rare, and in this case i don't see it could happen. want the grand bargain? they have to do the leg work now, and would i argue it's not as politically hot potato as many members think that it is. senator mccain, i referenced his comments last week. he's already said we're there. republicans are taking the vote. we're just not taking it until the lame duck. speaker boehner has said before the final deal with harry reid, barack obama and john boehner, just the three of us in a room before everything collapsed, and then ultimately 24 hours later we had the bca. they had a deal that wasn't the bca and what the speaker said after the "washington post" reported on it and the it was an accurate article, he was going to get the house to vote on this, this house, the tea party house or whatever you want to call it so the republicans are there so when i hear members like carl levin and harry reid say we're going to break the

backs of the rigid idealogs on taxes, it's already happening, but the groundwork isn't getting done. all of the work that has to be done in a staffing and member leg of and the jurisdiction in ways and means and all the other ones, this overlaps in so many areas and places, so what should get done, fine, you're not going to take the votes now but do the work now. >> i'm going to pressure you. you still avoid the contingency i laid out which was let's just say this group of leaders is not able to come to the agreement that we think is potential and the sort of dam klees fall. we do get sequestration. as tom pointed out we entry world of something happens. what happened then? rebecca laid out the idea of potentially shifting strategy, maybe a shift in emphasis of i'm going to put words that you said, leaning more air towards the ground or the like, but in this contingency, in that contingency, which i would argue is not in the extremely extremely unlikely but is maybe in the unlikely, but we do

contingent. what then? >> i'll quickly say what -- how i think that would play out. first, not to avoid the question, but congress will not -- it wouldn't be an overnight thing. i think tom laid out how that happened. that's exactly right. this is not like a midnight government shutdown kind of thing that would happen. congress would back into this. one, there's probably going to be cr that runs through mid-february anyway so january 2nd is now february 14th for purposes of a sequester in theory, if that's how they do it and that's the rumor on the street. congress, running through the hill right now, the newest consensus for how to fix sequestration is a three-month delay so now you're talking may, mid-may. they will try to do all the things like the leg work that they haven't been doing, whether that's d.o.d., actually building out the extensive scenarios and new strategies and the entitlement work as well. one-year delay is also a very

popular fix right now. i've heard speaker. i've heard james clyburn and chris van hollen all reference a one-year delay. so, unfortunately, the right answer is rebecca's and i completely agree. it's not how the town works, and that's not how we would back into sequestration. frankly we're in now year four of d.o.d.'s endless state of debilitating strategic review and the strategy is changing. i don't like it and it hasn't been a consensus strategy, but it's been changing so quickly that the budgets can't keep up, overlaid with the budget-driven decisions by congress and the white house, so that would be the thing that should happen, and unless you're having a sweep of congress in the white house, it wouldn't. i agree that that would be the right thing to do. >> tom? >> robert kennedy once commented that americans are not well informed, but they are highly entertained. and i think one reason we're here right now is to try to help the process of getting americans

well informed, and what they need to be informed about is that through some mechanism or another this whole process has got to be at the very minimum delayed long enough to make it informed. right now it's not. i mean, it's -- it's implicitly uninformed because it's got the automatic dimension that goes into it. where i -- what i would like to see in an only semi-facetious but mostly facetious way is that i think every republican on the hill ought to walk around with a red lapel pen that has a blue 20 in it and every democrat should have a blue lapel pin with a red 20 in it and 20 is the percent of gdp that we have to get to in both federal expenditures and revenue. right now federal expenditures, including defense, are 24% of gdp which is an all-time high since we have been keeping reliable records. we are at 15% of revenue which is an all-time low since we have

been keeping reliable records. those two numbers have traditionally been about 21% on expenditures and about 19%, 19.5% on revenue. that gap is quite clearly unsustainable, so at some point there has to be a serious, informed, realistic discussion about what the options are that are going to move you back in the direction of those -- of those two metrics which basically is the number 20. i haven't really seen that yet, and i haven't seen too many indication that people are willing to get there, but if you begin to focus on the problem then one of the first steps you're going to have to take is take a deep breath, and i think senator ayotte was very clear about this. get this moved back to where we can deal with it in a constructive and not destructive manner. i just tried to lay out the paralysis that is going to hit

the united states government and particularly the defense side of did, and i'll tell you, when i was here with mike back as the federal army -- army federal executive fellow back i won't say how long ago, but i did -- i did a report about how the defense department does its planning and programming and budgeting process with the intent of going to gather best practices from other agencies of government and applying those to how the defense department does it, but much to my surprise what i discovered is nobody does this as well as the defense department. i talked to the fellow at the state department who would be the counterpart of i guess david chu in those days, and he said, you know, i've got to deal with three things, people, telephone and buildings, and i have a hard time coordinating and laying that out, and i only try to do is one year at a time. it's a very complicated thing, but we've got to step forward

