then i want to drain the swamp. i want to fix this dysfunctional mess of a tax code so we have incentives for creating red, white, and blue jobs, creating jobs here in our country. i know we're going to be calling on you all often in the days ahead. i have a couple other questions about issues that are pending. senator thune, you're next. if i could just finish these two questions, we'll go right to you. the first deals with the implications of inversions on health care costs in america and the implications for the american consumer. i was struck by comments made in "the wall street journal" recently by the ceo of abbott, who said that he was concerned about the higher prices that american consumers would have to pay if proposed inversions like his companies did not go

through. and i'm still trying to figure out how these savings are going to be passed on to consumers and of course to taxpayers who put up so much of the money that funds the medicare program. so mr. -- we'll ask all three of our professors. explain to me how somehow these costs, particularly medical costs, because so many of the inversions thus far are medical, explain to me how or even if -- because you've done some scholarship on this, dr. desai. how's this going to benefit the american consumer and the medicare program in particular? we'll start with you, dr. desai. >> so i think the broad way to think about this problem is to understand that this question relates to the broader question of the incidents of the corporate tax.

so who pays the corporate tax? there's really three sets of folks who can play. so the first is customers, which is what you're referring to via the health care system. the second is workers. the third is capital or shareholders. so whenever there is a tax-saving move, like an inversion, we can expect those benefits to accrue to one of those three sets of people. either workers are going to get higher wages, shareholders are going to get higher returns, or customers will get lower prices. i think most of the consensus in the scholarship is when taxes change, they don't typically get transmitted to product prices. >> they don't get typically translated to product prices, which would be the prices that americans pay for health care. >> in this example, exactly right. >> very good. thank you. >> they typically get translated more likely to wages and some degree shareholders. >> very good. senator thune has just come back. we'll bring you into this question, dr. merrill and dr. robinson. that is the impact of reform on

the deferral issue. of course, one of the goals around which there's bipartisan support for corporate tax reform is to simplify the system. i think we all understand that the international tax is inherently complicated. my question is, wouldn't repealing deferral go a long way towards corporate tax simplification by eliminating the complicated system that exists today of tracking unused foreign tax credits and the related earnings and profits. in effect, income would be subject either immediate taxation or exempt from the current foreign tax credits and utilized against current taxable income. so answer to the question, if you might, would deferral eliminate a very complicated feature of the tax system, and

would doing that as part of bipartisan comprehensive tax reform make the system more simple and understandable? dr. robinson. >> i do think, as i put in my written testimony, that the implicit cost of the u.s. tax system is higher than the explicit cost. and what i mean by that is that the cost associated with actually avoiding repatriation or maintaining deferral for long periods of time is what i believe makes our tax system uncompetitive. so i do think that eliminating deferral so long as the rate, of course, was lowered sufficiently would be what i would be in favor of. the reason i say that is because the alternative approach, of course, is to implement some sort of territorial system, but i think those types of systems, to design them appropriately, would have to recognize

instances where earnings were not subject to robust tax systems abroad and you have to introduce all sorts of exceptions and exclusions and base broadening provisions. by the time you introduce those, you're sort of right back where you started. so i am largely in favor of ending deferral and lowering the rate as a means of simplification. >> dr. merrill, unless you want to add anything, i'll recognize senator thune. was there anything you wanted to add? >> why don't you take mr. thune's question. >> very good. senator thune. >> thank you, mr. chairman. i want to thank you and senator hatch for holding this important hearing. thank you, all, for making time to share your expertise with us. i suspect there are significant differences about how we improve the u.s. tax code, differences of opinion among members here in the finance committee and probably in the senate and the congress. but i think that all of us agree that we want american companies to be competitive. we want to for them to be able

to compete and win in the global marketplace. i think unfortunately, we ask them to do it with one hand tied behind their back because we actually make the rules they play by. when you make bad rules, you get bad outcomes. there are economic signals right now that are driving a lot of the decision making that our businesses are following. so i think some of this inflammatory rhetoric and accusing them of not being economic patriots is really not helpful. and i would hope that we could focus on not just the symptoms but actually the cause for these problems. and that is we have an outdated, dysfunctional tax code with the highest rate in the developed world. and we're also one of the only few countries in the world that continues to use the worldwide system that hasn't moved to a territorial system. i shouldn't say in the world, but certainly one of the few

countries in the oecd. so i just think that we need to focus on the problem mere. the problem is the high rate. there was a time when we were back in 1986 when the tax code was last reforms where our corporate tax rate was five points lower than the average. now it's about 14 points higher than the oecd average. it is only -- i mean, this is what you're going to get when you have these kinds of rules. we need to change the rules. we need to reform the tax code. so i guess it seems to me, at least, that the system is basically the worst of all worlds. because we've got -- if you're asking your businesses to compete in the foreign marketplace, not only do we have the highest corporate income tax rate among oecd nations, we're also one of the few nations that has a worldwide system of taxing income. so dr. merrill, i guess i would ask you, could you elaborate a little on your testimony in term of what this means for a u.s.-based company competing in foreign markets against companies that are based in

nations with more modern and favorable tax systems. >> yes, thank you. so what we're seeing is a world where a u.s. company that operates abroad is now generally competing with foreign competitors in the same market but facing a very different home country tax system. they all face the same rules in the country where they're operating. the difference is they face different home country taxation. so if the u.s. company earns income abroad and wishes to invest it back home in the united states, bricks and mortar, if it wants to use the money to get back to its shareholders, if it wants to use the money to pay higher wages to its workers, it faces a u.s. tax on that repatriated earnings that would not be the case if it

was a foreign headquartered company under a territorial-type system. so we see this manifesting itself in u.s. companies stuck in a way building up cash abroad that they would like, in many cases, to return to the u.s. to invest here, to use for a variety of purposes. but if they do, they would face the highest tax rate in the world in bringing it back. so that is a very important driver of why a u.s. company is not particularly an attractive target when they go out to buy a foreign company. if you're a shareholder in a foreign company and a u.s. company says, gee, i'd like to buy you, you realize that means that if you're acquired, any foreign profits that will be distributed to you have to go through the u.s. corporate income tax system. if you're purchased by a foreign

acquirer, that's not the case. it makes it harder for u.s. companies to make foreign acquisitions. it makes it harder for them to even invest back at home. >> and there seems to be a misperception about what this -- the way some of this has been covered at least in the press articles. it's implied that u.s. companies are somehow changing the taxation of their u.s. income through these deals. isn't it the case that income earned in the united states remains subject to u.s. tax regardless of the corporate structure? >> u.s. company that moves its legal headquarters abroad is still subject to u.s. income tax on its u.s. operations. it's still subject to tax if it brings back the foreign earnings it has previously earned in its foreign affiliates. >> and this is a question -- one more, mr. chairman. there's a suggestion in the administration's proposal that we attempt to stop corporate

inversions in that, you know, there's a concern about some of the steps being taken designed to stop them could create more harm than the inversions themselves. in particular is a concern this management control test that's being advanced by the white house and some here in the senate could have the effect of encouraging mergers whereby management control would be outside of the united states. what's your view on that issue? >> congress has a long history of trying to address inversion transactions, and each time finding unintended effects. congress tried in '84. the irs tried about ten years later in '94. of course, congress in 2004 adopted legislation, each time trying to deal with the transaction of the day. and what happened is companies found different ways to achieve what the economic incentives are driving them to do, which is to

have the assets owned in a tax jurisdiction that's more favorable. so the concern would be that, you know, another stop-gap measure could lead to kinds of transactions that are not desirable from a u.s. standpoint. a true foreign acquisition of a u.s. company where the headquarter jobs are abroad and the u.s. headquarter shrinks. >> mr. chairman, i thank you. i appreciate the answers to these questions. i would ask if i could get my statement, entire statement, which i didn't use all of included in the record. again, point out that we got a problem here. the problem is our tax code. >> without objection, it is so ordered. >> thank you, mr. chairman. >> senator thune, you may not have been here when i made this point. i am fully committed to working with you and colleagues on the other side of the aisle for the ultimate cure, which is fixing this dysfunctional mess of a tax system. the question is, what are we going to do about the damage that's being done right now?

