trillion in new taxes. so d.o.d. is the only federal agency taking any sort of spending cuts that were supposedly applied to debt reduction, but as you know, the debt's not coming down. but i agree with her broad points. i was just at a meeting with a senior air force official. it came up in one of the questions earlier. the discussion was about the active component cuts and the reserve component cuts in the air force, and it just serves as a great anecdote and example of how -- of what a knife's edge the u.s. military is operating under. high budgets aside. most of those budgets go to people. let's just talk about -- michel had me here talking about that other times before, and that's not what i want to talk about, but this delta of 1,500 people in the active air force and the reserve component air force and could they have done that any other way and sliced that any other way? it's driven by force structure reduction. so a-10s, for example. you're familiar with the debate

and the family feud that has spilled out into the public. literally, it can't be done any other way because they're on a knife's edge. to think there's all this more money that could be possibly be absorbed aside from sequestration. that's really what i want to talk about. the subject panel here is solutions. one of the favorite solutions i hear around town is nothing new, but it's any deal to fix sequestration is going to have more defense cuts, which kind of baffles the mind since we're already talking about the 487 and how difficult that has been to absorb under the bca tranche one. so sequestration is going to get bought down, but it's not going away. that's unfortunate because i think that should be the discussion. you know, ultimately in the end, even if congress backs into sequestration, the pentagon will get flexibility in determining. it will never come down to the program project activity level because of the damage and eloquent destruction that's been described up here on the stage today.

so i've been thinking a lot about what are the solutions. let's get aside from how awful it is. i do think this is consensus that it was pretty ridiculous, and it was a silly bill that passed, and it was an awful sophie's choice that was put into place for many members of congress. that is the sequester. so the solutions. i was at bloomberg news conference last week. i heard a lot of members of congress talking about sequestration, like senator mccain, senator levin, norm dicks, congressman welch, a bunch of others. i thought i might hear something new. i wasn't surprised i didn't hear much new but a couple things. washington loves to dust off the old plan that died before there was the new plan and recycle ideas when we have to come up with a new solution. i just figure i'd tell you what was going on before so you know where everyone is going to go. all the things we're going to turn back to when we have to have this conversation in the lame duck. may or may not be the right solution, but we're not going to

resurrect big, bold, new ideas. although i say steve made a great point on the last panel about the grand bargain. i've met with senator warner's staff. senator murray's staff. a lot of members on the hill do want the grand bargain. they're not talking about it publicly, but there is the will there. it's not all gloom and doom. nonetheless, what are the old plans that died before we had the bca and are going to get resurrected in terms of any new conversations about a tax deal that ultimately allows people to have a conversation about sequestration. don't fool yourself. tax increases aren't going to pay down sequestration. that's just to get everyone at the table to talk about sequestration. there's no dollar for dollar offset here. same thing with obamacare, potentially. money is freeing up from the supreme court, for example. that depending on how they rule. well, let's dust off simpson/bowles, the president's commission, because that's become a favorite position for a lot of members because there was a lot of work and thought that went into it. what it gives us on the defense side is the exact recipe senator

11 has outlined and that we all already know, which is there are significantly more defense budget reductions beyond the $487 billion as part of the budget control act. if you break down just the defense side, and i think it's always great to look at these en masse. it's important because it looks at the whole budget, just like rivlin/domenici. that's one play and that's key one. i'm glad that if we're going to dust off any plans, it's a plan to look across the federal government and federal spending writ large, but if i'm just breaking down the defense piece, this plan centered around roughly $850 billion in total over a decade of defense spending reductions. now the baselines have changed so all the numbers are different, but you get the rough idea. focus primarily on modernization. f-35, v-22. pick your program. it's probably in there for reduction or cancellation altogether. but there were some ground breaking changes on a bipartisan level to talk about defense entitlements.

