driver or significance, significant driver has been suggested of high-value industrial activity, especially technology innovation. i think while the effects may be declining over time, we're talking about 70, 80, 90 years history of investments and experimentations that have left us with a critical sense, said

industry. we need to think about, and what i'm going to argue is that if we think about the size of the military posture, consider the rest of our economic strategy to ensure that we protect and build these industries. my group here has identified what we call a nation advanced industries, 50 hi r&d, high stem, stem instance of industries in normally enter the economy. that's not just a claim. inordinately high drive patenting come inordinately high drive innovation, or activity growth, exports until the. they really are, only about 10% of the economy in terms of employment but a significant driver of our global prosperity.

so ranging from aerospace, semiconductors, medical device manufacturer but also a number of energy initiatives, renewables, fracking is critical here, and high tech services like computer systems. so the point here though is, these reflect decades of productive interaction between the military and the private sector, including those secret pieces, including inadvertent spillovers of knowledge. they reflect decades of strategic capacity building, made inefficient, maybe not. and decades of directive procurement. so here i'm looking at a different channel of rejection. i'll go further. in the absence of consistent, urgent nonmilitary industry strategy such as competitors,

whether it's germany, south korea, china and ask, defense expenditures as a function something as a self international policy. for better or worse, i'm arguing on balance they have been helpful to the defense budget has turned out to be the only place that one could argue for and deliver certain kinds of useful economic industry innovations. because someone beyond criticism for a long time. so in that sense since world war ii, it is argued been the nation's steadiest most creative supporter of technology progress. you know, i won't bore you with a lot of the anecdotes that i think ben alluded to, but world war ii but world war ii, key source of funding for foundational scientific

research, manhattan project created a national lab system, arguably one of our most important distributive networks in a court case of the innovation system. darpa with these experiments and new formats of the blue sky and into thinking, establishing in many respects started as an idea, promoting decentralized networks and innovation, you know, sophisticated kind of initiative. that is i think not just in spending or in science led to structural approaches, structural innovations. and thirdly, recent heavy investment in emerging fields whether it's computer science, materials science, solid-state atomic movements, data

analytics, robotics, the list goes on. and then it's deployed huge procurement budget. this is a different, in this sense, not just early stage r&d but creating markets for new technologies. my friend dan from arizona state university stresses special attributes of military innovation. this is a focused mission, enduring ties to the private sector, a distinctive feature of the military enterprise. and in this role as an early customer for advanced technology. whether it be nano or microprocessors, artificial intelligence software, data analytics, to some extent the military continues not just make the early investment but to be a

discerning strategic early customer. so that's what i worry about. and the question isn't simply to maintain the military effort at its highest or perhaps inefficient to maintain perhaps inefficient innovation and industry benefits, but it's about making sure that we look at the overall economy to consider other maybe civilian interventions that would parallel that spirit to make a good point, which is an ideal world we would have government sponsored basic research any of these in chicago would be coming out of long run considerations for technical change and maintain technological leadership. our political system is not good at investing in long run, making longworth investments with uncertain payoffs. the political impact of military

r&d is that people can concretely see that the facts that military spending has a privileged place in the political system. it's unfortunate it away the main reason we're getting does come again ideally we would have a muc much broader base programo look at both nonmilitary and military uses, but this appears to be one of the main function of the military spending is degrade political basis and support for. >> i think to date necessary interventions have migrated to the defense budget for delivery. i think the request your, or the culture i think is to have a broader discussion which the defense budget is simply an opponent -- a component of the national stance. it may be laissez-faire indiana but i don't think it would be. >> -- in the end.

>> as i hear you, mark, building on what ben just ask him for something to impressed by the ways in which the defense has contributed national economic growth but aware at least two limitations. one, it's coming down as a person like a national resource and, therefore, it's not going to be as adequate as a marketing. secondly, we need a better civilian strategy to combat what ben was and because of its report on defense industry and you're not that happy about where we stand internationally and competitively. am i correct -- sustained solid support for defense, not to wake the baby with the bathwater, keep th that barbara cochran att with a stronger civilian surge? >> from a defense economy point of view, somewhat agnostic. the question is are we going to maintain and economic posture, and economic stands that clearly centrally will have a public-private collaborative