senator portman, do you have any other questions you'd like to ask? >> thank you. why don't you go ahead. >> i have no other questions. >> can i just do a quick, quick round? >> of course. >> with the team here. first of all, i quote you all the time because the tax code is 100 years old and it looks like it. so i appreciate your attitude about wanting to pursue reform. i'm concerned that by taking this detour it's going to make it harder, not eeasier. again, the unintended consequences we talked about, include accelerating this acquisition of u.s. companies by foreign entities. the joint committee on taxation, which is our official nonpartisan scorekeeper has said with regard to the president's proposal in his budget last year, and these are mostly international tax revenue raisers to deal with some of these issues. they said, and i quote, many of these proposals may make

corporate structures with a domestic parent relatively less attractive than corporate structures with a foreign parent. and because these proposals are likely to raise u.s. tax liability, parent structure more than the foreign parent structure. seems pretty clear. and that's not republicans or democrats. these are our nonpartisan arbiters as to what we ought to be doing in terms of good tax policy. i guess one question i would love to hear from this distinguished panel is, dr. robinson talked a little babout access to capital. it's a big disadvantage to u.s. companies now. forget the rate. even forget kind of the general notion of territorial versus worldwide. the fact is these u.s. companies are not as nimble. they can't move assets around where they need them. and i think that has to be addressed. here's my question. sometimes when i debate my colleagues can on this issue,

they say, well, just because a company is foreign doesn't mean they don't have u.s. jobs, which is true. anheuser-busch still has u.s. jobs. they sell a lot of beer in america. their market share is in good shape. maybe, peter, if you could address this or dr. desai or dr. robinson, whoever has looked into this, but can you tell us about what happens when -- peter talked about fortune 500 companies. you've seen a one-third reduction in u.s. companies. what happens? what is the impact on jobs when you see u.s. companies being acquired by a foreign company? >> yeah, i have not actually studied that issue. it could go either way. if the foreign company is a better managed company, bring in new technology, it could

increase jobs. on the other hand, it could go the other way. i don't know what the actual experience has been. >> dr. desai? >> i think you're right to put this in the context of a broader market for corporate control, which is really the issue with foreign acquisitions. i think the issue with foreign acquisitions is particularly with respect to high value added headquarter jobs, those may well get relocated when it becomes foreign owned. that is something that we have seen at least anecdotally. we also know that headquarter jobs are really important. they give rise to lots of economic spillovers more generally. for that reason, i think you're right to be suspect of the potential for these foreign acquisitions, which is they can lead to high-value added jobs going abroad and in particular headquarter jobs. >> dr. robinson? you do any research on this? >> i was going to say, i don't have anything to add concrete. i've not done any research in this area. >> let me just assert something that's probably pretty obvious. when a company chooses a domicile somewhere else and when the headquarters moves, which

often happens, there's an intangible impact. so the companies in, you know, our great cities in america are major benefactors. companies in my home state of ohio are involved in every single nonprofit in one way or another. and often provide a lot of executives to, you know, help to lead these nonprofits and charities. and obviously make huge contributions. i've love to see some research on that. i do think this is sort of the intangible impact of companies pulling out of the u.s. it hasn't been given adequate focus and research. so if any of y'all have any thoughts on that, i would love to see if we could look into that. certainly on the jobs front, we'd like more information. but also on just intangible benefit. what happens? why does it matter? i think it matters. i think my colleagues do. that's why we're working hard on this. i think we need better

information to be able to explain this more in terms of the impacts, the negative impacts to our constituents. thank you, mr. chairman. >> thank you, senator portman. at this point, i'd ask unanimous consent that a statement by senator levin be included in the hearing record. without objection, the statement will be included. let me leave you all with one thought that we really haven't, i think, gotten into much this morning. it seems to me it would be one thing if there were just a few of these inversions. in other words, if there were a few of them, we'd work, as we've talked about this morning, on comprehensive, bipartisan, you know, tax reform. we fixed it, and then we wouldn't be back here again in another decade. part of what has influenced my judgments is that's not going to happen.

and i spoke a couple hours ago from reports about the financial press about this feeding par ii. that's what's actually going on out there. it's not a few of these inversions you could put to bed with financial tax reform. according to the financial press, it is a feeding frenzy where you have the investment bankers going out to all the possible companies with their slide decks and say, you better do this quickly. and the reality is that tax reform is moving slowly and the inversions are moving very rapidly. as i indicated before, i think that's a prescription for real chaos. so you could hear from the senators here today. wasn't a lot of shouting and a lot of screaming and finger pointing. so a lot of goodwill here. my hope is that with your good accounts, very thoughtful testimony, you can help us address both of these tasks.

to close the inversion loophole and then move on to the great challenge in front of this committee. that's the real cure, which is comprehensive bipartisan tax reform. with that, finance committee is adjourned. >> you can watch all of this hearing. it was interrupted by a series of votes. watch it at c-span.org. on the issue of taxation or taxation reform, see key reports

that the majority leader harry reid filed cloture yesterday on a motion to proceed on a measure that would give tax breaks to employers who return jobs to the united states barring a time agreement. that vote would likely happen on wednesday. the chairman of the finance committee is also pushing for support this week on a plan to keep the highway trust fund afloat until congress can come up with a long-term fix. that with an august 1st deadline awaiting. while more live coverage coming up here on c-span3 this afternoon when the senate veterans affairs committee holds a hearing to confirm robert mcdonald to be the head of the va. he's a former president, ceo, and chair of proctor & gamble. that will be live at 3:00 p.m. eastern. also in about 40 minutes, the head of the centers for disease control, dr. tom frieden, will be talking about the middle east

respiratory syndrome known as mirs, as well as the rise of antibiotic resistant diseases. that will be at 1:00 p.m. eastern on c-span2. in washington today, a ruling at the federal appeals court may have delivered a serious setback to president obama's health care law, potentially derailing subsidies for many low-income people who have bought policies. they write that a three-judge panel in washington ruled 2-1 that the law as written only allows insurance subsidies in states that have set up their own exchanges. that invalidated an irs regulation that allowed subsidies in 50 states. legal correspondent jeffrey tubin of cnn tweeted after that ruling, the 7-4 democratic majority on the d.c. circuit will nuke option means likely overturning of that obamacare ruling.

this weekend on book tv's "after words" -- >> i thought it would be compelling to tell the story of a white family and a black family with the same name who come from the same place and follow them from slavery through the civil war, reconstruction, jim crow, the civil rights movement, up until today. and compare and contrast. >> chris tomlinson on his family's slave owning history in texas and how the legacy of slavery still affects american society. he talks with lah rar tomlinson, the brother of former nfl running back ladainian tomlinson about their family's lineage as former slaves from the hill. saturday night at 10:00 eastern on c-span2's "after words." according to a new study, per capita cost of active duty military personnel have increased by 42% over the last

decade. recently hosted a panel with former house and senate staff directors to examine the issue. this is an hour. my name is steve bell. i'm the director of economic policy at the bipartisan policy center. you did not come here to hear me, but i want to remind everyone that in front of you, you have a joint product of the american enterprise institute and the bipartisan policy center team. this is a chart book that is designed to simplify what we think has been a misunderstood issue, mainly personnel costs. we have an excellent panel today. we're also very lucky to have

andrew tillman, who is a bureau chief at the pentagon and a reporter for the "military times." andrew started his military defense reporting in iraq for stars and stripes. he has won a number of awards, including last year, being named a kiplinger fellow. even though he started with "the houston chronicle," he ended up in new york at the columbia school of journalism. which is pretty good for us guys from texas. one of the reasons we wanted andrew was his story july 1st of this year, in which he featured bob hale, the comptroller, saying that personnel costs were declining. and since that was opposite everything that us budget analysts had looked at over the past 25 years, except in the most kind of constrained way, we thought, this would be interesting to have andrew come here and tell us what his view is after all of his reporting.

our view is that per capita costs have gone up dramatically. that has led to, obviously, reduction in forces, that is continuing to lead to further reductions, slowness in operations and maintenance, readiness, and a decline in modernization. we hope to begin to show you with this chart book, which is the first and several things that both aei and bpc will do, we hope to show you why we make those contentions. i remind you all that in 1985, we did something called ground hallings. it had a sequester. i was staff director at that time. yes, we invented the sequester, but we never wanted to use, so don't blame us, is the way i would lead. and with that i'm going to turn over to andrew. >> okay.

