we're retiring 10% of the fighter squadrons, programs that seem to play in the main strategy, the joint strike fighter, the virginia class submarines so really no one was spared in this, given the delta from what the pentagon had been planning, the growth they had listen planning in last year's budget to the relatively flat budget that they're constrained to now, it did require painful choices across the board. the three things i'm going to be looking for, though, when the details of the budget come out, are the following. first, the budget share of each of the services, it's interesting that throughout time, the services have tended to maintain relatively equal budget shares over the years. now when you include war funding over the past decade clearly the army and marine corps got a much greater share of that, but i went back and looked at last

year's budget request, the five-year plan they put out and they already showed last year that the air force was going to gradually increase its budget share over the five-year plan. the army would gradually lose budget share over those five years, and the navy and marine corps, they're basically going to stay flat, so one of the things we'll be looking for when the new budget comes out, the strategy says we're going to place more emphasis on air and sea forces, less emphasis on ground forces, so are they going to accelerate that shift and budget share or is it basically going to stay at what they were predicting they were going to do in the last budget? the second thing i'll be looking for is the mix of active component versus garden reserve component forces. it's one of the things the secretary talked about a bit yesterday. we don't have a lot of details yet but it sounds like the army is, while they're making major cuts in the active duty force, there will be smaller cuts in the garden reserve.

the air force may actually be going in the other direction. they may be cutting more deeply in their reserve component in order to protect some critical parts of their active component so that's one of the trade-offs, one of the competitions in the budget i'll be watching as well. the third one, and this is one that we often don't like to talk about, because it's very politically sensitive, but nevertheless it is a real competition going on in the budget between retirees and active duty. what i'm talking about here is what the pentagon has to budget and pay every year for retirement benefits, not just retirement pay but health care as well, versus what they're doing to support the active duty troops in terms of pay and benefits. we didn't get a lot of details yesterday. they talked about creating a commission to go out and look at options for reforming the military retirement system. i actually think this is a great idea. i think this is a good approach because you don't want to go

into this in a haphazard manner and just start saying well, you know, we think we can cut this. we think we can cut that. you don't want to end up with another redux, you know back in the mid 1980s we had this idea to cut the retirement benefit, redux i think stands for reduction, so the idea was we're just going to make a sudden shift. everyone who enters the service from now on will get less of a retirement benefit. well that didn't hold. it created this discrepancy within the force where as we got closer to 20 years after that point, when people would actually start retiring under the new benefits, we balked, and we went back to the old system. so hopefully if this retirement commission does get formed, they'll take a broader view of this. this shouldn't be about finding ways to cut. it should be about finding ways to get better value. they do this in the private

sector. it's called preference-based benefits optization. compani optimization. you need to do this all the time, how people value various components of their compensation and then you can make smart tradeoffs and if they do not value something, maybe you cut that and give them something elsewhere they are getting good value out of it. so i think, i hold out hope that this commission that congress will take a serious look at this, and perhaps get the legislation together to bring that forward. but overall you know, what are the traits we're seeing in the budget? personnel costs make up about a third of the pentagon's budget. when you include military personnel costs plus the defense health program, it's about a third of the pentagon budget and what they said yesterday is personnel costs are ohm taking one-ninth of the cuts. so that means that other parts of the budget are going to take a disproportionate share of the cuts because ultimately this is a zero sum game.

they have a budget cap required by the budget control act they've got to fit in so procurement i think is actually going to get hit the hardest. we heard a lot of the program decisions yesterday. i imagine there are many more. we have yet to hear and those will come out over the coming days and weeks. the total savings that they're talking about, and again, this is the savings relative to last year's budget, it's $259 billion over the five-year plan. 25% of those savings are supposed to come from efficiencies. that's another $60 billion in efficiencies on top of $178 billion in efficiencies that was in last year's budget. boy, that's very optimistic to think that you can find all those efficiencies. i think it is incredibly risky to be banking on those savings before they've been achieved. it is always a good goal to try to find efficiencies, to try to

get more efficient, to root out waste wherever you can, in any government agency, in any organization, but to go ahead and bank on those savings for a quarter of what you're doing in this budget, i think is a bit risky. if those savings don't materialize, where are the savings going to come from? this is a zero sum game. they'll have to come from something else and that's going to be a hard decision. the brac proposal i thought was also interesting because number one, they're not banking on any savings from t and that's fair because if you do another round of base closures now, you're not going to get any savings in the next five years. in fact it's probably going to cost you a little money. they also did not budget for the cost of another round of brac. so i would not read in, too much into this suggestion that we're going to have another round of base closures. i think this is a notional idea right now and in an election year i think it's highly unlikely that congress is going to want to enact that legislation. the final point i'll make is,