element? this is not an argument for heavy-handed and social policy but it is about a degree of public investment, public creativity and experimentation in partnership with a private industry. >> one follow-up, maybe give a couple highlights about what you wrote about with the protocol about it as a case study and maybe ben has a follow-up and if not they will go to all of you. i will think to make this concrete you could tell about what's in the accident report from i guess now two years ago? please. >> well, we came on the scene there at the time of consternation late 2011, concern about the discussion of sequestration. and found regional economic development officials, various military leaders, and

progressive democratic governor john hickenlooper very concerned about threats to a front range complex basis that harbored significant high-end data missile preparedness, king occasions capabilities. that created along the front range and extremely, i real exemplar of the effect of economies can grow up in ecosystems alive this kind of -- [inaudible] built up enough for economics but yielded a major aerospace-based defense complex that has begun to move towards new commercial applications, and

in some cases have begun to evolve away from government contracting. so we arrived, looked at this, especially the aerospace peace. and recommended acceleration where ever possible of the move into the commercial space location where they have companies that are delivering earth observation technologies that you all have, are using on their cell phones, that you use google maps, for instance, major companies. wherer a service is being hung off of technology and launch capability we are allowing significant commercial growth. strategy emerged there are this is a state that wants to make

sure that it continues the evolution, wants to protect the base but also move into commercial application, the kind of diversification strategy. and i would just hold this as an example of another factor which is going to be the kind of -- sabah national actors around this huge federal activity. this is a state that created an industry champion to both watch the military budget but also work to build networking among various rooted industry, wound up creating $200 million accelerator program for supporting small startups in the space. so i think this is another factor we're going to see, subnational response to changing divisions of labor.

and in this sense it's quite productive i think. may represent the first glimpse of a new division of labor as the defense budget shrinks. >> when you look at regional development, it's a question of how much is the motivation, basically zero-sum game type where parts of the country looking for additional federal funding of me at the expense of all the taxpayers. certainly given the interest of local politicians it's got to be part of what's going on. the same time, i'm not going to disagree with what you're saying because technological change and innovation our ultimate local events and about networking among different groups, private sector, universities, defense and so once what has to happen somewhere. i think i agree with you this is an example of positive spillovers a defense spending r&d, but again ever tried to

evaluate these types we have to take into account sorted regional benefits vis-à-vis the national benefits. >> the desired to diversify, to identify commercial opportunities. clearly there's a dimension which is legitimate. i think the accident in colorado -- [inaudible] we see this all across come in many of these places with 6% plus shares of the economy and defense are looking at that way i think. >> actually. please wait for a microphone. we will go here, woman and a green shirt first and then to the third row. please identify yourself and please just ask one question he could to make sure we have enough time. >> inc. is a much.

reporter with media group in china. mr. bernanke, do you think it's about maybe -- do you think china's move to devalue its currency is going to exacerbate the u.s. trade deficit was and is there any negative impact the u.s. economy as it relates to fact raise interest rates but also to think the floating exchange rate will do any help to join -- [inaudible] thank you so much. >> i'm going to say one thing which i should sit senator cochran to cut it protect my colleague in any question he does want and which is not directly related to today's topic. we will give them the right to defer. but having said that spirit you are confusing the with the chairman of the fed.

[laughter] certainly i will just say, you know, in some sens sense what ca is doing is what we've asked entity which is will market forces playable into to the front of the currency, that's what we are seeing. the chinese currency appreciated very considerably because of it being tied to the dollar and that the pressure on chinese economy. so this is a liberalization that it's moving in the direction of more market -- something u.s. has asked for for a long time. >> next question. >> mark, and you find what impact universe have on overall growth in these high-tech entries such as aerospace? what effect is the best way to leverage the skills that help the university to go to get national defense and overall economic growth speak with great question. let me provide one note of

prehistory, which is that to an extent in a number of circumstances, the military has actually created university departments, for instance, in computer science, for instance, or invested in building the high level academic knowledge. that has been another benefit here, beneficial set of activities. in this ongoing interaction between i think big government in the form of the military and private universities, public universities, so absolutely crucial in building the skill sets and creating much of the ip that has fueled the system. ..

and we have become, by the way, we have become much better interacting between universities and the private sector and government. that's become a much more efficient process in the united states and that's something we should take advantage of. >> i think the military history has been important in working out those patterns. i think that is now becoming a standard way of operating.