thanks a lot. i want to thank the bipartisan policy center for putting together this very compact chart book. i think it really gives a good summary of a lot of the real basic issues and personnel compensation today. i also want to thank them, because i had two main reports in my inbox this week, this one and also one from the military compensation commission, which is 450 pages. so this was much easier to digest. with that, let me start by introducing our panel. to my left here is professor linda bills, who teaches public policy at the harvard kennedy school. charlie hoye, who is now retired, but was the staff director at the senate appropriations committee. scott willy, to his left, was a former staff director at the

house appropriations committee, and on the end is ann saur, who is a staff director with the senate armed services committee. so we've got a lot of good perspective today. i just want to start, before i turn it over to some of them, and say, i've been covering this for many years, and i want to start with a little bit of historical perspective. we're going to talk about the run-up in personnel costs from 2001 to the present, which is the window we frequently talk about. but a little background. as many of you know, the all-volunteer force is about 40 years old. and in 1973, when it started, they basically ended the draft with the stroke of a pen and didn't make a whole lot of changes to military compensation. so a lot of these structures we still have today are carried over from the '50s, second world war, even before. when reagan came in in the '80s, it was morgan in america. he told mr. gorbachev to tear down the wall and threw a lot of

money at the pentagon. but mainly that was hardware. ships and missiles and fighter jets. there was not a whole lot of money throw at military compensation, which is why, by the time the clinton years came around, there started to be talk about a pay gap. there was a sense that military compensation had fallen behind the private sector wages. the pentagon was starting to worry about having a retention and recruitment problem. so in the late '90s, there was a number of efforts on the hill to begin to close that pay gap. so although we tend to talk about the window of 2001 to the present, a lot of the things that we're talking about in terms of the run-up of compensation really began in the late '90s, in terms of pay increases that exceeded the normal employment cost index, increase in housing alliance, improved tuition systems benefits and things like that. and i talk to a lot of service members over the course of my job, and this is a deeply personal issue for them. this is not just their families'

financial security now and in the future they're thinking about, but also, it really gets to the heart of what they feel is the social contract that they have with the rest of the country. and this is causing a lot of angst. alts of hand wringing in the rank and file about what may or may not happen. a lot of these guys from ft. hood in texas and sailors in norfolk really don't understand how washington works. they have no idea how this is never going to pass. all these things on the table are causing a lot of anxiety. with that, let me start on the end with ann saur. if i could ask you to give us a brief summary of the period of 2000 -- you know, starting in 2001 to the present, as the chart book shows, there's been a massive increase in the per troop cost of compensation. and that goes far beyond just pay increases. what is it that's really driving some of the charts that we're seeing in the first few pages of

this book? >> great, thank you. thanks, andrew, very much. thank you for being here and thank you all for showing up. i want to say before we get into any of these issues, i think all of the panelists share the view, as andrew mentioned, the angst among the active duty military that this is a broad bipartisan issue, it's a political issue, but it's a bipartisan political issue, one of the few bipartisan political issues in washington. and we all strongly support the war fighter, our military personnel, and understand that their job and their sacrifice is nothing that we should take lightly. >> however, not longer term, i think we need to look at defense budgeting as having sort of four

levers, if you will. four ways of managing defense budgeting. there's four structure cuts, which again can be very political. but those can be dialed up or down. modernization, another tuna bowl lever of defense budgeting. readiness, again, adjustable, up or down. compensation, especially in these last 12 or 13 a years has only been a lever that tunes upward. now, granted, we're in the midst of -- have been in the midst of extended wars around the world, and i think that the congressional and administration's approaches to making sure our wounded warriors and our active duty military are well taken care of have been broadly bipartisanly supported. however, going forward, we really need to look at this in a bipartisan fashion, but we need to look at the tunability of compensation, because there

really are only the two solutions to the problem. one solution is increase the defense budget and allow these personnel costs and the programs and the benefits to stay the same. i think in light of the last several years in budget deals, budget agreements, budget concerns, and continuing concern about deficits and debt, that's not likely to be the answer. we're not going to see a large increase in defense budget, regardless of how elections go in the next couple of cycles. the other way to approach this is to look at broad structural reforms and military compensation. again, in the near term, because of the angst within our all-volunteer force, and because of the requirement, for example, that was put before the military compensation committee, commission, rather, to grandfather in all active duty members, even if we enacted tomorrow, broad structural reforms and a lot of these benefits, particularly pension and compensation, you wouldn't see any near-term savings. it would be five to eight years before we really saw anything significant in terms of savings.

so i think in order to accommodate the desires of congress and the administration and military leadership to ensure that our military are well compensated and are taken care of, their families, in particular, are also, i think that the next step in this approach, and it's even mentioned in the interim report, of a military compensation commission, is to look at domestic entitlements as well as military entitlements. i think, politically, the only way you can start to address what i will call military entitlements, and i don't mean that in a negative sense, compensation and benefits, is to have a similar look at the domestic benefits that people are entitled to. the mandatory side of the federal budget. with deficits increasing for cbo's long-term budget outlook, almost doubling, excuse me, the debt almost doubling, as a shared gdp over the next 25 years, both of these areas need to be looked at. and i think that's a potential solution or a potential approach

to take in a bipartisan way, to look at both domestic and military entitlements and manage those issues in a fair and equitable manner. is that going to happen? i guess i could say, talk to me in november, or maybe talk to me in january of 2017. we'll see. >> okay. thanks. let's look at this for a few minutes from the pentagon perspective. ann talked about the levers that we have to change some of these things and right now, obviously, the sequestration, the budget appears to be capped. and although military personnel costs have been a relatively steady slice, with about a third or a half depending on how you want to count them, for the past 12 years, everything's grown, you know, the cost of operations has grown, the cost of acquisition has grown, the cost of personnel has grown. now that things are capped, personnel will continue to grow, as it is under the current law, and some other things are going

to get squeezed. scott, could you tell us a little bit about what you think, you know, the dodd obviously has to work within the law, if they're told that they have to continue to give pay raises and continue to provide retirement accruals and that sort of thing. yet, their top-line budget is capped. what do they do? where do they find that money? >> well, i think that people assume that there's a lot more -- there are a lot -- many more options than there really are. and as ann pointed out, modernization is seen as something you can go up or down on. and that's true, the problem is we have so many legacy weapons system right now that you can dial that down, but you will end

up paying more in maintenance on those old ships and planes than the cost of replacing them. there's a point in time, just like the family car, that if you don't replace it, you're going to have big costs associated with it. and there's an assumption that you can do something on readiness or operations or maintenance. but, you know, that really is a function of your pace of operations and the events of the last several weeks have shown us, the congress really doesn't have any way of controlling that. they are going to be things that happen in the world that dictate what we do in that area. and so in many respects, as intractable as this issue of compensation and personnel costs seem, and i don't -- i haven't seen one proposal in this area that looks like it's got a ghost of a chance getting through

either house right now. but the only thing that leaves us is reducing the number of people that we have and that's fine, as long as we live in a peaceful world. but we don't, and it doesn't seem to be becoming more peaceful. so i think, you know, we're faced with a situation where we have very unrealistic projections about how much we're going to have to spend on both the defense and on the non-defense side of the budget. and as ann points out, i think it's the entitlement programs in both defense and nondefense, that are driving the increases, so we have to raise taxes to pay for those, or we have to find

some way of cutting them back. i don't think they're probably going to get cut back very much, on either of the nondefense or defense side, which means at some point, i think we're going to have to face up to taxes. >> thanks, so as you point out, there's not a whole lot of options. i think there's the general sense that particularly with a lot of the contracts on the acquisition side being set in stone, that ultimately, a lot of this is going to have to, in the short-term, come out of what they call readiness. but i know as a reporter, i find it a little bit difficult to track readiness across a force so large, that there's so many different things. can i ask, charlie, do you have any thoughts on, what does that really mean? if they're going to have to face cuts in readiness, how does that translate into the real world and what should we be looking for in terms of maybe a red flag that that the readiness is being cut too much? i mean, that we should, i think, to the next few years, we're

going to start to see that. what should we be looking for? >> is it on? oh, it isn't. it doesn't light up. readiness in a tough thing to understand. we know what it means when the force is not ready and not able to do the job that it needs to do, but in terms of how the budget share works out, readiness is always a tough thing. i always thought of the operations and maintenance account when it worked on the appropriations committee, it was kind of like a black hole. you put money in, but you're not quite sure what comes out on the other end. i think it was gordon england who described it as a river of money that flows through the pentagon, that they don't really know what it's for. as far as readiness, how you

track it, it's a tough thing to do. but if we find ourselves in a situation that we now face, which is, we have the budget control act that's in place, it reduces the rate of growth of defense spending over the next nine years or so from the time it was initiated, so the pentagon is no longer going to have a large increase in funds. so i think that's a given. so if we do not find some way to get rid of the sequestration burden, that's when you're really going to start to see problems come to the defense department. the 31% figure for military personnel is not that alarming to me, having watched this over the years, but there is an important factor that is, that is hidden in the 31%, and that is, it's 31% in a period of relative growth. and now we'll reach a period of stagnation or even decline. and at that point, you start wondering what happens to personnel costs, they're going to probably go up.