and i've made this before, is that this budget and this strategy do not prepare for the possibility of sequestration. that is a real possibility. i would not say it is highly likely to occur, but i would say that there is a finite chance it really will happen because it is the law of the land and if congress does nothing, if there is gridlock it will happen by default january 2nd next year. they presented the budget as a package deal, a take it or leave it, this is what you've got. the reality is, that's not going to hold. there are some things in there congress isn't going to go along with and there are probably further cuts are going to be needed in the years to come, even if we avoid sequestration, it's optimistic to think that the defense budget is just going to flatten out for the rest of the decade. history shows that doesn't tend to happen. so they talked a lot about how the strategy was flexible,

adaptable, agile, versatile, beginning to think that they need to budget in the pentagon for a new thesaurus, they're using those words so many times, but the same should be true of the budget. it's got to be flexible and adaptable, and the reality here is that further cuts are likely even if we avoid sequestration, the defense budget is likely to still decline in the years to come. so i would urge the pentagon to start working on a plan "b" and if it means you have to start over and come up with a new strategy that is more flexible and adaptable to the budget environment, then so be it. that's all i have. >> thank you, todd. stephanie, you want to pick it up from here? >> absolutely. good morning and again thank you for joining us this morning. i have a different interest in tracking yesterday's announcements. my perspective looks at programmatic details but also the strategic implications and the kinds of risks that these documents that we've seen, whether it's the strategy or the

strategic guidance that was promulgated earlier this month or yesterday's budgetary announcements. i will say that details really do matter. we don't have sufficient detail about the budget right now to make specific recommendations or to cast particular stones at considerations or decisions that were made. i'm waiting with bated breath for the budget to come out in the next few weeks. in the meantime what we can go over is the broader context. what does it say about our nation's national security priorities? what is the strategic context in which we should judge whether these are the right or the wrong decisions? my starting point is the strategic guidance that was released on january 5th, what are the assumptions, the risks, and the priorities laid out in that guidance? and so like secretary panetta, i would just like to provide an overview of what the five key

elements were. you probably all know this but worth repeating, one the military will be smaller and leaner but yet it will maintain technological advantages. we will rebalance our global posture, we'll build innovative partnerships, defeat aggression from any adversary, and protect and prioritize key investments. that is motherhood and apple pie. so when dr. hamre says there's broad consensus, absolutely. who could really argue with any of those things? in fact, if you go back to the bush administration's first qdr, it said pretty much the same things, but as we know that qdr lasted roughly eight to nine months before the global strategic environment caused huge shiftsz. this is back in 2001, and so what i'm wondering i budget information that we've gotten talks about

reversibility. it talks about key partnerships. it talks about the kinds of wars that we're going to be facing or rather the conflicts that we're going to be face facing in the near future and i have some concerns because i'm in a think tank and that's what we do, we have concerns. [ laughter ] first, it appears to me from yesterday's announcements that e scario is a high-tech war. if you look at where they're placing their investments, what they're getting rid of, they are not contemplating kind of the low intensity conflict, stability operations environment in which we've been operating for the last few years and so i have some concerns about kind of deemphasizing some of the capabilities that we've been developing over the last few years. i'm not saying we shouldn't invest in cyber technologies in space. those are certainly very important and really things that only the state can handle in certain aspects of protection.

air/sea battle and the budget review or preview yesterday seemed to affirm that. it actually says in the strategic guidance and in yesterday's announcements that the defense department is not anticipating a prolonged, large-scale stability operation that require land forces in a rotational basis. okay. what in the strategic environment leads them to think that? if you look at undergoverned spaces, ungoverned spaces, the probably of civil wars, the probability of long-term instability i'm not sure why they draw the conclusion. i would argue from a u.s. perspective we certainly do have an interest in maintaining a capability to address instability in places like the maghr maghreb, transsahara, the middle east and in asia. i wonder about the planning scenario by appears to be hirks-text but ignores the