>> in the third row. >> so much. fellow concern. mr. bern, to what extent do you think the middle east situation, situation in the middle east and also africa, isil and boko haram, these groups, to what extent do you think they have affected already the defense spending and military budget of the united states. >> ask you to jump in, mike because mike has done great work evaluating specific threats and military objectives for the military, pointing out you need different capacities for different situations. speaking totally as an amateur, one of the obvious things about warfare last few decades how little of it is between large national armieses but symmetric warfare of various kinds dealing

with lack of information and embedded guerrillas, so obviously -- there is story how much the u.s. is doing much more drone technology. the set technologies and set of military strategies has to adapt to the nature of the challenge and we're seeing a lot of change there. mike? >> two points. one of them on economics i need to be corrected here in a moment but the economics observation if you told me 20 years ago, 30 years ago you could have this much turmoil in the middle east and oil prices could have taken a dive and sustained that i would have been flummoxed. i would have said, professor bernanke, what is it about your course i didn't study? there is something going on i don't know how to predict. there is one observation but we know some of the answers but still stunned this could be true. i'm still surprised we haven't changed our defense posture very much. the defense costs continues and drawdown of force continues and

downward direction and general odierno who retired last week as arm chief of staff the degree the army is suffering the brunt of these reductions. that hasn't changed in official planning since the rice of isil. primarily it was about the last few years and dynamics we've seen. that is my second point. my third and final point, pushing somewhat in the other direction i would expect rand paul, bernie sanders notwithstanding moist of the political energy in the next quarter of the presidential election the push to the right in defense terms. we'll see major candidates of both parties advocating modest increases in defense spending, recognizing that threat has gone up a bit. we haven't even talked about russia and ukraine. as chairman bernanke sad we don't have to be so rushed in our concern bringing down the deficit to ignore what might be needed for broader national security purposes.

i'm not suggesting we'll have a 2015 or 2017 equivalent of reagan buildup, but we'll see modest real growth proposed by either party's presidential candidate once we get through it. the next six weeks in washington are interesting because of the looming sequester and frankly i'm a little bit surprised there hasn't been a better effort by two branches of government to be responsible for this, to make sure we don't sequester defense at this juncture. i think this would be a big, big mistake, this is plea from a think tank guy to avoid see questions term we don't need it and counterproductive to kind of issues we're raising. over here in the third row. >> yes, sir. thank you. michael mark. chairman bernanke. thank you for your time. tom with u.s. news world report. i like what you said that the government is not too good at uncertain investments over time. i've spoken to some people in the startup community are unhappy with the federal

procurement process. how do you think we could make the defense spending better for to fund promising projects quicker and make sure that projects don't continue longer than they need to? startups have a very short lifetime. they need money really fast. the federal procurement process can take too long for them. how do you think we could improve the federal procurement process to be more like a startup model? >> i think, i don't really know the answer to the question but i will try to answer it the following. you were asking me before about the linkage, the parallels between defense department and federal reserve. one of them, if i may, is one of them is the, the fed is engaged in technically complex activity with long-run implications. same as the pentagon in that respect. the way the fed has managed its relationship with congress is that, at least ideally, the fed is what is called instrument

dependent t gets to make the decisions how its objectives are met. however congress sets objectives. congress ideally does not interfere for example, in interest rate policy indirectly. it says, we're charging you the fed, achieving maximum employment and price stability. the fed has to explain how it will achieve the objectives but uses technical knowledge and long-term perspective to achieve that we can't use same model. i don't want to pretend you can use the same model for defense but the objectives are much more harder to evaluate and much less short-run feedback from defense. we can't say to the pentagon we want you to defend america and you decide how to do that. we can't do that obviously. could you move in the direction of congos -- congress and oversight bodies specifying particular goals and capacities it wants the military to have and giving more scope to either the military itself or impartial

commissions or other groups to sort of make some of those decisions so that you're not having politically-determined base locations and politically-determined procurement decisions and those things. i'm not naive enough to think we'll get all the way there but could move in direction like the base closing commission. it is a good example having more independent objective analysis that is then subject to up-or-down vote or single decision by the congress. so in which what you're describing, again if there was more flexibility to the military planners to meet their objectives, subject to fiscal constraints and so on, there would be more opportunity for them to have the flexibility that otherwise, too much intervention in those decisions is blocking. >> i would just jump in. one, first there are hints in the fact that these are mission oriented agencies that may that may provide a hint where this