it's something i know a lot of our colleagues up here and at brookings and around town are thinking about and have looked at. the way you pay those, not today's force. i don't want to go there. it's not the conversation we're going to have about how you pay tomorrow's force. and changes to tri-care, should d.o.d. operate commissaries? should we let the private sector do that? should they have to control basic exchanges and stuff like that. interesting ideas up for debate. doesn't mean we're going to take this plan and enact it whole cloth. it's an interesting idea. very quickly, rivlin/domenici, their proposal, slightly different defense number. came in around roughly the same amount, however. basically would freeze the defense budget for five years and grow it at the rate of inflation. seems reasonable, if you do it the right way, of course. but still, pretty big bogey. you're looking at doubling the 487 roughly. you know, senator mccain referenced one other plan we're all going to dust off, or at least those policymakers and

politicians are going to dust off as they think about how to come up with a deal big or small in the lame duck and beyond for figuring this out. the other one is the super committee. yes, it failed. there was a lot of work done on the staff and the member level of the super committee. there were a lot of negotiations. a lot of these members have already come to agreement in theory. they just haven't taken that vote. that's why we're waiting on the lame duck. it's all about taking the vote. people's hearts and minds are already there. in large part, there's a large center already there are to do any number of these kinds of things. so senator mccain referenced, for example, the proposal put forward by senator toomey as part of the super committee internal negotiations for tax reform of various sorts. it's a big, vague phrase. i understand it means a lot of different things to different people. as senator mccain said, tax increases are in the eye of the beholder. for example, eliminating ethanol subsidies, which congress is doing anyway right now. some people consider that tax reform, closing a loophole, generates additional revenue by

default. things like that, broader tax reform, those are things that are on the table. i think the super committee is -- deliberations and various packages they put together is also a place to look. the super committee was looking at more defense budget cuts. don't fool yourself. it was not, we'll take the 487 and go home. they were looking at it as a starting point, 200 billion to 250 billion. but there was a special emphasis on trying to protect the short-term acquisition cycle, not to break programs that end up costing more money in the long run, not to break r & d, that ultimately breaks programs in the future, and not to increase the unemployment benefit request as a direct result in the next quarter based on basically layoffs, the kinds you would see in sequestration, could you see in more defense cuts if they are not done in the wright way and if you have an increase in benefit cuts, have you saved a dollar? there was a lot of work in the super committee. this is where congress is going to start from when they have these conversations in the lame

duck. >> okay. thanks. tom. >> thanks, peter. peter mentioned i was a tank commander in desert storm in the third armored division and our third by guide officer was this little known colonel named dempsey. we had him to a dinner not too long ago. he looked out over all of us and said, it's just a great thrill to be here with all these old, familiar faces. i know why you're old, and i'm trying to figure out why you're familiar. i feel very much in marty's shoes on that. i'm also thinking that i'm at a point right now batting cleanup on this where i get to practice that old washington adage where nobody says anything new, but everybody has to be allowed to say t. i'm going to -- i had a whole bunch of very pithy comments here, but i think i'm going to restrict it down to just a couple. i saw a comment in the "economist" magazine. not too long ago, interesting that it would be coming out of europe where the editorial page

had an comment where it said it would be an extraordinary event if america sacrificed its position as the world's leading military power as a result of a legislative accident. and this would be an accident. nobody intended the provisions of the budget control act to actually be enacted. i think that's really where we are. we're looking at a very catastrophic, as secretary panetta has said, legislative accident that will happen unless there's a great degree of leadership and a great degree of attention paid to this sometime between now and january 2nd. everybody needs to recognize -- and i think everyone does. you've heard it on the panel time and time again. i'd have to tell you those of us in the defense industry certainly do, that the looming problem with deficit and debt has got to be addressed. it's going to have to be an addressment that comes in a multi-dimensional, detailed, and no small order time-phased approach. that's not what we're looking at right now. i think mackenzie has laid out

several reasons why that's a major challenge, as has rebecca. with her focus on the rtd & e accounts. there's two ways to get an airplane on the runway. a landing or a crash landing. this one is going to be a crash landing unless something is done about it. i get asked all the time, you're the strategic planner for general dynamics, so what are yo u guys planning to do to get ready for sequestration, should it happen? my boss has made the comment a couple times. i don't know, what do you do to get ready when you hear an asteroid is getting set to hit the planet? it's a hard thing to do. despite the length of the legislation, there are an awful lot of unknowns out there that make plan is rather difficult. just, for example, you know, what's the baseline that's going to be used for this? is it going to be a continuing resolution of fy-'12, or some sort of enactment of an fy-'13 budget. will military personnel be exempted? one must assume they will be because not doing so has the effect of essentially firing people as they're returning from

