you be willing to pay $20 a month more for tri-care for life. >> i said, sure, $20, of course. we're talking about that kind of thing. we have a federal budget which is being eaten up by medicare, medicaid and retirement programs. we have a defense budget that's being eaten up. if you look at the lines across, this is what we spend for personnel. this is what we spend for everything else. they're about ready to cross. we'll spend more money for personnel and benefits that we'll spend on all of the rest of the stuff we do including the stuff we spend overseas and more. that's been the problem that people don't want to wrestle with. when we started this thing, chuck wald said you know they'll burn this building down, don't you? that's the building where we are. i said, who? >> he said the vfw, and he meant it. those were the people that are going to be upset. the people that get the benefits

now and had promised to get benefits forever and oppose any benefit change. so i think you really have to look at the budget in discreet pieces and say, what are you going to do about the hollowing out that's already occurring because of all of the money we have to spend on benefits? so i think it's a more complicated subject and i don't think it's one sequestering will solve. i think it's one that maybe is going to take a couple of years to solve until people like wald and jones and the people like that stand up and say, hey, you know, we're spending too much money on benefits. >> mike, let me make a quick point here as background to sequestration and that is why are we here and have sequestration? i mean, think of the logic of it. 30 or 40ers yoo a eryears ago w

of the budget on programs we think are appropriate. now we're down to 35%. so there's been a huge shift of federal spending to the entitlements and we're not willing to do anything about entitlements. we're not willing to increase revenues so what do we do? we screw defense and come up with some idiot thing like sequestration. the money is good, but the focus this one area, because politicians are reluctant to tackle the heart of the problem, it just -- it doesn't make sense. one thing about the psychology of this that we want to ponder is meetings like this and comments like the senator made show that people are made aware that, wow, if we cut defense as much we could be jeopardized on security and the secretary of defense and all kind of powerful statements and the americans are listening to that and that's exactly what steve wanted to happen when he invented sequestration. he put so much pain on people and the threat is so great that they'll do the right thing because otherwise they won't do

the right thing, so hopefully things like this will convince republicans and we can get a big deal that we can relief the pressure with 35% of the budget that we're now trying to balance the budget of the total spending. >> so just the last, clarifying question, and steve, if i understood you right it sounded like you were saying that you might or might not live with the additional defense cuts as long as you can have some control over where they are applied and over what period of time they were phased in. is that a fair summary? >> it is. i see you go down one level and you see where the money is really being spent and you have to make, by the way, this is not a call for the draft, okay? please, no one take this as a call for reinstatement of the draft. >> you take a look at where the money's being spent. you take a look at somebody's in for 20 years and gets out at 39

and he lives to 79 so he's worked 20 and gets 40 years, plus the coa, and plus drycare for life are, and you have to ask yourself as very many communities are asking themselves around the country right now. can we afford, even for good work, policemen, firemen, those kind of important people, can we afford to do this while we are not getting new ambulances and new fire trucks or the most modern i.t. equipment. and i really believe that the money that needs to be found in defense by and large is money that we're unwilling to touch because it benefits people to whom we've made promises and those promises we probably can't keep in their entirety and nobody wants to say that. >> fascinating. i'm just going to make one comment myself as the token hawk on the panel. i didn't realize i would be that

when the conversation began. >> the token hawk? we have a bad panel here! >> i'll have a comment, there have been a lot of rich, provocative and important statements and we'll have to live with the need whether we like it or not for the reasons we mentioned. my own assessment is there isn't enough savings even in the ideas that we're talking about to realistically get that additional 500 billion in sequestration out of the budget of defense question. i think it would cut substantially into muscle and we could rebalance keeping our focus on the broader middle east and staying strong in the east asia pacific region and i suggested problematic cuts and even if we do that, partly because the obama administration is hoping for efficiencies and reform. we'll do very well to add 100 billion over the ten years. sequestration would add another 500 billion in cuts.

i'm not saying there's a bottom line, objective answer and i would add that to the mix as we go to all of you. with that, the same ground rules as before. we start with harlan in the back. please identify yourself and you can choose to whom you are directing the question, that would be helpful. >> i'm harlan altman, thanks to the panel because it has been a stimulating and provocative session. the world economic situation is dicey at best, if the euro happens claes the pressure put on us will be huge. you have a political system that is broken that unless one party winds both ends of pennsylvania avenue with 60 votes in the senate, i think there's very little chance of anything rationally being done and worse than that, no matter who win withes the election, you will have change in the leadership with the departments and it will be five or six months after the election or more until you have a chance for people who are in

