for the conservatorship of fannie and freddie, but when you look at the publicly held debt numbers, they haven't come up with the $5 trillion yet. they have taken a stab but they have not gone quite as far as we're suggesting. at the beginning of your question, an imbalance and concern that the troubles might be this to pursue inflation as you're dealing with it. that has been a concern around the world in the past. and it may work very well for the united states. on the spending side, you have an enormous number of spending programs that are indexed, and as inflation goes up, that is an increase in our spending. that is true in medicare and other programs. and we continued to released inflation-indexed debt. the interest rate will rise as

the inflation takes off. . his index will rise if inflation takes off. it is short term and it could go down because of surprise inflation but the market will charge a premium interest rate and say you fooled us once but we will charge you a higher rate on your three-year bonds. in practical terms, inflation is not going to be an effective strategy, even though it may be a legitimate concern to some folks. >> thank you. we do expect, according to the we do expect, according to the cbo score, interest public debt last year was $170 billion. they are projecting in the 10th year of this budget and $800 billion annual interest payment. hugely significant as to how much that would actually be in the out years. thank you. >> thank you. >> thank you for your testimony.

professor reinhart, you know that government debt tends to soar in the wake of a financial storm. that is often a result of a drop in revenue rather than spending on stimulus. could the deficit we incurred in the united states have been even larger if we had not invested in building a financial bridge through the stimulus? >> one of the things about this situation, to answer you honestly, as we do not know the counterfactual. in the fall of 2008, confidence worldwide was shattered. the stimulus package played an enormous role, not just the stimulus package in the united states, the stimulus packages that went into effect in different orders of magnitude in restoring confidence.

you pose a very difficult question for me to answer. i do think that absent a stimulus, i cannot quantify or give a counterfactual as to the student -- as to the stimulus would have been worse. our gdp declined relative to declines in other severe financial crises is smaller. our unemployment increases are close to the average, but are still below average. i would have to imagine that given the magnitude of this crisis, which we have not seen the likes of since the 30's because of its global nature as well, absent those actions, we would not be below the average in growth declines and unemployment increases. we would be doing much worse.

>> for me to restate that, although you cannot prove the counterfactual, it's possible we could have had the same levels of debt but no signs of the recovery that have been created partially by the stimulus or that we might have even had lower-level of employment and had additional current year deficits, which would be the worst of all cases. >> which is why i tried to highlight the japanese experience in that regard. japan, in the mid-1990s, assuming the crisis was over withdrew stimulus, so i'd double dip, and wound up with the worst of two worlds. it is important to remember japan's debt, which today stands at about 200%, was around 70% of gdp before the crisis started.

they wound up with both. >> thank you. prof. johnson or mr. marron, with either of you like to comment? >> i would give this to military positive assessment. i'm not a fan of stimulus in general. by think this was a very unusual set of circumstances and i think it saved jobs and prevented damage to potential output you would have seemed otherwise. the price of confidence was global and everywhere. the stimulus was an essential part of leadership in turning world economy around. remember the g-20 summit in april where president obama took a very positive brought role and brought a lot of companies with him in recapitalizing the imf and also help to rebuild confidence. that would not have been possible and would not have been credible without the u.s. fiscal cent -- that the u.s. fiscal stimulus. i don't again would have been

higher in the short term if we had not been a stimulus, but the medium term prospects would have been much more bleak for this country. the medium term budget issues are mostly, not entirely, about medicare. that's a longstanding problem we have not got around to addressing even though it has been in the cards for a while. that is driven by demographics and the rising cost of health care. i would say in contrast to other countries, they're almost all in the same place, they just don't recognize it. the european commission is counting and they are much less obvious than the cbo cost accounting. we're looking at getting growth back on track, preventing the destruction of potential output is very important and helpful, so the stimulus was worth doing. hopefully it will help us tackle

the medium term problems. >> i had a bunch of other questions and i am running out of time. >> the standard model and that the cbo uses to analyze the stimulus have technical multipliers that would imply a stimulus does not pay for itself. the choices that you end up with more debt as dr. johnson suggested but you also get economic bang in the short run and there's a tradeoff. >> thank you. you had noted that uncertainty is a problem and you mentioned establishing the estate tax. what about the rules of the road in general? prof. johnson noted we had not addressed credit defaults swaps and proprietary trading, derivatives, leverage, many of the risk factors that were inherent in completing the trio here -- professor reinhart noted that following financial crises,