and we've got to recognize that the objective is a long-term objective. it's an objective that's going to take work and honest reflection and informed decision on both sides of this equation that mackenzie has laid out, and we have got to move there without penalizing ourselves severely in the near term. if this goes forward, if -- if we are forcing the defense industry to have to reconsider, renegotiate, re-evaluate 40,000 contracts in just lockheed martin, the only thing that's going to come out of this is positive employment for at least one generation of lawyers, and -- and talking to dino alvarez a little while ago, for general dynamics, the a-12 story which has now gone on for the better part of 20 years should be somewhat instructive. >> all right. there's been so much positive

news from this panel, i want to open it up to the floor here for questions, so, again, please wait for the microphone to come to you and stand and introduce yourself. i think we have a question right here. >> ricardo marquez. thinking about the long-term objective if we can get past sequestration and think constructively about reforms, is there something that would be in terms of moving beyond perhaps service centric for-structure, something that would redo the way we have our forces postured around the world and in addition to that is there something we can do in the management side, move past long-term budget and work on the pps programs, two sides that make it more agile and nimble on the other side of the issue so heaven forbid sequestration is on the horizon again something about the organization is prepared to move and move agily? >> can i try that one first?

>> good question, thanks very much, and, of course, that's one i wrestled with a long time. rebecca is much more attuned to the contemporary thoughts on strategy, particularly as it pertains to air power which has been her expertise for a while, and mackenzie has invested a lot of time on the maritime side. i've got my own views about that. of course, i'm the army guy up here. i've got my own views about that as well, but let's set those aside for right now. there's a couple things that we're going to have to come to grips with in a serious way. what we're seeing right now is an accumulation of effects over a lot of discreet decisions and policies that have just built up to where we are. you heard senator ayotte talking about the tax exemptions, the loopholes as she described it. those are commonly called tax expenditures and exemptions. one of them that's in bowles/simpson i believe is eliminating the home mortgage exclusion. >> yes. >> well, that's something that affects 67% of american households. that's a big thing.

i don't recall the loophole, but why do we have that? well, we had that years ago to encourage something. what we've got to start encouraging now are outcomes in a much horholistic way than we have done in a very systemic way over the course of time. now, in my industry, despite what you may believe, you know, we're quite reactive. there are those that like to thing we rush up to the army and say my goodness, we were in the lab the other day and we came up this thing here. and it -- it walks t.flies. it shoots guns. it goes under ware. it will leap over tall buildings. truth of the matter is we're quite reactivech the army comes and says here's what we'd like to have and how much does that cost and by the time we cost it out they go, my gosh, i never thought it would cost that. that's the situation we're n.but we have to recognize a couple of things. it was said up here that you'd much rather have the united states navy of today with 284 ships than you'd want to have the one in 1915. i don't think anybody here is going to -- going to dispute

that. we also have to come to grips with another dimension of the all-volunteer army. you heard steve bell and others talking about the implicit expense that has accumulated over that for a long time. i'll plead guilty. i'm an army retiree. i made the decision a year ago to drop my company's health care insurance and just go with tri-care. i'm sorry, bob gates. i mean, i -- i went the other way tore 15 years, but as milton freedman once said in his book called "free to choose," it's a rational decision on my part which is taking advantage of the circumstances that exist. we've got to come to the grip with the fact that we have a volunteer armed force. we have a much more capital intensive force than we've ever had. we're never again going to meblize like we did for korea where we wind up bringing 3 million people on board. that's just not going to happen this. country does not mobilize anymore. in fact, if you like at the ten-year period of this conflict, even though the budget

has gone up, right, 60% in real terms, we've actually really only gone up 2% in military manpower. the army and marine corps went up, the army and navy went down. 8% fewer airplanes, 8% fewer ships. it's a capital-intensive service. that's just the way it is, so we're going to have to, as rebecca has suggested, take a deep breath, take a step back, holistically look at what we need to do and how we need to do it. find every way we possibly can to apply technology to it as opposed to manpower, and hope that we can capture the benefits that you get -- that you get from that. just one small thing. you're seeing it right now. predators, it's in the language now. people, my son who is an english professor at northwestern even knows the word, and, you know, he's an english professor and he could care less about what goes on in the military for the most part but we're at a point right now there should never be another john mccain story. we've got the technology.