when you have shrinking budgets, the first things that goes are the investment accounts. that's kind of how it worgs. the second things that goes is the readiness accounts, because there's not much you can do about personnel costs. and the chickens have come home to roost on this issue. an all-volunteer force now in force for 40 years, as uh yo mentioned, that means you have two cadres of individuals of retired and a growing number of individuals that have retired. you have a much higher quality force today than we had in the early 1980s, when they first started to address the issue of petty officer shortfalls, cat 4 individuals in the army, basically that means the people that scored lower on the army an constitute test was categorized as cat 4 by the army. today, you have 98% high school graduates, you have well over 50% that are in the upper categories, not cat 4, maybe cat 3a, 2, and 1. all of that means that you are going to have to pay a price for it.

i saw a study that was done recently that indicated that a high school graduate that joined the military would make money than in 90% of the other jobs that they were eligible for. that's a -- that means we have a large amount of resources that are going into military personnel costs. is it the right amount? it's hard to say. you need a higher trained force, because you have very high weapons systems that need to be operated and maintained. the military leaders certainly like a higher capability force because of what it means to them and their ability to carry out their missions. we no longer talk about a hollow army that we talk about in the late 1970s, we have a very effective, not most effective fighting force in the world. and so as we look at this, you see that some of the issues that have taken place over the years, with an all-volunteer force. i think there's a third thing, which is deferred compensation.

and that is in the public sector, both state, local, and federal, we have a tendency to look at kicking the can into the future. and i think that's one of the things we've done with military personnel as well, with a robust retirement program, with things like tri-care for life, some of the other benefits that are shown here on the last page of this chart. and so all of those things lead us to this issue where, if we don't solve sequestration,'dness, whatever that means in the very amorphous sense, it's going to start affected. but the bottom line to me on this issue is, we have a very small segment of the american population that's willing to serve. they are willing to sacrifice their lives, they are willing to endure long periods of family and separation. they are adhered to a strict code of conduct that most of us in the civil society don't have to adhere to. so they deserve to be compensated fairly. and that's something that needs to be considered if you look at military compensation and what it means for investment budget or the readiness budget.

we need to make sure we are taking care of the men and women who are, in fact, willing to serve, to protect the rest of us. >> charlie makes a lot of really interesting points there. one thing i would like to highlight a little bit in the chart book, which i personally, having pored over these numbers for a long time, i personal found the most interesting was on page 11, where you start to see, you know, most of this talks about the defense budget and how things are changing and shifting inside the defense department's budget proper, but there's also a lot of -- as far as taxpayers are concerned, and the long-term, the federal budget, there's a lot of costs that are found outside the defense department budget, that accrue over time. and i know, linda, you've done an awful lot of research in this area, can you help us understand a little bit, from a taxpayer's perspective, what should we be

looking at that's outside the defense department's budget proposal? >> sure, thank you. thanks for inviting me today, and i also wanted to shout out to a few of my students who are in the audience, from the kennedy school, in particular, robert belk, a very decorated navy fighter pilot. robert, stand up, you're going to be on c-span. i believe the -- robert is the only person in uniform here in the room today, and robert is 19 years in to the navy. so he's exactly the kind of person we're talking about theoretically here, but, some of you who are journalists might want to talk to afterwards, has got a very specific perspective on these issues. also want to say to all of you young people in the audience here, how wonderful the kennedy school is, if you're thinking about your graduate school. and for all of you not so young people, how wonderful the

kennedy school is if you're thinking about hiring young people. so i want to make a couple of points. and i will absolutely get to the point -- the important point you were asking. first of all, i think it should be noted that this situation is in large part due to the wars in iraq and afghanistan. because during these wars and i've written extensively on the linkage here, the pentagon has expanded tri-care to reservist guards, who made up so much of the force. we've increased compensation and benefits to troops, particularly in changing the way pay scales were indexed, at a time when recruiting was a big issue in the armies and the marines. we've paid some of the highest profits in the war to the companies that manage tricare. and in my own analysis, where did the money go for iraq and afghanistan. if you actually look at who

earned the highest profits, it was not the halliburtons and the other companies that roll off the tongues, but it actually was the tricare companies. and we've also had a huge surge in the number of claims within tricare, the number of troops and families who are having medical visits, for example, a 65% increase in children in military personnel, who are seeking mental healthcare counseling. a 150% increase in family members, seeking counseling of various kinds. huge increase in the number of claims for musculoskeletal issues and other issues related to the war. however, it's important to note that some of these increases are due to exogenous factors that are not related to the war.

for example, the price of health insurance in the private sector during this period for a family of four has doubled from about $2,000 a year to about $4,000 a year. and at the same time, the price of health care, tricare for a family of four has stayed the same. so the change in that differential has not surprisingly driven a very high increase into tricare for those who are eligible. so over the period, the percentage of people who are eligible to go into tricare, who actually are in tricare, has gone up from 29% to 52%. and the percentage of those people who have private health insurance has decreased from 44% to 19%. so we're seeing all of these trends, which are putting an enormous amount of pressure. now, all of this has been paid for up until now on the national credit card. because all of the iraq and

afghanistan expenditures have been paid through for debt. it's as if we have a giant credit card, and all of a sudden we've maxed out and reached the limit. the issue is not sequestration, but the massive iraq and isn't but the massive iraq and afghanistan war expenditures, which have been massive and not terribly thoroughly vetted which the naval does to pass through and fudge and have pass through and fudge and have a lot of money washing around the pentagon, which could be used to pay for various kinds of things. sequestration can be considered sort of on top of that, as if we now have a payment plan. so we now have a cap in order -- you know, because of all of the debts that we've racked up, so i think it's important to think about it that way. secondly, and to your question, i think we need to consider the increases in military personnel, and particularly, tricare costs, together with the increases that we've seen in the department of veterans affairs and social

security and elsewhere. now, the v.a. has increased in real terms, in the period from $60 billion a year to $160 billion a year requests this year. and that is an enormous increase. and yet problems abound, as we are familiar, and some of the proposals on the hill right now would add up to another $50 billion a year. yesterday, or two days ago, the new secretary was requesting another $17 billion for next year. we've already spent tens of billions on trying to harmonize systems on the disability claims process and the health care system between the alta and vista, between the v.a. and d.o.d. systems, which has still not worked. so i can think about this more, i can talk about this all day and night, but it's important to see these things together. in addition, the social security disability budget, which has also increased significantly, is

also related to these wars. the number of veterans from iraq and afghanistan, who are 100% disabled, are over 30,000. those individuals are automatically eligible for a full social security disability insurance. those who are 70, 80, and 90% disabled and service connected are probably eligible for that as well, because it's a binary system related to whether or not you can work. so all of these things, the health care system, the tricare system, the v.a. claims are all part of a massive cost, as sort of a hangover legacy cost, from the iraq and afghanistan wars, which we have not figured out how to pay for. which leads me to my third point, which is, in many ways, the most important and the most boring, which is the accounting system. now, if -- as charlie mentioned, we have a way of sort of kicking

these long-term costs down the can, and not actually accounting for them. if this were a private sector company and i work with both public and private sector organizations, all of these benefits that we have promised and that are accrued would be written up in the financial statements as deferred compensation. most of these costs, however, that are promised, that are accrued promises, in the military and in the v.a., don't appear anywhere on the financial statements of the united states. the actuarial capacity to even estimate some of these things is pretty weak. and when you compare the amount of time and attention and effort and knowledge in the social security and medicare systems, to what we know about the accrued liabilities for personnel, health care, in the v.a., and particularly in the pentagon, it's extraordinary how weak we -- how weakly we really understand the liabilities and

have accounted for them. and it's difficult, if you -- i mean, i've argued for years that bad accounting actually matters. if you don't know what it is that you owe, you can't even begin to come up with a sensible way of financing them. so i have my own views on how we should go about trying to fix skpofl these problems, but i'll defer that to my next turn. >> okay. sounds good. we're going to start a q&a here in a few minutes, but before we do that, i want to talk a little bit about things on the hill. and obviously, a lot of this comes down to what congress is going to do, you know, what sort of authorities they're going to grant the pentagon for dealing with this, whether they're going to, you know, a lot of these decisions on military compensation are really not for the secretary of defense to make, which is a really important point that a lot of

people are not always aware of. let's talk about the murray ryan deal from late last year, early this year, when they, as part of this broad sweeping deal that affected every aspect of the federal government. there was a clause in there that said, and, oh, by the way, we're going to take all current military retirees, even guys that left the military in the late '80s, and we're going to scale back their retirement increases, the cost of living adjustment minus 1%. personally, we at our newspaper thought this was a huge deal, because in so many ways, you'd talked about -- everybody had talked about how, oh, we're going to talk about this thing, but we're going to grandfather everyone. so don't worry about it. and all of a sudden, not only was everyone in today's force not grandfathered, but this was this change that was going to affect people who retired 10 and 20 years.