there are problems with output. this is the rules of the road for a financial community that does not result in high risk taking followed by a collapse. how important is that we get the rules of the road back in place to address these risks with our financial structures? anyone who would like to jump in on this, i appreciated. >> it is fundamentally essential. the problems you just laid out are all wrapped up in what happens if there is another financial crisis? what if major financial players have failed? how does that add to the system? if it's a big enough shock, you could be called upon to use automatic stabilizers are a good thing -- but the problems you identified are fixable, they're not being fixed, they must be fixed for at a responsible

budgetary point of view. >> in your written territory -- your written testimony, you addressed europe and greece and so forth. the argument that the stress test we put our banks through has not been -- was not i high- level stress, if you will. if we do not prepare for that, we may have another wave of stress coming that could result in a second financial crisis. is that a fair summary? >> yes. the financial system is undercapitalized. the stress tests or not enough. they were not that stressful. i don't think we're facing more financial collapses, but we're facing banks that do not have big buttresses against bigger losses. you'll see a tighter credit conditions throughout the united states and this is a global side -- a continuing weakness in the consumer sector. >> i am out of time.

>> because others have gone over and because of the attendance we have because of the weather, i think you should feel free to use another two minutes for 2 1/2 minutes. senator white house, i would do the same for you. >> thank you. >> the issue is that we need good rules and if possible, it would be good to get good rules sooner rather than later so that everyone can begin to plan with -- plan with the new environment looks like. i emphasize there are a lot of policy uncertainties hanging over everyone at the moment that makes them difficult for them to plan. some of them in both the previous administration and current one, where it -- we fell back on a lot of discretionary government actions. there was confusion about the role of park and other things. those may have been necessary in the heat of the moment they have created doubts about how we run the system.

in clarifying that and clarify ways for firms to behave -- for firms to behave appropriately is a very important. >> we face two issues -- the challenge in the commercial real-estate world that will be coming up. it is here now but will continue over the next year or two. the second is undercapitalized community banks and their ability to do additional lending. on the community bankside, i have proposed in the administration proposed recapitalizing banks to enable them to do more lending to small businesses and unable those firms to recharge the economy. on the commercial real estate side, i have heard very few ideas for how we address the challenges folks are rolling over balloon mortgages but trying to do so with a drop in the value of their assets and decreased cash was due to tenants and have lost during the

recession. should we pursue strengthening community banks to lend more to small businesses and what we do about commercial real estate? >> the issue of recapitalization, i think helping banks recapitalize should come with a carrot and stick approach. one of the concerns i have about the way we have gone about addressing the toxic loans is that it is to japanese. meaning it is too much for parents. i think if -- to much of forbearance. that's very important for lending behavior going forward, if you feel you have a lot of bad debt overhang, it will be reflected in your lending practices. that's the lesson i have taken

from the very long japanese experience. even helping the banks that lend to small business recapitalize, a proviso toward more capital write-downs is important. >> thank you. commercial real estate? >> i think commercial real station left to itself to sort itself out. unsympathetic in about trying to recapitalize community banks -- i am sympathetic about trying to recapitalize community banks. it will be worried about the signal their sunday, but i would be surprised if we could run a program begun to have a macro impact, unfortunately. >> final comment? >> building on the uncertainty point, the other issue for community banks is to what extent there are strings attached.

that may discourage them. >> thank you very much. >> thank you, senator, excellent questions and interesting responses. >> thank you. thank you to the witnesses were being here on this challenging day for travel in washington. we are caught between this is your blades here of on the one hand wanting to support the economy so people are employed economy so people are employed and we can begin hackett hit main street bill on the other hand, having -- have hit main street. on the other hand, having the strength of death. where we have very significantly

degraded core infrastructure in rhode island -- infrastructure. inner island for instance, we have a bridge to protect highway 95, a national archery. it is under a weight restriction. big trucks have take a route around it. that will have to be fixed sooner or later. we cannot have that. it is getting worse, not better. there is a bypass and providence that the department of transportation is refusing to put any more maintenance money into, because it is so degraded. it needs to be replaced. local budgets are so stress it is hard for people to get those jobs dumb. -- done. does this make sense to focus under the old fashioned. ries of,

if you are going to have to fix it anyway, it's not really adding to your dad and the proverbial stitch in time saves nine, when you do it more quickly, it tends to reduce the overall cost to focus particularly intently on degraded and in the structure that will have to be repaired sooner or later anyway as a way to increase employment without adding to the nation's overall actual liabilities? >> the remarks i'm going to make have to be taken with a grain of salt because they weigh heavily with the experience of one country. in the structure spending is at the forefront of the japanese stimulus plan. the streets of tokyo were paved every other week.