could go with much more focus on actual delivered capabilities. i think such that ben is talking about. i would also note within the defense corpus there have been successful experiments, sometimes famous ones, for instance. darpa. more recently, incutel, that the cia's kind of venture, cooperative effort that actually do do this. that have short applications, quick grant cycles and are built on speed and in fact wound up influencing other agencies and the private sector even. i think so much has been spent, so much has been attempted in military history. that the answers are within the military system as well you know. >> i will add a word here as well. it's a complex subject and the answer is going to vary from what type of technology you're

talking about one to another. we had an event on acquisition reform for the department of defense in brookings in april. frank kendall spoke. he is the undersecretary of defense for acquisition. i asked him how well do you think we're doing in acquisition? he has incentive to say okay. he put out three successive better road maps for buying power and energizing the case for reform e he says i think b-plus, whenever we go to war we have the best stuff in the world. after him we had bill lynn come up on stage. i asked bill the same question. bill had been the secretary of defense in the obama administration. they're teammates in some broader sense but bill run as small company, finn mechanical, italian arm of aerospace company. bill said i think we're pretty good at the big stuff like secretary kent dal stuff and cost overruns and delays are sometimes unfortunate but you produce a great system in the end but we're bad about anything

touching moore's law. anything concerning electronics. very kinds ever things on your mind asking that question, those specific technology is where bill thinks we need to find better ways there. is legal code allows you to use commercial procurement practices we don't use it very often. the military services tend to get kind of conservative in the situations there. are a million problems and a million answer. i would begin to say that some parts of the problem are more serious than others. fundamental system is not broken. there are parts of it brown in my judgment. way over here on the far side please. >> [inaudible] international news. dr. bernanke, it has been said that the u.s.'s ability to project power is very closely linked to economic power.

so in your view at what point does the debt become such an issue that it actually impacts u.s. ability to project power abroad? >> you said the debt? u.s. debt? yeah, okay. so, i said earlier that i didn't think that it was right to distort near-term military planning or defense planning because of the deficit, because it's, the deficit is a longer-term issue and debt is a longer-term issue. but that being said, in the long run, to a first approximations, whatever additional spending we do we have to pay for somehow and essentially with higher taxes at the end. and clearly with a higher debt-to-gdp ratio our resources are more constrained than they used to be. i can't give you a number beyond certain -- there is a very sorry history of trying to pick

specific numbers where things go wrong, it doesn't really work. but, i certainly didn't mean to imply in the end we don't have to think about our long-run national capacity and our resources. and again i don't think we're at that point now. i don't think that we should be distorting near-term decisions but we do need to think about over a period of decades, you know, what objectives we have as a country, both foreign policy and military objectives. and understand that those things are constrained by our economic power. it's a very complicated relationship between economic growth and the military. we've been talking about some positive relationships but we also know that work on rise and fall of great powers beyond a certain point you can become overextended and commitment of resources to military purposes can actually be very negative for your economy and long-run ability to project power. so, what i'm trying to say,

short-run, i think we're fine but over longer term we have to think about resource constraints on the economy and make sure we're not undertaking commitments globally, militarily, our economy can't sustain in the long term. >> can i build on that asking ben how you looked at things in the crunch period, around 2008, 9, 10, and to what extent was this question on your mind? obviously your main concern i think was to prevent the great recession and becoming second great recession and you were a firefighter in some ways trying to find greater ways to save the economy. i don't know if you were talking about saving long term national power but a lot of people were writing at that moment how china was perceived to be rising and perception was growing faster perhaps than the reality partly in part because of great recession. how did any of those thoughts enter into your calculus back then. >> i was thinking both long term

and short term the one reasons we had so much doubt and i still think in the political arena there is a lot of doubt and angst because we didn't really know in 2008 and 2009, we didn't know how things would come out. whether this was a bad recession or deeper and longer. there were questions of about our long-run capacity was going to be and what we've seen, a lot, not all, but a lot of decline in output we saw after the financial crisis was cyclical. that is there have has been significant recovery, not complete, significant recovery in output and employment. so the, longer run implications are i think less, than we were worried about in 2008. in particular, one point i did make very consistently in actual real time was that notwithstanding the scary deficit numbers we were seeing, 10% of gdp is a very big deficit

which we're close to that early on, notwithstanding those scary numbers i didn't think, at the time i said i didn't think that 2008, 2009, 102010 was the right time to go into fiscal austerity. we needed about long run fiscal constraints but short run we needed economy a chance to recover before we started cutting. so, in the short run, my advice to congress at the time was, you know, let the economy recover, let's not go into austerity mode yet but obviously we, at the same time we're thinking about recovery, and the contribution of fiscal policy to recovery, we also need to be thinking about long-run constraints we're facing and that is the right tradeoff i thought at the time. >> well, we've got a couple more rounds. we'll take two at a time now so we make sure we get a few more questions before we run out of time. why don't we do this gentleman here. then in the black shirt in the fourth row.