we can do this. and we're going to have to make a decision to move forward and do it in a cost-effective way. >> i can't resist. my frustration with the discussions on sequestration and turning the volume up to 11 on the national security implications is all of those senior leaders that speak with such urgency on that don't speak with the same amount of urgency on the fact that the defense budget is being eaten from within, that regardless of what happens to the budget, whether it goes slightly up, whether it stays flat, whether it goes slightly down or even significantly down, until you deal with the fact of the escalating costs and personnel and the lack of acquisitions reform, you end up in the same place, just by a matter of a couple of years. i mean, there's a recent study that found effectively, if we don't change, it escalating personnel costs mean that around 2030, 2035, that's it, that the

pentagon's paying for. nothing else, and yet how did we deal with them? you know, we have sequestration discussions and yet what happened. we decided to -- to potentially create a commission with power, a commission to be ignored later, and so i think there's a significant amount of real action that can take place in those areas, be it dealing with the escalating health care costs, catching up a personnel system, you know, that is designed in the 1940s and doesn't mitch millennial troop needs. it was mentioned acquisitions in terms of the shift in industry has been towards services. more than 50% of what the pentagon buys from industry is services and yet we've had no significant reform on the pentagon side to figure out how to buy services smarter and better, so to me that's the real part of the -- you know, the equation that needs the volume raised and that's the solution of maintaining our national security strength rather than

just these numbers, so my soapbox off. let's give someone else a chance to ask a question >> let me throw one more thing in for the colonel here since he brought it up, the personnel costs. the people in the pentagon, peter is absolutely right, have got to have a more open mind on dealing with a lot of this than they had. we were doing a study 20 years okay on the military medical establishment, and i was on the program, budget staff, officer in the program budget staff in the army, and it was obvious to my little group that this was going to be a cost driver that was going to really hurt us in the future. no one could see it at the time because the costs were not obvious if you just looked at the first layer, but when you adjusted for the fact that we were taken out, major medical facilities. we were taking out doctors and eliminating faces and all that, costs were going up. i came up with this radical idea. i just read about it. didn't know anything about it. just read about it in the newspaper that a lot of places do a thing they call co-pay.

so i propose why don't we just set it up so that when a soldier takes his daughter, because she's got a small cold to the clinic and he's generally gone all day, let's just have a little $2 co-pay which will make him do the rational decision about do i spend all day doing this, or do i take my $2 and i go by the drug store and buy some aspirin and put her to bed? you would have thought -- i thought i was going to be court-martials. you know, how can you possibly believe that a soldier ought to have to pay $2 to see a doctor? well, it was a radical idea, but, you know, other people do it. so i think peter's point, if i'm reading you correctly in, so many ways the military is an isolated insular group, and it really has to be brought forward, less isolated and i think more consistent with how practices really go on in other places where you're not seeing the personnel. i mean, nationally you're not

seeing this increase in employment costs, in training costs and so forth, so we've got to give a step back. >> no sexier topic than military health care. you focused on active duty troops, but reality is that most of the costs are on the other side. so it's not the idea of this active duty soldier getting the co-pay, but studies have found that the lowest per capita cost user of military air fair is active duty or the pharmaceutical costs have gone up by 500%, mainly because it's retirees sourcing through retail rather than mail order. frankly mail order is a little bit more convenient because it comes to your home rather than going out, but the point is -- what we're getting at here is there's a lot of smart things that could be on the table that aren't because i would argue a lack of leadership and unwillingness to pay some political pain, but let's go to something that is far less sexy than military health care. other questions?

right here. >> hi there, nic iquinto with the american institute of contemporary german studies. so i've heard a lot of focus on the domestic repercussions of the sequestration, but coming from i guess my perspective we've had leaders and strategists from german political parties come to our institute last week, and there was some concern about, you know, funding in context of the european partnership and the transatlantic partnership, and they kind of referenced a lot of the de millization of europe by europeans themselves and also looking to the united states to pick up the slack, and meanwhile we have the united states saying we can't also spend all of that money, and that's in the -- that's in kind of the sense of the assumptions that, you know, on the one hand we can't do the sequestration, but on the other

hand we also need to cut defense to some extent, so i guess what would you say the repercussions are for the transatlantic partnership in international security cooperation? >> well, i'll take that. you know, as you know, some of our key allies, i'm thinking particularly of britain, of the uk, have already been through a fairly wrenching process of cuts. i spent as many time last week with a group of 12, one and two stars from various international air forces and all of them, nearly all of them, were -- were deep into a series of cuts, and, you know, one fellow said, i think it's really key, that this is no time to turn our backs on each other, and he meant it as a group of airmen, that being the context. so we certainly need to find and try to protect those things that will help, and sequestration is hard because one thing that i think would be cut pretty quickly are those partnership and cooperation activities. i think of exercises. all the services, marines, army,