it does add to that. >> of the streets of tokyo don't have to be repaved every other week. if you are creating make work, if you are building bridges to know where, that's a different proposition. that's why i focus on things you have to fix any way. if my roof had a whole lot in it, and rain comes in, the sooner i fix it, the less the long-term cost of repair. if my son needs to make money for the summer, it seems to make a lot of sense. why doesn't that simple wisdom prevail? or does it when you are dealing with truly irreplaceable necessary and the structure like bridges that are condemned? >> if we're talking about things that need to be replaced, the

subset of the more general proposition of in the structure as a way to go forward in terms of channeling, which is what my remarks were addressing, in the end, anything, be it in the structure or be it a transfer, it does impact that. -- it does impact debts. i cannot discriminate across types. they just add that. >> done we have a defective accountability, for accounting in an all in way, who -- if i were budgeting and it was my house and had a hole in the roof had been together a family budget, i would put in there that i had the sixth hole in the

roof. whatever the cost, i would put it in, even if it was five or 10 years, if i had to put something away to cover it in the meantime -- >> i understand and i take your point, but i would just add that we should go toward looking at any activity as activities that do have that consequences over the short run. >> i have used a lot of time on that question and would like to shift to another. since it is just the two of us, -- >> i will give you some additional time. >> i would look at the cbo's scoring dan the advantages of payroll taxes over infrastructure spending. second, your point about having a proper capital budget is essentially right. one way to think about that in the context is toll roads.

we should be discouraging things are bad like ingestion on the major roads. as somebody who is unhappy user of an easy pass scanned tag on my card, and this is not a federal issue, but if you move people toward a system where they are paying to use roads that are more expensive to maintain, that will help address the issue and raise revenue for specific issues which are much broader than rhode island. >> i think -- i agree with you on the theory. if you could end of fighting she would have done anyway and move them up, that's incredibly logical stimulus, but there are some is in there. the first is the have budget discipline that says if i spend an extra million dollars today, i literally will come at myself to spending a million dollars less in 2013.

you know how highway funding works. that's a hard discipline to institute. the second concern is that in our political system, this is the mean and flip a diversion -- -- a mean and flippant version -- our system requires us to fund 435. this theory yet described maybe true for a handful of projects -- >> the theory is true that the politics make it hard. >> yes. >> let me jump to health care. you have said twice that medicare is a big item. i'm not disagreeing, i just think it's important we look at this.

medicare is a big item. according to a variety of different sources, the amount of waste, duplication, excess cost, and efficiency in the health- care system runs between $700 billion and a trillion dollars a year. we have ways to get at that, but as cbo has testified, it requires a certain amount of flexibility and experimentation. it's a continuing management problem to work your way through it and it requires providing the executive branch with some tools. but i happen to believe significant savings can be achieved that way. when they are, they are achieved in a beneficial way. it's the extra test you did not need. it is the hours in the hospital waiting for your paper records to get there and having tests redone in an emergency. it's all the clutter and

clumsiness of our existing health care system. what i worry very much about is if we get into a physical condition, statutory commission, it gets very narrow and is given a very urgent charge because it's an urgent problem. if you do not have people who understand the possibilities to understand taking advantages of the efficiency gains in health care system, and they're hard to quantify -- cbo cannot quantify them effectively -- you can not quantify it because it requires executive administration to make it succeed and they cannot predict that. but it worries me that we are laying out an incredibly easy short cut for fiscal hawks to take hold this thing and say i can document we will have real savings in the medicare system if we just throw these people off the system.

the pressure to do that becomes irresistible because we have whipped up a great panic about the debt and given people only understand those jewels decontrols over this expedited, high-powered system. i think that would be a terrible, terrible mistake. when you look at a system as wasteful and complicated and grotesque, more doctors are paid for doing more procedures rather than out of, everywhere you look at it, the system is somewhere between $700 billion and a trillion dollars in waste and excess cost. how do you go with that in the time frame? let's say it takes four or five years to deal with it. how you relate that in two -- how would you relate that to the urgency of the fiscal that given the primacy of the medicare problem and that this will that equation?