then we'll respond to those together. >> there has been a recent push -- >> name please. >> brian noke. there has been a recent push in the fast-food industry to raise the minimum wage $15. that would give a full-time employee gross pay in $30,000 a year. in contrast, military, newly minted officer with college education earns low $30,000s and enlisted personnel earns about 18,000. would you discuss how the raise in military wage impacts military cost with 1.2 million active duty personnel. >> take this question, please. >> the name is john. can you talk about the consolidation in the defense industries whether you think on balance is good or does that consolidation lead to megaprojects that have a life of their own? just the economies of scale that

would bring and how do you actually politically address those. >> i take whichever fraction and i will try -- >> on the, on the minimum wage, how much that minimum wage constrains demand for labor depends a lot on the local conditions. wages are different in different parts of the country. in some parts of the country that would not be very far from low pay workers get. in other parts the country would be very high. probably would squeeze some workers out of the, out of employment. so obviously the military has to maintain competitive wages. i haven't done the study. i can't give you exact numbers but my impression is that military pay is pretty competitive. that, the military is able to attack on average pretty good quality recruits and relatively-skilled workers. so, i would turn to my colleagues on this one but not

my impression at this point that labor market constraints are preventing the military from meeting its needs. i don't think that some increase in minimum wage, whatever benefits or cost of that, i will not address that broader question, i don't think that will be major concern. of course if necessary the military can make adjustments. >> that's right. there is quadriennial review of military compensation you're familiar with, that comes out every four years. and the last one looked across various strata of the defense demographic. what it basically found if you compare the typical person in uniform to a person of the same age and experience, educational level, test proficiency, in the private sector, military pay for enlisted personnel is at about the 85th percentile. in other words they make more than 85% of all people with similar cohort. that includes their allowance for housing and health care

benefits. does not include military pension into calculation. not to say they make enough. that is separate ethical and moral question whether we're doing enough for them when we send them off to war but in terms how we're handling labor mark the so far it has been okay. you raised a good., hypothetically if we go to higher minimum wage and economic recovery chairman bernanke and others engendered, you may have recruiting issues in in recent years we haven't. we'll keep an eye on that. do you want to try the defense consolidation industry or is that mark's question? >> i would say, what we've certainly seen that again there will be a calculus between places and you will see consolidation into certain places at geographical level that will prove from this and others i think not but the larger question is structure of the economy and industry as it

exists to deliver mission critical the question is about maintaining sufficient competitiveness i think. there has been a lot of consolidation i think mike can talk about but the question is what is the right spot. >> sector by sector we've gone through five or six major shipyards. that is probably okay but not five or six separate companies. we have basically two companies making fighter jets. two companies making fighter jet engines. there is a single, consolidated production line now or single effort associated with nuclear-propelled submarines aircraft carriers. some of the work is shared. two different shipyards in two different states. so sector by sector we usually have a couple but that is not true in every domain. we have a big decision looming

in coming weeks or months which is about the long-range pom -- bomber. there are two main competitors. boeing and lockheed are one and. lock heed and boeing making other fighter jets and aircraft. northrop grumman makes a lot of drones but their fate as a future manned space company probably hinges larger extent in the balance who wins this cometics. how would we feel if we lost northrop hypothetically in that space? i would be somewhat concerned. that is the kind of space you go from two to one or three to two, tough ask yourself hard questions. maybe you pay a little bit of a premium having two separate production line to retain independent design and production capabilities. if you find reasonably economic way to do it. with aircraft carriers we don't do that. it is too much. there is one place we build them, in virginia. that is hope for the country. we hope newport news

shipbuilding delivers well. they deliver well but new carrier costs 2 1/2 times than the old carrier does and i'm worried about that trend. you worry about losing competition. the problem is there is no perfect answer. as we continue to have defense budgets stay about the same or shrink a little. average cost per weapon keeps going up because of high technology, you will have more and more decisions to make. the next one is the long-range strike bomber and again i'm still sorting through the economics and national security dimensions of that. go in the backs here next to the camera. >> yes. hi. creighton jones, future science foundation. my question, getting back to the topic of bridging the relationship between the defense and civilian economy, what do you think of the prospects, maintaining inputs we get from defense and r&d and manufacturing, bringing more of that final expenditure of that