multiple tours overseas in an economy that's perhaps not prepared to take them. i think all of you have seen the statistics that unemployment figures among people who are former veterans are higher than the general population. will overseas continue to see operations continue to be exempted? it's not in fy-13, but will it be politically prudent not to fund that full account? i think it probably would not be a very popular thing. how will they be treated in the following years? michael mentioned when he was up here there is a bit of a placeholder going out in the out years, but will that be rolled into anything that would happen in the future or not and how that would be scored. unobligated balances. how much are the unobligated balances? one reports says $65 billion. one says $85 billion. that's a $20 billion swing, which is about 40% of the amount of the sequester impact on the defense budget. if these accounts are exempted,

and many of them would have to be, then that puts a bigger burden on the modernization and investment account that people in my industry are most concerned about and the accounts that are associated with those projects, programs, activities. and despite steve bell's comment earlier, you know, what are projects, programs and activities anyway? there's not a uniform view on that. omb has a responsibility of coming out with the rules on enacting this, and so far they have not done that. we can just assume that after you make some prudent assumptions on how this thing would go, we're looking between a 12% and 15% cut. now some have argued that even if sequester happens and it's full flower, that that's just going to return top-line defense spending back toy 'sensingly where it was in 2006. and that's basically true. but that's not really the problem. the industry, the defense industry, has shown over the years that given time, given

guidance, and given the ability to do so, we can adjust under new circumstances. the problem here is the rapidity of the dissent, doing so in one year, because the one-year time frame basically prevents the department of defense from doing a few managerial things that it would otherwise want to do, involving force structure, benefits and many other things that you've heard mentioned before. let me talk just a little bit about the warren act to make sure everybody understands this. you've heard it mentioned two or three times up here. it starts for the worker adjustment and retraining notification act. that requires, by federal law, those of us who have people working for us in our work force, if they're going to lose their job, that they have to be notified 60 days out where employees may reasonably be expected to be terminated. interesting wording here. may reasonably be expected to be terminated. the federal requirement is 60 days.

there are some states that have 90-day requirements. california and new york among them. there are some labor agreements that have a date that pushes out even further. this gets you out into the time frame of potentially mid-september for when warren acts notifications will have to go out. the only thing that's really known about sequestration right now is that something happens to january. what does that mean for specific contracts, specific programs, specific locations, specific facilities? that's not known. we do know this. from past practices, the government tends to be rather broad in its interpretation of what the words may reasonably be expected to lose their job means. if they believe we reasonably, as employers, should have seen this coming, then we have a certain obligation and wind up with certain financial burdens if those warning notices don't go out. my supposition is that a lot of

these warning notices will go out. they will go out in advance of november 2nd. some of them will go out about that date. i think they will no doubt get somehow or another into the political dialogue. we may be seeing a little bit about that right now. this is simply compliance with federal and state and sometimes labor agreements. it was mentioned up here, and it went by quickly. i wanted to mention it one more time. that is, when it comes -- in fact, general dynamics was mentioned specifically in the case of a submarine. when it comes to meeting a certain objective in terms of savings, inevitably because of termination costs and other fees associated with contracts, you may wind up, you probably almost certainly will wind up terminating more than $1 a program to get $1 of savings. in other words, even though you cancel this and it's $1, yes, but you owe me 20 cents back or

whatever it is. so this compounds the implications of terminating contracts. prime contractors will have to make adjustments to the contracts that they have with the government based upon economic adjustment rates, and we will also have to redo contracts with our suppliers. a lot of us are still trying to find out exactly what the dimension of that readjustment is going to be, both with the government and with our own suppliers. i'd have to tell you at general dynamics we don't quite yet have a grasp on what that number, is but bob stevens at lockheed martin has mentioned the number 40,000 contracts. that would have to be dealt with by him. and again, as was mentioned before, a lot of the reductions that happen on the non-defense side will have to be applied in some form or another against personnel, and that presents a real serious challenge. i want to take just a minute here to drag you all into the weeds as if you haven't been there long enough already.