lessons over the last few years. my concerns are focused on the innovative partnerships. if the u.s. is going to focus on technology, who is going to handle the rest of the issues? we have something called global training equip in the department of defense to train military forces around the world to handle counterterrorism operations and stability operations. will we see an increase in that activity? are we going to depend on partners whether it's the united kingdom, whether it's mali, to address some of the concerns that really we have the capabilities now to address, but we might not in the future because of this transition so that's something i'm going to be watching closely. what are we asking our partners to do? last year the united kingdom came out with their strategic defense and security review and we talked to them about, as a nation, about what are they giving up? i wonder whether we had similar conversations before the roll-out of the new strategic guidance and this budget with

our reliable shoulder-to-shoulder partners. have we talked to the brits and the australians enough about what we are giving up, what strategic risks we as a nation are willing to accept, and therefore as our partners, are they going to accept the same risks or are they going to fill that niche? how did those conversations go? based on my experience they probably went very quickly. [ laughter ] they probably went about two days before anything was rolled out, and we called them "consultations." it remains to be seen what our partners can do. that's one set of partners and david and i have talked at length about building partnership capability within existing partners who are capable, you know, the brits shall the germans, the french, what are we doing to help them with their capabilities and capacities, versus innovative partnerships which i think is the executive branch's code for, you know, partners that we don't -- non-traditional partners k we call them, the malianes, the chatians, the

indonesians and i wonder how the budget will impact those relationships. not quite sure what innovative partnerships means and my third set of concerns hinging on this word, reversibility. now it used to be envogue to use transformation, rebalancing. what does reversibility mean? when you're talking about early retirement, how do you unretire something? if you're talking about slowing procurement, i can maybe see trying to reenergize a production line but from an industrial perspective, what does reversibility mean? is it possible, did defense officials walk the factory of floors and go okay if we slow procurement and you have to slow down your production line, how fast can we revitalize it, if we need to? this was something we saw obviously with up-arming our humvees not too long ago and having members of congress go out and walk factory floors.

bob simmons, the current staff director of the house armed services committee takes great pride in talking about really focusing the executive branch on what it means to use the industrial base. i know secretary panetta mentioned protecting, well we won't use the word protecting -- working with the industrial base to have a strong one. i'm not sure what that means. i'm not sure what they've done to ensure that that happens. when you terminate global hawk, how do you unterminate it? how is it reversible? and so that's the third set of concerns that i'm looking at, and with that, i will turn the floor over i guess to clark for final comments. >> thank you. it's always a little daunting to come at the end particularly when three such competent and you, but nevertheless in much the same way that stephanie defines her role as a think tank as having concerns

think tank is to talk when i'm asked to talk, so i will do that but i'll try to keep it blessedly short so we get to questions. one of the things that we constantly look at in washington are the inner play or those of us who watch the pentagon between strategy and resources. we usually talk about the strategy of resources mismatch, where we're not spending enough resources to execute the strategy. it's very interesting that we had a base budget that had a strategy, the 2010 quadrennial review defense strategy, it was right there. that defense budget projected a 1% increase in real dollars was flattened, actually not completely flattened, as president obama said, there was a slight increase to the fed's budget, yet we have a new strategy. i've put together along with a colleague of mine, kim wincup of the defense drawdown working

group and had a big debate, what is the difference between strategy and strategic guidance? the 5 january strategic guidance, it's really emanating from the 2010 strategy but that was dispelled right away because pa net ta and general dempsey referred to it as a new strategy even though it's a strategictru to the precise priorities within it, but if we had had any doubt whether or not it was a new strategy, it is a newwe the seq $600 billion or maybe $575 billion depending on how you estimate it. will that mean we have another new strategy? enifill he said sequestering is like "taking a chainsaw to the budget and out of that you take a new strategy." i'm actually a strategist and i hadn't realized our strategies were so vulnerable to relatively

modest changes in the resource level because we've been told right now, well the first strategy couldn't withstand a % dec decrament. i think our strategies need to be a little bit more robust than that and maybe we should be as todd has said looking further ahead to say well, maybe we have a real reduction, a real reduction along the lines of the 25% to 35% of reductions and think about what are our priorities under those circumstances and cast backwards rather than be where we are now, every time there's an increment we say we have a new strategy. there was a commentary i didn't have time to read this morning, there's not a lot of big cuts here. cuts here, there's