-- and that fiscal that equation? >> the fiscal situation we're worried about here is something that approaches this over the next decade or decade and a half. but we are fortunate and we should look at countries in europe that are now is set by the financial crisis, particularly in blood. they have a decade or decade and half. -- particularly in england. they don't have a decade or decade and half. >> the date the efficiency gains could be somewhere between $700 billion and a trillion dollars a year? do you think we can get it out question but i'm not an expert, so i would not want to comment. >> that is systemwide and not just medicare? >> some process of rationalization would make

sense. also, i'm sorry your colleagues have left, but passing an unfunded prescription medicine component to medicare under the bush in restoration was unfortunate in this context also. they're going to be some very tough choices about who gets access to what kind of care. the big difference between our projections and yoursçó are expected cost of technology will change for treating patients, which has been very much the same across the u.s. and other industrial countries. we are more honest about it. europeans only take into account demographic changes. there are very tough choices at and i'm not on the side of saying throw people off medicare. i think that is acceptable. but the budget issue we cannot duck forever. >> i have gone well over the time and i think you. >> -- i thank you.

>> let me just say to the gentleman from a profile of that i believe the rest is the flip of what you see. i believe the risk to medicare and social security recipients is a failure to act in a timely way to deal with the long-term debt trajectory that virtually every expert that has come before this committee says is unsustainable. that is, as i look ahead, i am the beneficiary of social security. i lost my parents when i was young. social security helped me through college. i have seen it in the lives of my family and i have seen that care in the lives of my family. i have seen it in the lives of my constituents. my great fear for the very positive things those programs do, is that our failure to act to deal with the long-term trajectory is what really

threatens them. that is my belief. >> mr. chairman, i cannot agree with you more. i think we have a window of time, as the witnesses have said, we're fortunate. we have a window of time. the wolf is not fully at the door right now. the fiscal my aides do not have to come up in an emergency way you are suggesting. the will have to if we do not get ahead of this. we have lost a year in this administration already before we can deal with this and that fact is agonizing for me. while we are in this window, we should be focusing relentlessly on that while we can because that is the tool that evaporate as it gets closer. the fiscal might will always be

there. you can always throw people off programs and shut them down. it would be a human tragedy to do so and we can avoid it if our responsible about delivery system reform in the time we have. >> i agree. delivery system reform that for some reason got no attention in this debate on health care. yet every serious expert that came before us told us it is the single most important thing. frankly, i think the media have done a grave disservice to the american people for chasing every red -- chasing every rabbet of an i am not talking about -- and much of putting the blame on network media that has a minute and have her story and never has a chance to explain to people,

water the things it really matter to this debate? instead they obsess on things that are incomplete side issue. i think that has been an enormous disservice to the american people. i also blame ourselves for not doing a good job of coming back to what really matters. it is that delivery system reforms that every expert says is the number one opportunity to the class under control. there is almost no wear and the date -- it is dead panels and things and not even exist let me go back to the question of wary are. you justified that once you get to a debt of 90% gdp your research shows that has an adverse effect on economic growth of roughly 1% is that correct?

>> my calculus tells me that we will hit gross debt to gdp of just over 90%. if we stay on the path we are on, that will continue to rise with no policy changes, no policy changes to 97% in 2012 and then start coming down very, very gradually. almost imperceptibly. according to your research, we already face the consequences of reduced economic growth in the future because of debt levels today. would that be a correct interpretation of your testimony? >> that would be a correct interpretation. i try to highlight that in my remarks and written statement that while the plan should not necessarily start today because of weakness in economic

activity, a conception of a clear plan to reduce the debt would be or should be forthcoming today. one thing we can say with a fair amount of certainty is that we never know when the wolf will be on our door. the wolf is very fickle and markets can turn very quickly. a high debt level makes us very vulnerable to shifts in sentiment we cannot predict. >> thank you. what i have heard the three of you say -- very clearly, you would not take immediate steps to reduce deficits and debt because of the risks it could create to a double dip. what i have heard each of you say is that you do have to put together a credible, long-term