i, for many years, as peter mentioned, was a program budget official for the army in the pentagon. there are a few things that come down to the practicalities of how the pentagon is going to have to deal with this. i wanted to just share with you a few of them. i've had some discussions with my old community over there. most of those discussions are reasonably brief and sometimes rather harsh on their part and generally end with someone throwing their hands up and running for the door. but here are a couple of things that you need to keep in mind. first of all, none of the offices that work within the empire of the osde comptroller in the defense department going down to the service reflections that they have have any experience in doing this. they don't have established s.o.p.s. they don't have what we in the army would call t.t.p.s, tactics, techniques, and procedures, for actually implementing something like a

sequester. second, compounding this issue over the past several years, these offers have been managed and have been run by people who are accustomed to taking big infusions of budget authority and distributing it around to meet immediate requirements and needs. this is the opposite of that. this is the opposite of that. this is taking money away. this is establishing priorities. winner, and you're the loser. i first went to the pentagon in this capacity in 1986 as a young major. we didn't know it at the time, but we were just then on the cusp of the reagan buildup. we were just then having to change how we actually handed out money and how we actually managed it as we went through our programming and budgeting processes. it was a long, at least two-year, learning process. third, many assume this is a relatively easy issue. one just takes every line item in the pentagon, multiplies it by whatever percentage is determined to be allocated to

the various accounts, pushes the sort button, and you get new numbers and you're done. the pentagon database, so far as i'm aware, unless there's been some major change, is not configured by ppas. on the programming side, it's built around things called programming elements which contain all colors of money. each service has its own versions of this. and in the army in my day they were called pdips which stood for program development incremental packages. but a pdip for something like an a any helicopter, it has procurement money in t.fs it has military personnel money in it. it has o & m money in it. it may even have construction money in it. digging all that out and sorting all that out is no small task. and it will take the pentagon a long time to do it. so however the sequester cut is

mechanically applied, some programs are going to be cut that should otherwise increase because that is what the plan would be. some will have to be cut that would otherwise be cut further. you're going to wind up, in some cases, after you've managed to sort through all this, with a situation where some programs actually, if this is built off the continuing resolution from fy-'12, will have more money in them than they otherwise would have had, had fy-'13 merely gone forward. all this is going to take a lot of time, and depending upon the time frames, depending upon congressional action or inaction, i think the probability is quite high after you've done all the data sorting that has to be done. the department will be faced with the prospect of producing the mother of all reprogramming requests followed by the mother of all reports. this is going to completely paralyze the system for some amount of time.

so i think as harlan said back there, this is not going to be dealt with very quickly. it's going to take a long time. it's going to drag into the middle of next year. meanwhile, all of us are going to be setting around wondering exactly what programs are going to be adjusted and which ones we're going to have to adjust. i wanted to pick up just two things, peter. a question came up, a young gentleman sitting here on the row about exports and moving into services. i think the question was, you know, if all this happens and if you have a diminishment in the buying power, won't you guys just go and do overseas sales, and that'll pick up some of the difference or move into services because services should be a growth industry. well, the answer to both those questions is probably not. if you take a look around the world and the condition of the world currently, you're going to have to look pretty hard to find a place where there is a great passion and a great amount of money for buying the type of equipment that this country

produces. the market internationally for selling the things that are produced on the manufacturing side of the fence industry is a very challenged market right now. we heard a comment here a few moments ago about euro and europe and the eurozone. nobody in the eurozone, except for one country, spends anywhere near what the agreement is supposed to be. supposed to be meeting on the percent allocation of gdp. there's some money to be spent in the middle east. some capability there. we have, for many years, had a co-production contract with egyptians for m-1 tanks. the announcement yesterday about the results of the egyptian presidential election creates a high degree of uncertainty. we'll have to see how that all plays out. in terms of services, many of us have already moved into services. we have one major component. in fact, it's our biggest component. many people think we still build

f-16 fighters and all that, but we actually exited that market. our biggest group is the information systems and technologies group, which has a major part that does government services. a lot of that business is very mature. i would suggest to you -- a lot of people are probably going to be pulling back from government services because those are also government expenditures. peter, i think with that cheery assessment, i'll pass it over to you. >> all right. so it seems both generally from the past panel and this panel there's a fair amount of consensus that sequestration is not the smartest thing to do. tom, i was waiting for your movie reference because the movies that have been thrown out there have been "spinal tap," "rebel without a cause," "sophie's choice." these are not situations you want to be in, but that's where we're at, okay. so we have consensus around this. don't do it. it cuts muscle and fat by the same percentages. it cuts the innovative and --

and the wasteful. it doesn't reflect a strategy, okay. i hear that amount of consensus. i seem to hear general discussion around some kind of support for our grand bargain that doesn't just focus on defense but brings in these other elements of other parts of discretionary spending, but most important lit bigger parts that are eating up the budget. i hear that kind of consensus. okay, my concern is this. we're in the realm of thinking about national security and thinking about it with a realistic lens, and we do things like contingency planning. we plan in our realm for things that are not only extremely likely but sometimes not all that likely, so, for example, the u.s. military maintained a plan to invade canada all the way up prior to world war ii. in turn, canada maintained a plan to invade the united states all the way up to world war ii. they sent a spy mission to the united states in the 1920s to figure out invasion routes, so we do contingency planning for things that aren't likely.

