and is my perception wrong? >> i -- i think i would respectfully disagree with your perception in this sense is that if you look at, let's start with the administration's new national security strategy which is a shift in focus with the asia-pacific region because of the investment that china is certainly making in its navy and its military and that being a very important part of the world in terms of our economy and the entire world's economy. in conjunction with that, the administration has said that they're going to keep the focus also on the middle east and rightly so. if you look at what's happening right now with iran making efforts to acquire the capability of producing a nuclear weapon, the presence we have right now in the strait of hormuz is very, very important in terms of our protection, the protection of our allies. so if we want, and i think we

need to do, have the presence we have, we also see other areas in the world where we have dealt great blows to al qaeda, but they're also continuing to thrive on areas of africa and to me there are grave risks that exist around the world that need to be addressed and i think the one premise i would disagree with in terms of how you framed it is defense spending is being reduced. i think there is bipartisan agreement, although difficult choices on the rough number of the initial reductions. what we're talking about is let's not be irresponsible on the additional cuts that are coming across in the approach coming in january between 500 and $600 billion. i agree with the administration's shift of focus to the asia pacific region so long as we keep our eye

importantly on the middle east, and i don't think the world is any safer that we should suddenly be withdrawing from it and/or, significantly diminishing our capability and let's not forget that the strength of the world economy, there is a direct relationship between not only the thriving economy of america, our relationship with economies around the world and our strength and keeping security for our country. >> one more question, please. anybody else? >> yes, ma'am? >> helen, resources of the future. if you flatly reject any kind of tax revenue increases, what kind of revenue increases do you have in mind that you would be happy to talk about? >> these are two separate policy areas, but i think we have a

broken tax code. i don't think that you should -- there's no question that on a bipartisan basis we have to do a large, fiscal agreement for the country that would not only include a tax reform. i think there are some bipartisan support for simplifying our code and also eliminating loopholes, deductions and how you want to look at it and making it a simpler, fairer code. i think that in the context of that we can look at -- and the super committee, in fact, did some examination of areas of revenue that aren't adding -- increasing our tax rates, but areas whether it's eliminating loopholes or other areas of revenue that don't further hurt our economy. that's something that republicans would be willing to talk about. what we aren't willing to talk about is to take the broken tax code and say we're going to increase tax rates on

individuals to do this, because i think that's the wrong way for us to go for america. >> can you be more specific about the alternative? >> i can't here in this setting. the super committee did look at a whole host of revenue raisers. i'll give you an example. it wouldn't apply in this context and i voted for the ethanol, but that's an example where maybe we could find common ground within the tax code of loopholes that perhaps we could apply that to deal with sequestration and the super committee looked at a whole host of issues like that. we're saying let's bring that back up and let's sit around the table and you didn't do the job the first time and let's get it resolved on behalf of the country and there is common ground there, and i think we can see a way forward, but to take our broken tax code, to increase tax rates, that's not something i see a core group of republicans willing to do when

the road forward to tax reform will be to simplify our broken tax code and that needs to be done in hopefully a big deal where we also deal with entitlements which if you look at where we're spending the money in federal spending, the growth of the mandatory spending programs are going up dramatically. so we could cut defense spending to the bone, to the absolute bone and we will not get a hold of the fiscal crisis unless we take the big picture of how -- where our money is going and how we're handling things within the government. >> we'll go seamlessly into panel one, but please join me in thank the senator. [ applause ]

thank you, everyone, for staying with us. we'd like to now begin with the first panel and i have the pleasure and honor of moderating this panel, as well and i've got a great group here discussing things after our panel, we'll have a brief break and then peter singer will convene the

second panel. so here to my left, ron haskins is a senior fellow in economic studies at brookings. many of you know his distinguished career know welfare reform when he worked on capitol hill in the 1990s and he's been balancing as the welfare reform attempted to do, his concern for fiscal restraint and care which is concern for the nation's neediest and for his economic future and that continues to be the theme of much of his work recently. to my right is david warren which, as many of you know is one of the most innovative and dynamic defense companies in the country today. david's been good enough to join us on previous bookings, vents e is specially related to the future of the defense industrial base and his perspective is extremely informative because for one thing he works for a company that's been innovative and trying to help protect our country with more economical means in many cases. so he's a voice that's willing to consider various kinds of