the position to talk about reprogramming and the like. now i think you're absolutely right that we have to make far greater cuts to our overall spending. there's probably not going to be any agreement between the differences over taxation and spending. so give me a couple of big idea, how you deal with a system that's broken. we really have to accommodate by cutting trillions and trillions of dollars and doing it in a sensible way and who do we get to lead the charge? mr. obama will not did that, unless he's reelected and mr. romney will not be elected until he does it. tell me about the looming catastrophe that everybody rick ozzes is coming and nobody wants to stand up and take the tough choices that will be needed. >> let me say one thing as a background here. in this room, five or six years ago allison stood up in the

audience during a debate like this that she was afraid that we would not solve this crisis until a disaster occurred, until there was a crisis, or some kind of financial crisis and i think that's still a realistic policy. to state you're right, we'll have to have some kind of disaster even worse than the financial disaster before politicians will face what they have to face, and it's the easiest in many ways because the tax code is so bad. in fact, i'll tell you how you might get republicans to do it. our tax code is so bad that everybody agrees, i think, you ought to broaden the base and reduce the rates and that's classic way to reform the tax code and you have the tax base and the best way possible. there will be a lot of objection to that, so you've got to wound, a lot of people, i think. you can't just do it for a few people. there's got to be a lot of

sacrifice on the spending side and the way you do it is you do it in a way that might be revenue neutral and cbo will score it that way, we fixed the tax code and we're not raising taxes and not just rates, but we're not raising additional revenue. if you don't get a certain amount of revenue, then there's some fail safe procedure where you do raise rates or do something to raise the revenue you need. i think that's doable and it would give republicans cover, and eventually we'll do something like that. on the spending side, there's lots of spending that would be safer for the country than defense spending. we've spent a lot of federal dollars in education, and i can't see that it's done a lot of good, and i think we could save, 20, 30 billion on education spending. so you get several places like that, and i think -- i think it adds up. allison and i wrote a chapter

where we proposed all kind of cuts like that that added up to a substantial amount of money on the spending side, so i think it could be done. it could be done in the way that would be the least damage to the country and we could face a lot of risk that the less government money you spend, it could have an impact on the economy, and it's going to increase unemployment and it's inevitable and let's survive for two years and then things will return to normal. >> i'm glad you asked that question. i am kind of surprised to be characterized as an optimistic perspective. certainly, i'm never cast that way when i'm back in the valley. when i look at the data and the data shows median and household incomes stagnant for the last 30 years and it may be rising slowly and largely mainly because of the top end. my concern, and i alluded to this at the start is that we have an economic growth problem

here and when we have an economic growth problem here and everything becomes the zero sum and we're trying to figure out which paul we're going to rob to pay peter and that's not an encouraging conversation for any way to be a part of. i don't think the perspective that has increasing resonance on the valley is that there is a technological innovation component of this that we really need to refocus on. we have, perhaps, all been blinded by the computer age and perhaps high finance and we're living through an age of technological innovation here and i think if you sat for a few moments and thought about other areas or other sectors, perhaps transportation where we're moving slower today than we did 30 years ago in energy or still burning oil, are we still innovating? is it still the engine of growth in this country? absent economic growth and we're having this conversation of 3% or 4% of an ever-decreasing pie. i think this is a particularly

relevant conversation for this group because the department of defense clearly has a history, a robust history of helping this technological innovation in this country. unfortunately, it is a rather aged pedigree in helping out with innovation in this country. there's no reason that that necessarily has to be true. in her article yesterday proposed any number of areas where the department can set its mind to it really fired up technological innovation and what i would argue is the root cause of having the conversations that absent growth we're having zero-sum conversations and everyone's happy. i do think there's a way out of this, but it will be hard. go ahead. >> let me speak very briefly about something extremely complicated, but which i've been speaking about on the hill for the last two or three weeks. can we avoid as much damage as

possible in the lame duck session? you notice i'm not talking about big, big, huge things and not one specific thing. how do we pass a continuing resolution by october 1st? get through the elections and then minimize the damage the lame duck will do while maximizing the opportunity in the 113th congress that we actually might be able to go towards the big deal that ron has mentioned? believe it or not, there is a way to do that and as soon i briefed yesterday on it said to me, steve, that's great. that's rational. that's really intelligent, and like a mechanical engineer, but you don't have any votes for it because we're not rational up here. this is a person that's been up there 20 years and she is a very smart person. there is a way to compel behavior short of sequestration.