i will put sequestration not in the category of invasion of canada but in a potential likelihood because the other thing that we've heard, consensus, is dysfunctional leadership. so let's just say we go down this pathway. we agree we don't like it. as tom put out really effectively, then he said we get to this point and your quote was something happens. what should happen? we've talked about our worries in this contingency, but what -- if we get to this dangerous period that we all agree we don't want to happen, what are the things we should be doing if we're stuck in that -- in that dark alleyway? >> well, i'll try to give a long and we'll go to rebecca. love to hear from each of you on it. >> sure. i'm sure we all have a lot to say on what should happen. sequestration is causing us to admire the problem and to avoid the strategy discussion. we really must have.

we are the richest nation on earth. we can pay for what we need in defense. what we haven't done is decide what that is. we had a lot of things we had to do in the last decade. some of it was spending on new programs, and a lot of clandestine stuff and a lot of it was building up the ground forces for the wars that we're in. we have not really collectively decided what's next, and what's too bad is that countries like china have. you know, the people's liberation army helped put the chinese government back in power back in 1949, but quite a few years ago they said in their doctrine we're done with the ground force stuff because our strategy is going to be x, y and z. we need to do something like that. we either need to say, you know, we are going to follow our january 2012 strategy and invest more in sea power and in air power, or we need to say, you know what? we are really a land power. let's take the money there. take it out of something else. i know where i come down on that, but the main point is we need to have that discussion. we've had some -- the good drawdowns that we've had, the

steep ones, including the one after korea, was done thoughtfully. the eisenhower administration had a plan. it said that i have to use an example that old, i think. there was a plan after the end of the cold war, maybe it wasn't what we all thought was perfect but there was a pretty coherent bottom-up review with a steep plan that said here's what we're going to do. that's what's missing right now. the most time we discuss sequestration the less energy we have to get to the choices that we must make. >> i would add to your emerging consensus, peter, another one, that sequestration could ultimately cost more than you save so the 55 billion for defense or to get to the total 1.2 trillion, and not just the determination for convenience and the contract-break and the subcontracts doing the prime and passing the bill back to d.o.d. and all the efficiencies, the lawsuits from the civilian wo

workforce and others and also just the general process and the nature of it, i think we can agree, unemployment request benefits if you do have the scenario, if d.o.d. is america's largest employer and any form of sequestration, even when you exempt certain accounts for people, you're still going to see an uptick in unemployment in it's structured so there's emerging consensus that it doesn't save much money so why would it do it as well in my opinion. so i think rebecca laid out a really good first answer and i'll try to back it up and what should happen. so back to some of the three bigger plans that i reference, lime simpson/bowlesor super committee or rivlin/domenici or gang of six. senator conrad had a draft budget we never saw but it had a lot of things. snow coburn has a back to black budget. senator mike lee has a new budget to restore the american dream. there are lots of debt reduction plans out there. since we all know some -- any debt reduction plan is going to have to tackle something to do

with taxes, however it turns out. it doesn't matter what it does, but it's going to address tax reform broadly presumably. all of that work has to get done now, so what should we be doing? we should be doing that work on the committee level in the u.s. congress now. other smart people and other panels have talked about their experience on domestic spending tax policy issues in the '80s when president reagan and the congress made multiple deals, one to include major tax overhaul, but it doesn't happen overnight there. had been four years of groundwork that have been laid before the final deal was done. the staff have to know what's going on. the members have to have been talking and thinking about this. there has to be oversight hearings there. has to be hearings of inquiry. there has to be so much leg work done to say we're just going to reform the tax code because it's the lame duck and now we're ready. it just doesn't happen like that. sometimes you can muscle through something major like a new s.t.