pickal restraint, but still, i'll let him speak for himself in terms of how to make the country be strong. to my far right is steve bell, who is for those of you who have been in washington for a while, you will know him, nonetheless, either way as senator domenici's right hand man, a man like those powerful, inside washington people we read about and they don't exist just in tom clancy novels, for those of you that know senator domenici's career he's been one of the most effective american statesmen in assuring the nation's fiscal kohl currency for many decades. we've had some success in that endeavor back when senator domenici were in charge. we need to turn to them for advice now. steve has been central in the new bipartisan policy center report on sequestration. so i'm going to begin with him and work this way and each

person will give opening thoughts as i ask a broad question and then we'll go to some discussion and then to you. steve, we just had an excellent presentation from senator ayotte talking about the broad challenges about how the defense department would be affected by possible sequestration scenario. and we all know, sequestration, to review the basic point, would be $500 billion in additional cuts over the next decade on top of the 500 billion that are already happening, on top of additional reductions in war spending which were always intended to be temporary, but none the will, it's worth putting this in context, and i would like to ask you to summarize what you are most concerned about concerning sequestration for better or ill. i don't want to pre-judge the conversation. not everyone here is as adama adamantly opposed as sequestrationas everyone else, and most us, speaking for myself, are against it, but i'll

let steve speak for himself and highlight what the bipartisan policy center report indicated about this potential scenario that could kick in in january if nothing happens on capitol hill in the meantime. >> it's also a pleasure to be here especially with the former cbo analyst of high refute, and had an opportunity in the '90s to go through some of this. in 1985 we had something called the hollings act and i was staff director of budget director at the time and mr. domenici was chairman and bill hogan was the deputy and it hurt us to have to write that language. that was the first time that we had sequester as far as i know, as a legal term in the budget lexicon. i didn't approve of it then. i don't approve of it now. i don't think congress needs it coming down because it can't do its work. we give them, and i've been in

11 campaigns in addition to doing more on budgets. we elect them for a reason, we elect them to vote and we elect them to get things done, and when someone says and is willing to say publicly as united states senator or united states congressman, we can't do this, we need something to force us to do this or to do it for us and then you know something really important has gone wrong. our report is very simple. we have jim jones that used to be nsa director, pete dom nichy and dan glickman who was the chairman of the house intel committee. the white paper says three things. one, it's stupid fiscal policy. two, it's stupid defense policy. three, it's stupid economic policy. why? >> if the sequester goes through both on defense and non-defense it doesn't change our approaching 100 to 200% of gdp,

debt to gdp ratio except for two years. so instead of 2032 it would be at 200% it would be at 2030, with 100% of those taken from the smallest parts of the budgets, about 35% and the largest and growing part untouched so it was stupid fiscal policy, economic policy, i had the misfortune of having spent ten years on wall street, now defunct and i could not imagine a more fragile time to be doing silly things with soars subjects and i think this is a silly thing. with approximately 1 million lost jobs in civilian and non-civilian areas in a two-year period and there were people with bigger numbers, but the fact is that starting this august when the unions and the

companies are talking about warrant notices and earlier in new york and i'll start there, people are going to be scared and the economy will continue to slow down as someone who collaborated with us on our report said the sequester has already started. you're starting to feel it. that's why cbo reduced the growth estimate and it's why the fed board of governor came out with this unusual reforecast down and finally as defense policy, can you imagine anything dumber than taking all programs regardless of merit and just cutting across the board by, in our case 15% over the last three-quarters of the fiscal year 13. so you've got to probe, 7 years old and by the eighth year. you have another program that's two years into its teb-year course and they'll cut both by

15%. that's not good defense policy, and i think it was unanimous in our group and we did have a variety of people that there are lots of ways to cut defense, and this is the worst. >> very provocative and helpful opening. david, let me turn to you again. i know you're not unafraid to consider defense budget changes, even reductions, perjurily as the person who began in the office and corporately and i'll let you speak for themselves, how do you situate sequestrat n sequestration, is it a bridge too far? is it doable? can you speak to the general subject of where we are in the budget process and what the sequestration possibility means to you? >> sure. sure. thank you for having us back. we're always pleasantly surprised, to be invited back to

the party. if i say something that sounds crazy, it's because i'm from california. you know, it was difficult, quite frankly, for me to begin to engage in this sort of thinking about this because it just seems so crazy when you dig into the details. i will try to, i think, parse out some of the craziness from, i think some of the underlying issues that are meaty, that are involved in this conversation. first of all, on sequestration, we certainly will and are willing to add our voice to those saying as currently proposed and this thing is crazy and it will have bad impacts across the board. it's our hope that something rational will happen as an engineer, my mind immediately jumps to the classic theory game of chicken problem where you're driving down the road and you find yourself in a game of chicken and the correct strategy is for you to very visibly rip your steering wheel off of the column and be seen to throw it