obviously, this was a political disaster by some criteria, because congress promptly repealed it. what lessons did we learn about this topic and how it's going to play out in the real world from that experience, i'll open it up to any of the panel members. >> i think that's a prime example of what i was talking about earlier, that you cannot approach major changes in the military retirement system unless you look across the board at domestic entitlements. i think the inequity of focusing on military retirees without touching any of the domestic entitlements was a major flaw in that approach. i will say, as a private citizen, not speaking as any former affiliation, i thought it was a step in the right direction to get people talking about the issues. unfortunately, in the final process on that bill, it was, again, limited to the military and did not open up the other entitlements. and i think, you know, just as scott was mentioning, you know, for structure reductions and things like that could help ease some of the budgetary problems with military personnel costs.

those are just as politically charged as a brac round, for example. so, again, i will go back to my comment that while i think the ryan/murray deal got us through a very difficult spot and laid out a framework from which -- a framework for walking together from which broader reforms could take place, we have a lot of work to do, because these personnel costs at 30% of the defense budget today are only going to continue to increase without structural reforms, just like social security, medicare and medicaid. >> as well? >> please. >> murray ryan was a huge solution for the congress for the country in terms of getting rid of sequestration for a couple of years or minimizing the pain of sequestration. and they politically it was a miscalculation for them to come up with that recommendation.

we see this in the pastp 1985 or so. we gave ourselves 15 years to grandfather in everyone. then we had to implement it and congress repealed it under great pressure from the leadership of the military. it's very difficult to go in and change compensation, especially those that have been deferred compensation. it's easier to put a pay freeze on than to say we're going to nickel and dime these things that people have already earned. whatever approach people take in the future, i don't think it's going to be successful until we reach the point where your organization thinks that the congress is acting in the right way. not only the military leaders in today's force say it's the right thing that needs to be done, the military associations have to agree with that. and the people that are military retirees have to agree with that, something that needs to be

done to preserve security as we have these constrained budgets in the future. until that happens i don't think there is going to be a lot of success in a murray ryan deal. i have a feeling they won't come forward with this proposal again if they find themselves in the same position next year with sequestration. >> i think that's a safe bet. anyone else on murray ryan? >> i think it's completely true that you cannot understand this problem outside the context of the entire budget. and if you look at -- we have a budget process. i don't want to get into it with steve. we have this argument all the time. but we have a budget process that's intended to inform our budget make and its done the opposite. the budget control act is an -- a perfect example of that. the budget control projects defense spending and discretionary spending is going

to decline by 3% in real terms over the next 10 years. and in a world where our trade with the rest of the world doubled in the last ten years is probably going to more than double. the world population is going to grow by a very substantial amount over the next year and the idea that we are going to substantially cut our pace of operations or somehow unburden ourselves of the legacies of iraq and afghanistan is unrealistic. we have -- at the same time, i think a totally unrealistic notion of how easy it will be to cut entitlements on either side all of the growth in the federal budget over the last 25 years has in terms of real per capita spending, all of that growth has been in three programs, social security, medicare, and medicaid.

and that's basically our retirement system. the defense and non-defense discretionary programs have basically stayed the same in real per capita terms. and yet we look at a future in which we're expecting all of those things to decline in real per capita terms. and our spending is going to rise to 23% of gdp with revenues of 9%. -- of only 19%. it's that 4% gap. what's the deal that closes that 4% gap. if you have that deal, you can figure out what we may or may not do with military spending. but we can't do anything draconian military spending unless we are willing to do big things with all the other inputs into that 4% gap. >> if i could add one quick comment. i must distance myself from any

conversation about increasing taxes, accept as a result of economic growth where revenue increases by virtue of greater employment and better trade with our allies and businesses make additional profits which we tax in a fair fashion. in arms control world, we have confidence building measures and i think economists, the wall street businesses are looking at what the congress and the government in general is doing on the overall budget issue of debt. yes, deficits are declining or manageable in some people's views, but i still think they are to high. but looking at cbo's long term output debt goes up. that's just public debt ,that's not the off the books debt, ie debt to social security for example, the money we borrowed from social security. so when gdp is "x" and debt is

more than "x" we are essentially bankrupt, and that is projection if we don't do anything. confidence building measures as far as improving our economic outlook, which would raise revenues, can be a structure of looking at entitlements and looking at others mandatory spending, which we have not touched. i think all indications are, at least i have read and people have talked to, is that would help confidence in the economy increasing revenues by virtue of a better economic situation and that could close that 4% gap pretty easily. >> i think that's an interesting point and shows how the discussion of these issues in the military, that's what linda was talking about, health care too, this discussion can be specific to the military and defense department but quickly veers into the broader discussion of entitlements at large and the rise in health

care cost and reigning them in somehow. we were talking about what the crystal ball might show and he thought none of this was going to be addressed until those bigger things were going to be addressed which i thought was a higher bar, if that's possible. linda, do you have any thoughts on -- i know you have thought about the solutions. did murray-ryan and the way that played out change what you think is possible? >> i look at it from a very different perspective. and i think being in academia you tend to be a little bit further away from the everyday situation here on the hill but it's you know, what i see is that the solutions that have been bandied around for this have fallen into -- have either been around stuff, cutting the price we pay or the quantity of stuff or around people, cutting

the price or quantity of people or both. and that's where all of the conversation has been. and where i see the solution or at least the major gains that could be made that have not been tackled is in the 30%. and this is gates striestimate overheads in the pentagon. if this were a private company, we would be looking at the overheads which are -- 30% according to gates. i think they are even higher. which have not been scrutinized and particularly have not been scrutinized in the huge era of growth over the past decade. and just to kind of give you a little anecdote to think about this, i worked somewhat with ben cohen who is ben from ben & jerry's ice cream. in talking to ben about the sort

of ultrasuccess there. he said the way we keep our costs low, we scrutinize every penny around logistics and rents and distribution and refrigeration and manufacturing and sales and marketing and finance, but we never cut a flavor. we would never cut a flavor. it seems to me in the military we are talking about cutting the flavor, cutting end strength, cutting weapons systems. we're sort of going there because those are big and easy. it's easy to cut cherry garcia. but it's harder to go through the real pain and suffering of getting into the overheads. now what would be involved in actually getting into overhead? what's involved is -- i mean, two or three things, first of all, effectively restructuring major parts of the pentagon budget into a managerial accounting system which means instead of just looking at everything in terms of salaries

and inputs, looking in terms of activities because the savings are not the contracts per se. the savings are the whole process, the planning the rfp, the awarding the rfp, the evaluation, the legal costs. all of those indirect costs for every single rfp. so sort of cutting a couple of people is not hitting it. that's easy but that's the flavor. but restructuring the budget into a managerial accounting budget is a four or five-year effort. you really have to get religion on this. everyone i know who looks at this and has been there, include

gates and rumsfeld and others feel this is very important. but it hasn't been tackled because it hasn't had the sustained leadership. and together with that, there needs to be sustained leadership around the financial accounting. the pentagon has flunked its audit every year for 20 years and is the only department who continues to flunk its financial audit. it contributes to an enormous amount of frustration where people can't count stuff and don't know what it's worth. some of the problems i was discussing before. so i feel that, and you all are the political experts, a way that has not been tried is to seriously try and prune back on the overhead costs. >> that's an interesting point about reminding that the d.o.d.

is the only agency that really doesn't -- i don't think they can be audited let alone pass it. i think their books are so skewed and reuters wire service did that a few months ago that was jarring even to people who were tracking this. they had people in regional offices crossing things out and pencilling things in. let me open it up to a q & a. what's the drill for that? anybody? would anyone like to pose a question to the panelists? >> very interesting to me there's not been any mention of -- [ inaudible ] -- product from the military compensation commission. but if you talk to senators, and i assume representatives, they are counting a lot on what this commission is going to come up with. i'm not naive to think that everything they proffer will be implemented but the fact that it was really strike to me that nobody mentioned that as even

part of a way forward. >> i think that's interesting. the questioner asked about the military compensation and monetization commission. congress created and sudden study this. they have a remarkable staff of 60-some people, study this for a year or so and come back with a detailed slate of recommendations. theoretically that's going to be presented to the hill and it will spark this new discussion and we'll be able to maybe clear some of these political hurdles. but you're right, we haven't talked about this much. can anyone offer thoughts on why? are there low expectations for that? >> i have looked at the interim report. it's a good survey of what the issues are and programs are and statistics together with what aei and pbt have put together is a good reference material and it

would be absolutely fabulous in the political arena if the commission would come forward with substantive, well thought out balanced suggestions about what the congress and the administration might do to address this problem. but i've seen a lot of commissions in my time. and i've seen a lot of -- i've seen a lot of good reports from commissions that don't go anywhere, rolls and missions commissions, base closure commissions, things of that sort. so i would love to see that commission come forward with some great, strong, bold and brave recommendations. but even if they do, i think the political reality of the 2015-'16 congressional cycle leading up to a presidential election makes it not terribly