not a lot of big, showy, cuts, doesn't this reflect that there's no real pain and in the press kfr press conference they were eager to say, very tough, and it was said, there are 50 or 60 things in this budget that we want to do but can't afford to do anymore. i would argue this is just a subtle version. but the cut cans that are there are for the negotiation over what is going to replace sequester, and nobody wants that because it has a deep point, it's not just the size of reduction, it how steeply it's administers during thathe's goi negotiation over what will replace sequester, the only way

to avoid it is to have an agreement to replace it and that will involve i believe, more cuts to defense, it will be a more reasonable path, it will be targeted and not across the board the way the sequester mechanism ill straigshows and i have to do something with the pay in benefits. our current of increase has been said to be unsustainable. one of my colleagues at a working group said, and this was before the announcements of yesterday, if you look at current trend lines, if you look at current trend lines and you hold the budget flat by some year, 2039 or something like that, all we can afford are military personnel costs. it's like the norm augustine issue, it's all that we can

afford is people, nothing to equip them with or make them ready. i think there's no question that out of this, the hope of the pentagon is that we have to do something to stabilize pay in benefits so as to leave resources to equip them. to train them. because everyone is determined to avoid a hallo force, one thing to avoid with a hallow force is too. structure, when you have too many structure, you under man them, you don't equip them, and you don't train them. they are doing a good job o trying to force structure with budget cuts. as the first chart shows, the trend has increased in the dollars being spent but not much on the increased strength. we cannot just savings that we .

what we will find is out of this process will be finally, you know, the executive branch and the legislative barrage come together to about unstainable personnel costs and deciding over how deep that cut will be, over what time and over what glide path thank you, clark, >> let me provide a few wrap up comments and then we will open up the floor for questions. i think it's useful for us to observe that we are not trying cutting the budget. i'm confident that inside the room as the decisions were being debated, it felt really hard. you know, and for all the constituents involved in each of those, it was really hard. nonetheless, it's fair to say, there's not a lot of, in fact,

visible damage from $487 billion of reductions and that would lead the casual observer, like an appropriator to say, surely there must be more. now, sequestration, actually, takes more. and there's a great deal of language out about it that doesn't take into account a careful reading of the law itself. and this is worth pointing out, because the basis of any change will not be the language out in the ether it will be in the law that is signed and passed by the president. proceeding ones, provides enormous to the executive branch in general and the defense department specifically in allocating cuts across a broader base, all previous sequestrations were

done at the ppa level. every line had to take the chainsaw approach. as was said yesterday. this one is at the account level, that means the appropriation account level. that mns chainsaw cuts omr armiy and mil pers, and that is exempt by the way. so that or ship construction navy. not every account has to have an equal effect, right? the pentagon has consider flexibility and the president has considerable flexibility. it is -- provide additional flexibility including perhaps modest flexibility year over year. the other part of that equation

though, unlike all the other draw downs, we have today, present as part of the dynamic, the global financial market t reason we got the reductions is because of the threat of default over the debt ceiling. i don't reer ticking, i think the submitted his request to raise the debt ceiling the day the congress came back, so the 15-day clock will be reached next tuesday and i presume on something like wednesday morning, our debt ceiling will go up 1.2 trilli$ n trillion, pending a veto and then the president signing it and it will go up. good news this morning, 2.8% gpa

growth which indicates more revenue, less pressure off how quickly we will reach the debt ceiling. woe to us if we reach it in the lame duck session.cbo and omb are doing sufficient growth rates in the economy, that we won't reach that. let's hope reality keeps up with your estimates, if you will. let me make some points. we have the strategicd strategy initial information from the secretary of defense and the pentagon but we are still missing the real element here which is the budget itself and we have until february 13th, it will be the third time that the administration has been late in

what should you be looking for in that budget as it comes forward, number one, the question of. there's $60 billion that the secretary cited, and you'll n a budget. you'll have to look at a lot of programs, aggressive and competitive contracting practices. that is not really an efficiency, it's a tightening on margin and fee and presumably on performance, better use of information technology. ever since we created information technology we have saved money by taking money out of the budget in anticipation of better use of information technology. and i'll not be surprisedn. i streamlining i will confess to totally baffled as to how i'll be able to tell if you did that or not.

i know what getting rid of staff means but that does not necessarily mean streamlining. and reduction in contract service. most are out of the operation account and there's no display of that in the budget, but there are disturbing trends already under way in the industryis itself. it's a deiscoping of the requirements for the positions and i suspect you have seen it already. the pentagon is saying, i can take a bachelor's agree and not a master's degree and not pay the cost of that master's degree. and that is okay, if that job can be done