activity domestically? such as through expanding the role of army corps of engineers in terms of size and scope? creating programs returning soldiers to engage in actual nation-building types of activity, such that you sort of close that cycle of import, of input and output but actually the final product is expended here in the united states itself? you know, close in particular the multitrillion dollar infrastructure gap we currently have? >> take one more question before we go to responses here. yeah, we'll go in the back, gentleman -- stand up. here comes the microphone. >> i appreciate all your comments so far. i noticed the principle of draconian measures, in case the budget balance gets to be a very serious issue with the gdp which may occur. i wonder, if there is problem with the sequester as we heard following that, that that's a

problem? what to do? in 1939 fdr was faced with a problem of britain and situation in europe, they told europe we'll give you what you want, but principle of cash and carry. by january of 41 they moved to lend lease. currently we provide a great deal of weapons to countries and don't charge them a thing. i wonder how long can this keep up? is this right way to proceed? >> get one last question, to final round and divvy things up one by one. here in the white shirt. >> yes. i graham with inside sources. you spoke earlier about sort of the implications of all this for labor and workers. debate over how much training actually benefits workers and i'm just curious. as you look sort of long term, and you consider the cutbacks or maybe future increases in the defense budget and defense

spending what other sort of implications does that have for workers, for sort of quality of jobs for low-skilled folks, for higher-skilled folks, and then maybe talking about different metro areas what are sort of difficult recognizes in different parts of the country in terms of that issue? >> if you like i can try to begin with the first two questions and pass you guys, whatever comments. >> go for it. >> on first two questions, very fair point but i would point out in broad terms we're already doing pretty well by the standards you identified. in other words american defense manufacturing is largely an export-or remember ended sector. they do export fair weapons abroad. most of the money is spent by and for american firms. we downsized overseas basises, dramatically more so than domestic bases there. is always room to look at another example to say we could do better here but we also have to maintain a sense of fair

trade because we are trying to continue to persuade overseas customers to buy our stuff and if we never think about buying theirs it is hard to maintain a culture that says we should be open and fair. overall i'm less concerned about the broad picture than you might be and i do think defense trade is an advantage for the american economy now. we do more exporting than importing. related question where we're giving away weapons, you know, there are some good debates to be had but only concern three or four important countries, three or four big chunks of money. we're giving a lot of security systems to egypt. myself i think it is too much. i don't want to support president sysy but, afghanistan where we eventually fund army and police and we have to do that for number of years. not so much high technology weaponry but more salaries or a little bit of both. we give ongoing help to israel.

israel makes its own decisions where to buy weapons and often makes its own weapons. gulf states buy weapons with money they earn from the oil economy. same thing for east asian partners. same thing for european allies with others, obviously they all make their own revenues in different ways but they're all capable of paying and they tend to pay. you have good debates from foreign policy view, should we give as much money to afghanistan, israel, egypt, to some extent iraq but i don't we're giving as much money. i don't think it's a big problem that most of our defense exports depending on taxpayer largess. it is winning a lot of contracts with paying customers largely in the middle east, east asia, europe already today. i will leave my answers to ben. ben, over to you. >> well, just in the last one

about cutbacks, again, going back to the question about the debt and so on, having a large military is an economic burden ultimately for the most part. it uses up resources and tax money that could otherwise be used but to extent it has benefits, one of the ones i think we identified today on technological spillovers and -- spillovers and in particular as mark was pointing out that the, it seems politically, unfortunately seems easier to get some of these things funded and supported via context of defend spending than it would be in a more general civilian context. i think that is an important consideration. we want to make sure that we remain technically and technologically competitive and that does affect, it affects different workers differently of course but it does affect the overall prosperity of our economy and ultimately affects most workers the ability of our country to produce at a high

level, with high productivity. i think that is the main thing that i feel a little bit uncomfortable about. we are in fact, we are in fact reducing our reliance on federal and defense oriented r&d in the sense that is coming down as total share of r&d but there is a good economic case for government support for basic research and research with broad based spillovers, to the extent of cutbacks in military, mean cut backs in that kind of research as well, i think that is something to be concerned about. >> i will throw in on parallel basis, the military clearly anchored the creation of the sort of baseline stem workforce in this country. we're clearly seeing shrinkage of that, aging of that in many of the defense industries and i think peril so what ben is saying and what ben is