likely that anything gets done unless it gets done in the early part of 2015. so it's a good point that we really need to see thoughtful, independent, bipartisan recommendations from these folks. but to my earlier point about equity and fairness between military entitlement and domestic entitlement reform there is no commission on social security and medicare and medicaid that's going to be coming forward either. high hopes but i leave it to you to figure out how to be bold and brave politically. >> there are a finite number of proposals to change compensation. and the people that work on this know those numbers. and they have vetted those proposals with members on the

hill in order to try to figure out how many votes there are. and it's possible there could be a future congress that would support some of those. but i would agree with ann. this congress or anything that's likely to be seated in january in either house is very unlikely to support the kind of pain that any effective reduction in personnel spending would inflict. >> and i looked at the interim report. i haven't read it word for word. they do a nice job of laying out the problem. in a sense, they lay out the problem. they talk about all of the different aspects of what's in the compensation package. and where it came from and the historical context and where it is today and where it's going to some agree. but i didn't see in the cursory reading of this 400 page document. i found out yesterday it had come out. i did not see the news it had

come out. that was yesterday afternoon's exercise. i did not think they came up with something that said okay this is the model that we're going to use to get to the future, but laying out what the situation is today. maybe the commission will come up with something. we've had a lot of commissions over the years. and other than a brack -- brac commission where congress is going to vote on this, not a lot comes out of those. and i share the views of my colleagues here that congress is not likely to address military compensation in a vacuum only as a part of a larger agreement on overall mandatory spending and taxes. >> if i could just add one more point on. this i agree with what everyone has said that this is a -- it's a systemic problem and needs a systemic solution.

the problem includes the fact that military retirement compensation, as you know, applies to those who stayed in for 20 years. we have my former student 19 years in, staying in for his 20th year. but 80% of the iraq and afghanistan veterans will not stay in for 20 years. so for the young person who comes back after two or three grueling tours of duty, where do they go? they don't have military compensation. they end up, in my opinion, going into the v.a. system claiming for everything they can possibly claim for. they end up in the medicare system and in the social security disability system. so we are by sort of fixing just one piece of it, we're just transferring the costs, effectively, to other places. i haven't been through the whole report either but my criticism is that we have a systemic issue here and it's very difficult to just fix one piece of it without looking at the aspects. >> that's a really interesting

point that i think the number is 83% of service members leave the service before 20 years and end up with no retirement. so the problems are so deep that despite the costs you still have so many people that arguably are getting -- leaving the service without those benefits. so in the back, there, sir? >> [ inaudible question ] i'd like to ask the former health staffers to react to the professor's suggestion is overhead a pot of gold that could be easily tapped or is it why we have three military service, three military departments and why we have people checking to be sure contracts aren't improperly used. is there a pot of gold there? >> a cup of gold. >> question for the panel was,

to elaborate on linda's point that maybe there is a great pot of gold in the overhead costs. he asked if the former staffers could comment on whether they think that is a viable place to find big savings? >> i would offer that there have been some although not perhaps as well informed as they should be. there have been significant overhead costs undertaken in the last several years. the pentagon claims something in the neighborhood of 150 to $200 million they reduced. it includes people. having worked for a large corporation and worked through these cost saving exercises, there are still very, very hard decisions that have to be made no matter how much data and clarity you have on where the costs are, you still have to make the hard decisions. are you going to cut people or consolidate activities or bases, for example, facilities in a

congressional district. so i would say, charlie, short answer, no, it's not a pot of gold. it's an area that needs to be looked at. but it's not going to solve the problem. >> i think there is no question that our procurement system is if not broken, pretty badly messed up. i don't really understand -- i'm all ears in terms of how someone will fix that. in my mind, it's a fundamental issue. i think we really lack the talent both in the uniform and the civilian side of the pentagon to know what we want, and to know how to buy it at a reasonable price. and one reason for that is the people that are able to make that kind of sophisticated decision in this country are

making huge amounts of money in the private sector. and we're trying to hire them on the cheap. we end up with basically fairly low-skilled relative to the top -- and we do not have the top business minds in the country inside the pentagon and we try to hire that expertise in contractors and that really doesn't work. you've got to build -- you've got to build the personnel capability who are government employees and whose entire loyalty is to the government and the taxpayer inside the pentagon in order to really change that decision and no management is going to -- no management system is going to change the expertise of the people that we have if we don't do something about the compensation that allows us to hire those people.

>> sir in the back? >> there's been a lot of debate about moving if we're living in an insecure world moving some of that active force to the reserve force and keeping that capability and debate about personnel costs and a commission called forward to examine that issue. but i'd like to get your take on that and any reaction. >> thanks, tom. tom asks about basically the active and reserve force mix which is a question that comes up a fair amount as the budget pressures mount especially, there's some people say the reserve components are cheaper. and they come with reduced readiness, obviously. but do you all think that that question might emerge to the top of the list of things to address or maybe not? >> i'm not sure it fits in with the discussion of compensation all that much.

but every time we do have a constrained resources, you have a view that there is a view that is expressed by some we should shift our force structure to the reserve component and generally is a reluctance on the active side of the house to go along with. politically it becomes difficult when you talk about specific districts or units or states that have to be occur tayde when you make these kind of changes. there is a battle in the congress right now over the active and reserve force mix and whether certain units should be disposed of or downsized. i think it's a kind of a question that you always have when cow to this period of constrained resources. i don't think there's a long-term solution. you can't have too much of yourself force in your guard and reserve or you lose readiness in the force. >> you know, i think that that question gets at an issue that i

don't think we're talking about. and i really think we need to. i look at the discretionary budget on the domestic and on the defense side. on the domestic side i think you can say, you know, the pace of government activity, the amount of government that we need is driven by the growth of inflation, the growth of population, the growth of the economy. those three things. it's somewhere between real per capita growth and gdp growth. so if you wanted to have relatively the same level of government in terms of the same number of people manning passport identification stations at airports when you come in, ie or across the board, bureau of prisons, whatever, you're going to be in between that. what's the pace of operations for the military?

i mean, we worry about iraq and afghanistan and i think particularly iraq was just an unnecessary squandering of resources that we got little or nothing out of, in my view. but, before that, we had you know, we had bosnia. we almost went to war with serbia. we were just that close. and i think the idea that now that we're out of iraq and afghanistan, the world is going to be a better place is already falling apart. so what -- what do we need to plan on in terms of future pace of operations? and i think it's somewhere between the growth of global trade in which our interests become more complicated and the growth of the world economy and

the growth of the world population. those sorts of things. but this idea that we're going to have in a growing world economy an increased interconnectivity between countries a static military is just very poor budgeting. it is not realistic. and we need to think about. maybe we want to have military activity that is smaller relative to the size of the world than we have now. but that is a deliberate decision we could make rather than an arbitrary thing than we are going to have a 3% reduction in real expenditure and a great reduction in term of military expenditures relative to the size of the world we live in. >> i think we're running out of time but maybe one more question from -- i'm sorry? yes, go ahead in the back. >> i'm a navy fellow in senator kuroda's office. i wanted to ask a question about i used to work in the pentagon

dealing with a lot of military compensation issues and one of the things and concerns i think there is is that you have service members that are being forced out by initiatives and you also have other folks offered more money to go back to sea and other things like that. and some of the things and some of the policies that have come out of that have been a little conflicting, you know, kind of sending a mixed signal. i know, professor, you mentioned cutting the right flavor and getting the right mix of people. what do you think -- this is a question for the whole panel, what do you think would be a more balanced approach to try to either getting that right mix of people, you know, and also being

able to offer the right level of compensation that you want to try to retain? >> well, i think that if we are continuing to have an all volunteer force we have to recognize the fact that we have a contract -- this is a contractual relationship with individuals in which we promise them certain things which includes a stream of compensation, benefits, v.a. disability benefits, compensation for families. there's a whole contract here. this mentality has not grasped the fact that that's what it is. i'm an expert in the accounting system so i see it from that perspective. but you know, my sense is that the -- this is kind of goes to a lot of things that have been said today, if i'm answering your question right, there are a series of contracts that we make throughout the system with the v.a., social security and other departments and military compensation system which have got to be reevaluated and rethought and people need to be able to rely on them and at the