because we have so many members of congress that are new, to be blunt with you, it will be difficult to tell them how to do this without them saying oh, my god more washington, d.c., gobbly dee gook. i think the powers that the senate and the house have, using something along the lines of enhanced reconciliation instruction, and i hate to say that again, but that's why i come from, i think there is a way to get us into next year with minimal, without taxes and entitlements and i know there are senators in congress thinking about it now and they don't dare before the elections say it out loud and i don't blame them, but there are some people thinking about it and i want to say there are some very good members on both sides of the aisle who were briefed by mr. dudley who is the chairman

of the federal reserve bank of new york and other people over the last two weeks who understand what's coming out, thinking very actively about minimize the damage, get a big deal even with this congress after the lame duck. i'm still, for this one time am going to think about a happy outcome. >> we'll come back to it. yea. >> i would take two questions before we go to the panel. >> you talked about sequestering. congressman adam smith, ranking member of the house arms services committee has a couple of panels and he's made the point that by jawboning this whole thing, don't worry. we don't have to worry about the initial intent senator graham and others, i don't need to worry about it. he says the other point and the biggest supporter of the military as he is fort lewis and his district, they're not

interested about worry budget defense budget. they're worried about whoopths to the -- their retire am incomes and they're worried about medical care and when the senator was talking, the issues he brought up about the guard and everything else. the chief of staff, the air force, the secretary of the air force made difficult decisions on cuts and active duty. both the house and the senate, you can't touch the air national guard. so, again, everything's going to have to be put on the table. how do you convince the american people how serious this is? >> let's take this other question, too, and go down the panel. >> hello, i'm matt keen from the observatory group. this is a question for steve bell. let's suppose for the sake of argument that an agreement is not possible in the lame duck session on the sequestration to avoid the automatic cuts. to what extent does the administration have discretion in terms of the timing of how

soon it implements the automatic cuts because i've read that they may have some discretion in terms of the -- of how much they appropriate to the various agencies and also, if you can flush out a little bit about this idea that you have to avoid it. >> this crazy idea. yea. there are two, and one thing to deep in mind and the deficiency act and one is something called the empowerment control act and in between those two things and you can't spend money appropriated to you that's a felony and you cannot empower money except through certain specific processes. most agencies are going to have to spend some, in the first quarter of this year, and the upcoming quarter of this year. it sounds very arcane, but very important. some people say there will be no obligations in the first quarter

of this year and that seems highly improbable to put it mildly. the question is how much will be spent by the agencies and our estimate is 22%, and not 25, which is what you might think at first, but 22 and how many games can be paid by omd within that 22? in 2013 almost none. why? because this is a program, project activity level. very granular level cut. you are going have to reach it if you're in the department of treasury, for example, by making hard decisions, and you have 5% contracting out for some things and then this week we can turn over 150 billion worth of national debt run by 10 or 15 people in the base treasury.

they'll have to at some point layoff people. that's what it will come down to, either through attrition, furlough, which is a real pain to do or, worse, trying to lay off people permanently. so, there are not as many games that can be played as people feared. democrats think the games will be played in defense and they come to me and say how can we stop these games? how can we stop these games? omb will make the final calculation and if they do what they did in '85 they are going to go down to the lowest level enumerated specifically in an appropriation bill or a report accompanying that appropriation bill which means fuel purchases. air force, fuel, right? you know the categories better than anybody, and at some point, you know, 15% of an m-16

magazine is not a great thing to have if you need the full mag. >> ron, do you want to comment? >> my response my response woule article in the "new york times" this morning. once people see what the cuts are going to be down to the granular level, all hell's going to break loose. >> yes, sir. >> and congress will have an opportunity to mess around. i don't think they have the option of not coming at least close to $1.2 trillion. especially for republicans, the tea party would completely revolt. it would be a huge problem. people would lose election over this. i think they're going to get there somehow. almost any way would be more rational than across the board cuts you're describing now. people haven't seen them yet. there's a huge problem of ignorance out there. they're speculating what's going to happen. 26,000 teachers i saw somewhere this morning. maybe that's true, but we need to see the o.m.b. until we know exactly what they're going to be. then we'll see who's really going to get gored. they're going to be mad and do something.

>> adam smith. >> just talk about his military base there in washington state. i guarantee you -- my brother used to live right outside of there. i guarantee when those folks see what the impact will be on small businesses that service the personnel on that base, to housing, to all of that, at some point, and i think it's going to be in september after the august recess, they will start caring about something other than just their 401(k)s. they're going to start worrying about the grocery story that's going to go to five people. i guess i can quote stevens from lockheed martin. they've already started slowing down what they're doing. so guys at some point are going to go back to their banks, where they've had lines of credits for 20 years. this guy has 150 people in his tool and dye shop.