out the window. this is clearly the approach that the defendase is taking wh going around town thinking we're not going think about this and the concern with that strategy is that with your counterparty has taken the same approach, you perhaps put yourself in a position where even two rational parties are unable to avoid a catastrophe and we hope that's not the case with this. if it is, bad things are going happen, certainly, but we do think there are actually more interesting and logical elements that this conversation is to be discussed, implicit in a lot of people's responses to the sequestration question is this underlying belief that lower defense budgets inevitably lead to less incapability and a diminished industrial base. i've spoken at this group before about our thoughts on both of these points and in summary, we don't necessarily think that either follow and certainly in this environment it would be

silly for us not to acknowledge that deleveraging needs to happen and the government needs to figure out how to spend money on these things and defense will suffer somehow even if it's just the 10% on top of the 8% on top of the 20% that mike had discussed. if we care about these outcomes and we care about the industrial base then we should be talking about those questions, as well and not just the insanity of the proposed approach to sequestration. so i do have thoughts about all of those things. the main sort of underlying, perhaps, three layers deep mean that it's very prevalent in the valley these days and actually goes again, perhaps one layer deeper to ask the question is there actually something even more fundamental that we're overlooking right now, and arguing about whether we'll spend 3% or 4% on gdp and this is the point, if the pie is getting smart, your percent of it doesn't matter. there are tie-ins to this

conversation, and the technological innovation and the rate of innovation in this country that have this on an even more fundamental level. things that are concerned about and certainly opportunities for an interesting discussion as well. ron, if you can please frame for us, a lot of people in this group are defense specialists, first and foremost and we often talk about sequestration as the axe hanging over and the guillotine hanging over the department of defense's act and it could be affected comparably. and i wonder if you can look at macro economic issue, talk about sequestration premiere vantage point, and there has been discussion that it grew too much in the last ten years and tightening is not such a bad thing, but maybe this is the wrong way to do it and maybe it's the right way to do it and can you help us to reframe the conversation. >> let me first assure that i've

never been on a panel where steve bell is on the far right, and from the audience perspective he's on the far left, which is worse. so you should sit in the middle seat. the biggest problem with sequestration is it's way too small which is the way of saying we'll eat ourselves in little bites? i mean, the problem with the comments that the senator made is we're going to have to do six, eight times as much as we've already done and if we do it in bites like that, to me that's probably, and the pchl r. terms as well and they can appeal to the safety of the country as the senator did and everyone in the defense committee does. we ought to have across-the board cuts and we ought to go big as steve and his colleagues have been saying for years now and we've been saying at brookings for years saw the whole approach as just flawed.

the second thing is both the previous panelist pointed out, across the board cuts are truly insane. i spent a lot of my time studying the obama administration's answers on evidence-based policy that's sweeping the policy now and not just in the administration and the scholarly world that why didn't we pay more attention about what really works and as the president said in its inaugural and we ought to cut things that don't work and spend more on things that do work. so across-the-board cuts are opposite of that so that's a crazy thing to do. we're on this suit now of sequestration. we made a promise and i would say we disagree -- i do agree with we ought to make decisions and we elect people to make wide decisions and that would be 2.1 trillion including 900 billion we got last year and it's only a down payment so there is some

progress so let's give a little credit even though they backed off and want someone else's fingerprints on it rather than the committee. it still is a move in the right direction. all things considered, it's a lousy way to do thing, but we have to do it and not only that, we have to do a lot more of it and there will be big, political repercussions either way. in the long run, if we continue to kick the can down the road then there will be repercussions down the road if you take big steps now there will be repercussions now and the worst thing about the way we're doing it now is we'll take a big hit on public dissatisfaction and defense contractors and so forth and then we'll have to come back and do it again, and come back and do it again. so the politics of it is rugged. we need a big agreement any to the extent that this takes any of the steam out of it is a big mistake. let me question you in the interest of having a good, full discussion here today where