same time, pentagon needs to have a stream, a stream of funding which is not volatile. one of the problems with going to a much more reserve force, for example, is that that's a very, very volatile funding picture for the pentagon. because activating reservists and guards as we did during the peak years in iraq where almost 50% of the force was reservists and guards was an expensive way to deploy forces. you have to pay people instead of one weekend a month you are paying them for full time and plus a full range of extra pay. these are typically people who are older with families, a whole range of benefits which was one of the things that led to this culture of endless money. money was being thrown at it to try to deal with this. from an outside perspective one

looks at it and you see among the group here, you know, a fair amount of agreement on many things. and the frustration of those sitting outside is that when you see a lot of agreement on what are the important issues and key things to address and whatever, and yet somehow congress doesn't seem able to churn out legislation, which captures a lot of these areas of agreement. >> i hate to be the one to cut the panel short but i wanted to take a brief moment and thank all of you for coming, particularly for this panel, led by andrew. a great group to get together. counsel and psms, i want to thank the staff of aei and bipartisan policy center who did all the hard work and all of you for these incredible insights. i wish we had another hour. spx span does not. thank you very much for coming, everyone, and we'll stick around

for questions. >> when our coverage continues this afternoon, when the senate veterans affairs commit holds a nomination hearing to consider robert mcdonald to be veterans affairs secretary nominee. former president, ceo and chair of procter & gamble. we'll have it at 3:00 eastern here. we invite you to share thoughts on the president's recommendation on facebook or twitter. several court rulings on 2010 health care law. associated press writes a divided court panel in washington called into question the subsidies that helped millions of low and middle in come people pay premiums saying financial aid can be paid only in states that have set up their own insurance markets or exchanges.

meanwhile 100 miles to the south, another appeals court came to the opposite conclusion ruling the internal revenue service correctly interpreted the will of congress when issued regulations allowing consumers in all 50 states to purchase subsidized coverage. administration declared policyholders will keep getting financial aid as the legal department sorts out implications and reaction on twert, tom price, republican says, d.c. decision about respects and restoring the rule of law. it's also a remarkable indictment of the entire obama care scheme. senator chris murphy, democrat, colin kaepernick, says we've seen this play before, outlooifr lower court dense epa hire court is correct, federal exchange subsidies will be upheld. more on twitter.com/cspan. u.s. airlines prohibited from

flying into tel aviv airport in israel for 24 hours following a hamas rocket explosion nearby. the ban began today at 12:15 eastern. as that was happening in new york, the u.n. security council meeting on palestinian conflict, we are covering that live on c-span. the secretary-general said today it is, quote, his hope and belief his emergency mission to the middle east will lead to the end of fighting between hamas and israel, quote, in the very near future. again, coverage of the security council meeting now on c-span. >> with live coverage of the u.s. house on c-span and senate on c-span 2, here on c-span3 we compliment that coverage showing you the most relevant congressional hearings and public affairs events. then on weekends c-pan 3 is the home to american history tv with rams that tell our nation's story including six unique series. civil war's 150th anniversary,

visiting battle fields and key events. american artifacts, touring museums and historic sites to discover what artifacts reveal about america's past. the best known american history writers. the presidency looking at the policies and legacies of our nation's commanders in chief. lectures in history with top college professors delving into the past. the new series, tribal government and educational films 1930s through '70s. c-span3 created by cable tv industry and funded by local cable or satellite provider. watch us in hd, like us on facebook and follow us on twitter. >> former afghanistan war commander john allen said many of the crises in afghanistan could have been avoided if the u.s. listened to president hamid karzai. he leaves office after 13 years

in power. the discussion was held looking at legacy of mohammed karzai. this is two hours. >> welcome. thank you all for kochlgt now that you're here, i should say there's maybe one slight problem with the topic we're going to deal with today. the problem is is it too premature to speak about karzai's legacy. yesterday they began or in cable they began 8 million votes according to a deal secretary kerry brokered last week. i wouldn't be surprised going through something similar myself, it may be longer than expected. i imagine to a certain degree, the question we talk about,

president karzai's election comes to an end. we have a great deal to say. leading since 2001, we thought at ip an appropriate moment while the election is being carried out to take stock of what has been accomplished in that time. by that i mean not only the state of the country he'll leave for the next president but certain habits of governing he has adopted and become the model, to a certain extent of an entire generation of young people who have grown up during that time. one of the questions i imagine we'll look at, was this the only way of governing, another is the relationship we leave behind with the international community and u.s. in particular which will have a significant effect over afghanistan's development and progress in the next five to ten years if not longer.

the othether tricky thing aboute topic, it's karr issuing's legacy, not karzai himself. it will be difficult to separate the man from the legacy. in my own thinking about this, it seems to me from a point of view of u.s. policy, if not the international community in general, it's been difficult to have an afghanistan policy and often more had policy against president karzai, rules and terms we discuss the policy have been more psychological than diplomatic. what is president karzai thinking. how can we convince him to do this or that. has president karzai lost his mind. features of discourse about this president over the last 10 years. it's a testament, in fact, constitutionally the president has immense powers, which means he's the most important person

in the country to deal with. also a testament to the sort of shakespearean complexity of his leadership an his personality. so with that our panelists are here neither to praise or bury him, have an accurate assessment what he's leaving behind, what he has achieved, what he might have achieved and how really enduring is this legacy. how much has the afghanistan that he's created in large part over the last 13 years become a permanent part of afghanistan's new dna or whether there will be aspects of it that can be changed by the next administration, whoever will emerge from this. it's a complex topic, but i think we'll have an excellent panel for it. a young afghan journalist who

has just published two excellent articles on president karzai, including one recently in the atlantic that introduces this policy of his legacy, which is i have it here, the men who ran afghanistan, if you haven't read it is definitely worth a read. general allen, who is the commander of nato and forces in afghanistan in 2011 and 2013, a crucial time during the transition to the afghanistan for combat operations in afghanistan. has obviously dealt closely with president karzai across the spectrum of issues related to that military relationship and inevitably in part the political relationship. finally ambassador, special representative of the secretary-general of u.n. in afghanistan between 2008 and

2010 during obviously the 2009 election i mentioned earlier. while i'll try to be an impartial moderator, i suppose i should disclothes that. i worked with him during that period. that does not mean that i will not challenge him on some points that he may raise. so i'll ask the panelists to speak in the following order. i may have a few reactions and we'll opening it up to you for questions. with that, i'll hand the floor over to you. >> thank you very much. thank you for organizing this. there have been many events here over the year i spent in washington. i enjoyed them very, very much. i worked with him, but i hope he will not be too difficult today.

let me go back to two statements made by karzai when i talked to him in may of this year. one was looking back at 2002 when they installed the interim authority, he said it was really a euphoric atmosphere. i believe the international community will coin and help clean the house then hand it over to the owner in good shape. that was his thinking at the time. then he says about his thinking 13 years later. i see afghanistan upstairs does not interfere with the owner and how he organizes the house of the tenant is welcome to stay. the tenant being the united

states, but the owner has to organize the house. sometimes it's the international community has tweeted so-- that dramatic statement. you wonder what has happened in between this euphoric statement of 2012 and comes through in 2014. today karzai has seen deeply critical of the united states. i believe that's unfair, in fact. i don't think he is. he's critical of certain actions undertaken or certain policies that have been pursued but not of the u.s. itself and i'll come back to that. why did we come to treat him the way we did? in my view, because of a

profound misunderstanding of the afghan society and bob says in his book also, astonishing after 20 years we've learned nothing about the afghan society. then also a misunderstanding of karzai as an afghan leader. when you meet him, he's not like the other traditional afghan leaders but nor is he like the leaders who spent decades abroad to receive their education abroad. he's there somewhere in between. very easy to think here is a western oriented leader dressed in afghan clothes and it's far from the truth. president karzai is afghan to the core. he's an afghan political leader.