akron, ohio. he's going to say, okay, i'm going to reup my line of credit. the bank's going say, do you have that contract signed? no, don't worry. we've had it for 20 years. >> why don't we wait because he's got the occ and fdic looking over his shoulder. why don't we wait until you get the contract signed? i can't wait that long. that's not an exaggeration. that slow down is starting now. i don't think it's an exaggeration. it's not something the defense industry made up. it's not something secretary pi net that made up. if you go out to new mexico where defense spending is really, really important, you're starting to see the slow down there. it's not all just because we're laying off 400 people at lo los alamos. you're seeing people scared and not doing -- you're going to worry about your 401(k)s. you're also going to worry when your wife or husband loses his or her job. >> let me ask one clarifying question on that and one final round before break. could i ask, is this more right

than wrong? i realize sequestration is very complica complicated. is the following statement at least most mostly right? that next year the typical federal agency, if sequestration occurs, is going to have to find 15% reductions, 12 to 12% reductions in its work force expenditure? meaning that since you're usually not going to fire people -- >> you can't. it's very hard. >> and since you can only slow hire so much, this basically meaning up to two months of furlough. isn't that one way to understand the implications of sequestration? >> yes, and you can't reduce people's pay in the federal government. okay. that's against the law. where you are, gs-14, level three, that's where you stay. at some point you're the manager of an agency. you're going to have to say to people, look, i don't know how long we're going to be able to keep doing this. i've saved some money. i'm doing everything i can, but

you all ought to know that probably we're not going to hire a replacement for jeannie when she leaves. and i need three more of you by the end of this year. in an economy which is weak where people are slowing up their retirement plans anyway because of the last three and a half years, this is not good tidings, i think. >> let's take two more questions, then we'll have a final round of responses. we'll go over here. who else had had a hand? then here in the aisle to finish. >> jack bagly. i have no dog in this fight. i have not yet heard any discussion about a government shut down. what do you think of the possibility of a government shut down like we had in the clinton administration that forced people to act? >> great. then over here in the aisle, if we could, please.

>> my name is jordan. this question is probably mostly for david. i know there's been a lot of talk about defense industrial base, and there's two things going on right now. one geared by them, and one geared by the government, that are supposed to help them survive these budget cuts. the government with export control reform, trying to move stuff from state to commerce so that the defense industrial base can sell stuff abroad more easily. also, this idea that defense contractors are trying to transition from manufacturing to service and stuff. services things because, as i think the senator even said, services don't get cut as hard when the defense budget, when the haerm comes down. could you speak to how the defense industry is thinking about these things and whether or not these transitions are actually going to help them stay afloat? >> you want to start? then we'll go to steve and ron. >> sure, i can try. i think the, you know, the overarching theme of just listening to steve and ron talk

and try to answer this question is the depths to which you two have probed kind of the insanity of a lot of this. it's something i can't come close to touching. the export control reform is certainly something that even as a smaller business has benefitted us tremendously. i know for larger companies, that will hold true as well. as for the transition from service to manufacturing, i think i mirror a lot of the commercial industry in harboring some deep skepticism about sort of the cost-plus model inherent in a lot of the services work provided to the government and the incentives that generates. i don't know that i'm as bullish on -- although, that may actually end up being great for the industry. when it applies to outcomes for the government industry, i don't know that i'm as bullish about that as i am about expert reform. >> steve, any final comments? >> no, just that i hope that

everybody will -- you know, they talk about contacting were congressmen and your senator. this decision's going to be made by about six or seven people. it's going to be made at the leadership level in the house and senate. it's going to be, i think, very, very difficult. will we have a government shut down? i was involved in the last one. when i was told by a very smart republican leader, don't worry, clinton will get the blame, and i was very lucky because in 1997, january, i got to stand out in frozen west front watching mr. clinton be reinaugurated as president of the united states. i think -- and i'm not speaking for him, but my sense is the house republican leadership more than almost anything in the world hopes they can avoid even the hint of a government shut down in the october continuing resolution period. because they're not suicidal.

they want to stay in the majority. i don't know whether they have the vote to do a semi-clean c.r. i just don't know. i don't think anybody knows. but when we get to the debt ceiling, which is not a government shut down, which is much more interesting, if you can look at it from far away. like if you lived in china and you could look and see us not pay our debts, for example. i think that's going to come the moment of real truth. if it we go through what we did last august, acting like we were children and did not understand that we were dealing with the global financial infrastructure, at some point friends of mine that used to work with me in the bond market, but especially equity market, are going to run. they panicked, by the way. one of my best friends runs a mutual fund. he said to me, don't worry. if the panic starts, i'll be the first out the door. >> i'm going to ask you one

final question before we go to ron for our ultimate wrap-up here for the panel. i want to make sure that with your expertise on the hill, steve, that we get people as clear a sense of what really is at issue here. we talked a bit ago about furloughs and the possibility of that as one necessary response because of the way in which the sequestration language has been written. let me just imagine a big ship being built by one of our friends in industry for the u.s. navy. let's say it's a ship that takes four, five years to build. it's already one or two years into construction. obviously congress has the right every year to look at that shipbuilding process, decide if it's going well, decide if we still need the ship. usually congress is going to keep funding it because there are huge inefficiencies in deciding halfway through the construction of a ship that we don't need it anymore. we don't usually do that. what's going to happen to that ship in sequestration? because the company building it is presumably g