there's obviously some people adamantly against sequestration. it sounded like you were not in that group because it sounded like for you the biggest problem is we haven't gotten far enough and i'm assuming that's one of your concerns and tax reform as the senator mentioned and it doesn't sound like you are unduly worried about cuts in the discretionary budget either in the defense or non-defense because it sounded like your concern about the budget deficit is so great that it trumps whatever ugliness you might forecast in the way the sequestration axe will hit. >> i think we do need defense cuts and i'm not an expert in defense and we need defense cuts and we need cuts in domestic, discretionary and they've been increasing quite rapidly and we can figure out a way to make cuts and discretionary, and non-defense discretionary that would be okay, they wouldn't be great, but they would be okay and everybody knows that we're not going to make serious

progress until we do something about revenues and entitlements and there are little pieces of entitlements here and there's 16 billion and something like that, and that's nothing compared to what we could get. so we need reform in entitlements and we need more revenues and the republicans will have to come to the table and i just don't see how they'll continue to avoid it. so, yes, i'm guilty as charged. >> we don't just want to be preaching a single message that's not in the brookings spirit. i'm sure it's not reflected on panel, too. you talked about -- and you summarized the different cuts we're seeing. first of all, in war spending which is going to be in annual terms more than $100 billion a year and it's already down now about half that and it's headed down to 40, 50 in the next couple of years and that's already a big chunk of more than 100 billion out of the annual defense budget and it's never

supposed to stay that way indefinitely and it's in annual terms about a $50 billion chunk that comes from the first branch of the budget control athe $487 billion divided by 10 and now there's this additional 500 billion cut that would happen to dod under sequestration. how much of that can you live with or is it not so much the numbers as i put them, but more the time sequencing and as steve was discussing earlier the, you know, the blind way in which they would have in all accounts, if you would re-write sequestration, how would you do it? >> is that one question? >> yea. the last part. >> you can focus on the last part. >> obviously, implicit in the statement are the two points i started with. there is an assumption that less money being spent on defense implies less capability and a diminished industrial base. certainly, if we just do when

we're doing right now and spend less money on it, i think it reasonably follows that we'll have less capability and less responsive industrial base. the point that i believe i've tried to consistently make and the point that i saw mackenzie, and i don't know if he was here today is that there are, perhaps, opportunities now look at less money to create a different pattern of spending, the same way, perhaps they get chided by my peers in the valley that we are living in this capitalism exclusion bubble that that doesn't mean that capitalism will respond and look for market-based solution to the challenges. that doesn't follow to me and pay less to get less, perhaps. so i do believe that more innovative spending within the government and more opportunities to look for ways, for example, to open up government programs of record as

one possible example to disruptive innovation from other areas of the market. certainly, we've seen just recently with our friend elon and space launch, no way can the commercial market come and do something and that's something that the defense industrial base must do itself. maybe, maybe, but the market will find a way and that's largely what this country is premised upon. that's the kind of capability side from the -- what will the impact on the industrial base be, if you believe that the total defense spending is being efficiently allocated across the market and certainly spending less will give you less capability across that base. certainly, i don't think it's a contentious point to make that there are dislocations and there are in, fishences in the allocations of the defense spent and whether you can cut the fat without cutting into the muscle is perhaps where the debate is occurring, but certainly my experience over the last seven years trying to bring disruptive

innovation shows that it is possible to do more for less within the government and not sort of where the government is traditionally chided for doing less for more or the same for more. >> let me turn to you, please, before we open it up and i would just like to ask you to respond to where we are in the conversation because you made very punchy, pithy, eloquent statements earlier, pressing your disdain for sequestration, i think, is a fair word. >> yes. >> what we're hearing from our colleagues on the panel is a little less stride enzi in their objections to at least some part of sequestration. it sounds like both these gentlemen can live with, they may not prefer it, but they can live with it. that what bothers you about sequestration and you mentioned how it could affect good programs as well as bad. if you could re-write sequestration, how much cutting is okay and how much can we mitigate this to have a good

bill? >> it sounds like a chicken answer, but i think we all know from ron over to here that the defense budget is suffering from the same thing the budget is on, the benefits for personnel, retiree benefits and retiree health benefit, consume larger and larger proportion of the budget. so when someone says to you, oh, we'll spend 4% of the budget as a percentage of gdp on defense, that's an irrelevancy because before 1975, we didn't have an all-volunteer army and we didn't have to increase benefits to entice enrollment. we didn't have to give people 20 and out and just so everyone will know i have a 100% disabled brother from the war and 100% disabled stepfather. so i'm not speaking -- i'm speaking -- our family's always been in the military.