lives in two at the same time, the old afghan political context with culture and tradition, and he lives in the new world, institution established after the fall of the taliban. where does he feel most at ease? i think he by far feels most at ease in the old afghanistan world, because that's his world. that is a world in which he grew up. we tend to not understand that unfortunately. discussing his legacy with him, in fact, in may, i asked him how do you see his legacy. me pushed the question right back to me and said how do you see my legacy? let me answer, mr. president, first of all, i see you as a consensus -- yes, i very much

wanted to. i said, mr. president, it's not the easiest way of moving the country from a to b. he said how do you define democracy? my answer was democracy is ruled by majority. no, no, no. that's impossible in this country. in this country democracy must be rule by consensus. if you try to rule by majority, this country will go through conflict and fragmentation. i think he's quite right. i must say there's no other afghan leader that i have met who understands his society and its complexity. even when i was there in 2010 and later, afghan leaders spent much of their time abroad, came

and said to me, i admit now he understood the situation much better than we did. he understood reactions in the community, et cetera. much better than we did. i remember so well the one prominent minister who traveled with the president to the south and then he sent me a message which read, now i'm in the real afghanistan. what did it mean to me? he was a person who spent much of his life abroad. i think experience and describes in his articles, how he meets with the mullahs after prayer for lunch and discusses -- a very relaxed discussion. you wonder sometimes, because i

didn't understand what was being said. i remember leaving the meetings and thinking what is this about. it's about showing respect, allowing the leaders to go back to their communities and say the president showed us respect. in that sense, i think he's a master politician and certainly the politician. then karzai consensus, tremendously important at this juncture for keeping the country together. then karzai, the reform er. then i must say through 2002 and 2014, the country has been through a tremendous transformation. sometimes we over do it a little bit and become propaganda the way we use figures and so on. not so easy we sometimes

pretend. tremendous progress. you cannot say the man who presided over this is not part of that. i think since we have him here, i'll ask him what is the media, for instance, you're today in afghanistan in a situation where the media society is more vibrant, more open, more questions are being discussed over and over again than any other country in the wider region. any other country in the wider region. not only male journalists but female journalists. i remember one press conference where a female raised her happened and asked him a very provocative question about corruption. that would not have happened a few years ago. but there is an important

change. he's also the reformer. did he manage to become karzai, the peacemaker you wanted? unfortunately not in spite of all this effort and in spite of wishing that so much. then we come to elections. all the rumors we heard, he wanted to change the constitution. he wanted to put in a weak president so he could return. he wanted to create a chaotic situation so he could declare a state of emergency and hang onto the presidency. none of that has happened. i believe karzai is a person who intends to leave, intended throughout this process. lets hope he can finish in peace and without any further confrontation. just one more minute. >> take your time. >> there's a tendency to see him

as anti-u.s. but i'll tell you one story. in 2009 just before the inauguration of the president for his second term, i gave a press conference and criticized warlords and criticized corruption, and i said i really believe that a future peaceful structure of the region, afghanistan goes back to some sort of neutral state. karzai became very angry and reacted publicly. most of the media believed it was because of what i said about warlords and corruption. not at all. he heard that before.

he knew. i had six meetings to prevent him from appointing the vice presidency. he knew that. i had without consulting him touched on the most fundamental aspect of the country's status and future. his status. i said neutral without asking him. he called me up to his office and said, i don't want this to be a neutral country. i want this country to be a closed, nonnato u.s. ally. and he repeated that in his inauguration speech a few weeks later. what did it mean? in spite of the humiliation he had gone through trying to get rid of him, in spite of that, in

spite of feeling that he was rejected, in spite of feeling he was not consulted, he said that that relationship is critical to me. his second term became, his last term as president, became one long effort at restoring afghan sovereignty, and i believe he was right because sovereignty and respect for a country's sovereignty is a precondition for its return to normalcy. i think he has also done a tremendous effort in trying to restore that sovereignty and it will be up to his successors to choose if they will follow that course or if they will find another. but i do believe that he has laid the framework for moving forward on solid ground.

so in that respect i do see president karzai as a historic leader who managed to keep the country together, who managed to preside over a period of historic reform, and who then rightly insisted on respect for his country as a proud, albeit, poor and war torn country. thank you. >> thanks, kai. general allen? >> well, scott, thanks very much for the invitation to be here this morning. it's always great to be at usip. these are important sessions, and i would say that important to any gathering like this would be probably at the beginning to take a moment to talk about why this gathering is important. this is not just -- this isn't about karzai per se i think this

many respects. it is, i believe, a role of an institution like this in for ruruforrums like this, to learn from challenges. and in other countries similar to the situation we find in afghanistan. i think it's also important, another outcome of a session like this, for us to hold the mirror up and to look into that mirror both as a people and as a country and to decide whether we can stand the reflection that we see. and then, finally, a gathering like this ought to help us to inform the policy processes of the united states in particular for not just our current relationship with afghanistan and other states in contemporary situations like this, but our policy processes for the future.

so in that regard, scott, thanks very much for convening this group and for usip for putting this on. let me start by saying with a bottom line up front, which i think is what you would expect from a marine, i believe that the historical legacy of president karzai is going to be far kinder to him than many of the contemporary opinions are that are expressed routinely about him today. and all of us on this panel were selected to comment or to offer our perspectives on what i believe to be an extraordinarily important individual and a very complex man. with that in mind, we're probably going to agree on some issues and we're going to disagree on other issues, but i don't think that means that any of us or all of us are wrong. it is because when one regards hamid karzai and his times and the complexity of the environment in which he has had to operate and the challenges that he's had to face, it defies a simple distillation on the man

or the circumstances. so i took my role in this panel to be one of providing the perspective of a military commander, the isaf commander, on president karzai, and i remember well our worrying about my first meeting with him. we spent a lot of time actually preparing for that meeting. it would define our relationship in many respects and would follow on what had been widely considered to be a strained relationship with general petraeus. it was mid-july in 2011, and i was the fourth isaf commander in three years that president karzai was going to have to deal with, and in and of itself, that was a source of self-inflicted friction on the allied and the western side. turned out the meeting was a pretty friendly meeting, and it was an opportunity for us to

establish what i believe to this day is a friendship. i pledged him my support and my full energy in our partnership for the future, but not surprisingly afterward i was amused and a bit alarmed at the palace press release of our first meeting and the many things that i had conceded to him in a meeting which had i actually done that would probably have taken a couple days. but nonetheless, we were able to get some work done. it established a standard, i think, for a good relationship in the future, and when i called my dear friend the u.s. ambassador ryan crocker to point out what i thought was a process foul on this first meeting and the press release, he just laughed and welcomed me to afghanistan. so this began a relationship that would span my 18 months of

command and where i would see him at least once a week and often frequently, and i sought to make this relationship something more than casual. i sought to make this relationship productive, but i also considered the relationship a friendship because he's really a very charming, charismatic individual. he's extraordinarily well-read. he once loaned me one of his books and said would you take a look at this and give me your thoughts on it? a month later, marines take a while to get books read, a month later he asked me where his book was, and i brought him his book and a copy for me which i asked him to inscribe and we had a wonderful conversation on the anglo/afghan wars. he knew us far better than we understood him and the ancient culture of the pashtuns and the other tribes and the ethnicity

of afghanistan, and in this we were at a distinct disadvantage, or put differently, he was at a distinct advantage in his leadership, and i often told people that you could make a fundamental error in your relationship with president karzai by assuming that he is inherently a west failian president in the confession of a european leader. he is, in fact, a tribal leader. he is, in fact, of the elite of the tribes, and as kai i think properly said, many of those hardwired paradigms were the first lenses through which he would view the challenges that we faced and the crises that we would ultimately have to solve, and none of that is wrong, and it shouldn't be alarming and it shouldn't necessarily be surprising. it came from the inherent responsibility that we all had to understand the environment in which we were operating as

military professionals and ultimately to understand the inherent nature of this leader with whom we would deal. he always was happiest when he was relating the details of afghan history. he was, i think, not just be a afghan nationalist in that sense, i think he was an afghan patriot in that regard, and sometimes he would be seemingly rambling from one topic to another, and i would sit there wondering where all this was going, but invariably he'd bring it all back to the present, and e he would tie it all together very skillfully to address whatever issue or crisis we faced and would then use the very clear vehicle of afghan history to make the imperative or to make the point that we needed to solve the problems we were facing today. let me take you through just a few of the challenges that we faced together because i think it helps to define how he and i

dealt on a day-to-day basis in our interaction, and i'll go through these quickly but we can certainly come back to them in the question and answer session on any one in particular because each one of these was a substantial lift in our relationship. the first was the negotiation of the strategic partnership agreement. while ryan crocker and i sat at the table shoulder to shoulder for most of the negotiating session, we dealt very closely on this issue, and, of course, as you know, as a direct result of the s.p.a., we ultimately had to go into the negotiating of the bilateral security agreement as well, and in conjunction with the negotiation of the partnership agreement, the strategic agreement, he convene ed -- and it goes to an important point of the nature of hamid karzai as a leader and a politician. he was masterful, masterful in managing and manipulating

informal networks. when i say manipulating, that is by no means intended in a pejorative manner. he understood the people of afghanistan. he may not have been of their ilk, necessarily, but he certainly understood them and worked very well informally in those networks as a tribal leader would to seek this consensus that i think kai properly talked about was his intention. he was enormously frustrated with the u.s. over our policy towards pakistan, and he was convinced that we were fighting the war in the wrong place. this flowed through a number of themes that we dealt with on a regular basis, some of which were, frankly, quite painful, and that was the issue of civilian casualties, frustration over pakistani safe havens, the haqqani network and the cross border fires in 2012 and early 2013, part of w