navy, air do all sorts of exercises with international partners on a regular basis. i would expect that to go away. that would be a real loss. those are things that have great value and help bond the coalitions that we all now rely on. we fight in coalitions. it would hard to see that go away. i think that i think that would be a source of tension. there are probably larger issue ins the transalantic dialogue. but the budget thing is there, really, on both sides. so we will all be working through that, almost regardless of which direction sequestration goes. good question. >> okay, we've got time for one last question if anyone would like to ask it. >> well, okay. with that, actually, we want to offer each of you the opportunity for closing remarks. why don't woe just go e just go order before. >> i think there are things we should not do. and the number one thing we

should not do is chase after tilted windmills and chase after the things, you know, go on a wild goose chase, essentially. we need some of the big programs. yes, they're big dollars. we all know what they are. and i'd say a little bit the same with tricare. i don't think tricare is the number one hidden source of all evils. we have to come to grips with larger issues, but let's not let ourselves get distracted. let's not run in the wrong direction as we all work hard on the choices ahead. >> i would similarly echo that and say that, you know, the defense capableties and budget cuts have been underway now for three years. the budget control act is not the first round of kcuts so tha

pick ma makes it a lot harder. he just went right after modernization accounts, primarily procurement. he cancelled 40-50, depending on how he calculated it, major programs delayed. reduced the buying extended period in which you buy them. and 240 major minor ones. it's down to all the way, like, the radio. so that's the easy stuff. you kill programs, big win. although, again, the savings here is a really, big, kwisquis number. and then next year, low-hanging fruit. it's easy. it wins you a bumper sticker. you can show immediate savings. but actually, the number falls slightly. and then secretary gates tried

to get in front of congress and the president seeing the debt reduction snowball coming at the department. his own chairman saying we've got to cut the defense budget to cut down the net. the first year, he said we're going to save a hundred billion over five years. everything from closing bases to cutting the officer's demands, whatever. you name it: it continued into 2012, as well. unclear what it meant, just that they had a bogey they had to reach that's not going to change. but none the less, you see the drills that have been under way now. and here we are. so, today, we're going to cut the, you know, 30 major programs left. okay. that's great. then what? it's going to take a whole enterprise-wide effort. and it sounds so easy to say, you know, at the think tank, but it's generally true.

and it's going to have to start next year because you're going to need a secretary of either political party who's got time to do this. to learn up, to figure out how to tackle it all at once. the kinds of things like acquisition reform on the services side that get zero attention and peeter is a hundred percent correct. the dod civilian work force is exceptionally large and entirely need of review and downsizing pretty quickly. military compensation, not just tricare, the entire, whole thing. you know, you start plugging that retirement, what about education? what about health care? there snt juisn't just one easy. it requires a whole new system that has nothing to do with what we're doing today. all of that has to happen at once. we're at the point where cuts

are going to save you money or hurt your national security. it's not sexy. that's the problem. great, the wins you had, you're tough on the contractors or whatever. but the kinds of things that have to happen now are the slow, bureaucratic, boring things, behind the scenes, over multiple years of leadership at the secretary of defense level who can see those through. >> i'm just going to take this little thing in the industry representative here. and i appreciate rebecca and what mckenzie said about strategy and so forth. it was 50 years ago that dwight eisenhower delivered his address from the oval office. mckenzie's old colleague at the heritage foundation describes that speech as one destined to

be frequently cited and seldom read. but it coins the phrase military industrial complex. and there is this enduring it's also half that of walmart. so if we have a complex out there, it's existing in some other sector. david bertoe did a study that since the defense consolidation and the downturn of 1991, 150 companies have left this industry, eerts through consolidation or out right exit. this is a rather tightly, compact, very efficient business right now. >> we have gone from having a large number of unhealthy kpa s companies to a small number of healthy companies. you're better having that because unhealthy companies do

desperate things. the discussion we're having right now is basically a neat ax approach to the defense budget, the defense establishment and the defense industry that secreta secretary carter called the sixth leg of service. this is an effort and circumstance that we're in. deficit and debt reduction that has to have a very serious, calculated plan and program approach to it. that is not sequestration. the room for error in the defense industry is actually much smaller than many people a few years ago would have told you. >> i'll end on three quick points. first, december piet a real diversity of folks on different panels, there has been a fair

census around and the main one being the insanity of the predicament that we have placed ourselves into. placed ourselves into in the long term. but also place ourselves into in the short term. we may have disagreement on what to do next. but i think that's a big take away from me is that no one supporting this me ax-like approach. the second is the notion that these lean times will force politically painful choices. but not necessarily strategically painful. and that's why they call for leader shin. lead ir ship, which we've heard has been lacking in this context, is about two things. leadership is not only about making smart, strategic decision, but it's about making tough choices.

and i hoech we hope we see that. and then the third is the thank