plan to deal with the debt threat. if we do not, jury of the country going forward. is that a correct restatement of the testimony? >> if i could clarify, my position would be falling what is the imf practices, to focus on next government debt. the numbers would be slightly lower than yours. >> we should say for people who might be listening, when i talk about gross debt, and talking about the debt owed to the public plus the debt owed to the various trust funds of the united states. i use that figure of gross debt because in a budget context, that is what matters the most. all of that debt has to be serviced and serviced out of

current income. economists like to look at what is called publicly held debt, which is a lower percentage, in a 60% range of gdp, because they look at the effect of government borrowing on the public sector. >> general government would push it higher toward 80%. the imf position is that all industrialized countries to face a similar situation. new taxes or revenue between 4% and 8% over the medium term. that's my position which is not inconsistent with the spirit of what you're saying. >> i cannot speak for senator gregg, but he and i have gone on this effort to have a commission because we have been convinced that you have got to have an overall plan. when that takes account of where

we're headed in recognition that dr. reinhart's research is accurate and as you add that, you fundamentally weaken economic growth. let me go to the next point, if i can, and we're going to come back -- i will stop and recognize him next because he has not had a round. as we look ahead to this medium and long-term plan, spending has got to be adjusted, and yes, that means shall security, medicare -- social security and medicare have to get on a lower growth trend. it has to be because that is where most of the spending is. i also think the revenue side cannot be exempt. we have the lowest revenue of shares of gross domestic product

in 60 years and the highest spending at a share of gdp in 60 years. so we have the lowest revenue, the highest spending, i don't know of any logical conclusion that you don't have to deal with both sides of the equation. that goes to the question of what should the balance beat? i would like each of you to answer this question -- going forward, in the longer term, should most of the emphasis be on the spending side, should most of the emphasis be on the revenue side, or what do you think the appropriate balance should be between spending and revenue? contributions to dealing with this long-term debt. dr. reinhart? >> i think both the spending and revenue side have to be addressed. i had mentioned in my earlier remarks that looking at what

canada did it would be useful. nose down with a downturn. -- no stone was left unturned. unemployment insurance, decisions involving retirement age, and of course, the revenue side as well. when one is dealing with gaps that we're dealing with right now, even abstracting from the cyclical component that is very big right now, you cannot leave any stone unturned. >> but less you bend the curve for medicare -- unless she bends occur for medicare, that is first and foremost. >> that the 800 pound gorilla. >> absolutely. and it's a very unfortunate

thing. it is perhaps more about ethics and economics to decide what to do there. that's a very hard social conversation. but taxes, you have to address that. this is a fantastic country. it is based on a thin and fragile tax base. if the united states wants to be one of the leading powers in the world, i see any alternative but tax reform. i would emphasize what dr. marron did before -- our tax reform group and we have not redesigned this in a long time and not try to think about what do we tax to discourage, rather than taxing income, which will allow people to earn. we have to address the low private savings rate. witnesses them where people don't feel they have to save and as a counterpart to our foreign borrowing. when they haven't talked about today as we finance so much of the budget deficit by borrowing from china and the chinese

government. it makes no sense at all in geostrategic terms. even if you address and we come up with a strong fiscal framework, you still have the current account issued a low private sector savings. and as you wish for the united states to slip into the right of second-rate powers, that has happened to many countries in the past. >> i could not agree with you more. if this fiscal commission does its work, one part of it should be fundamental tax reform. we have a tax system that is an efficient and by that, i mean a high percentage of what is owed is not being paid. we have incredible leakage through offshore tax havens. if anybody doubts that, go punch in offshore tax havens and sewage you get. google that and see what you get.

we also have a tax system that was never designed for the time we're in. it was designed when america was completely dominant in the world and we did not have to worry about our competitive position. we have a tax system that now this incentivizes savings and this incentivizes investment. -- dis-incentivizes investment. it's almost an upside-down system, given the circumstance we're in today. dr. marron. >> the first point is a budget process in terms of where should the emphasis be on taxes or spending -- we are in a situation where it's going to be difficult have an intelligent conversation about that. if there is one view that has

taxes expiring, -- as you saw on the recent cbo report, if you add them up, the difference is three percentage points of gdp in 2012. i'm not going to have an answer of which one is right or wrong, but politically it's hard conversation to have intelligently because people will differ in what they choose. in terms of substance, the basic story is, once the economy is on a recovery path, what happens every year is spending makes the situation worse because it grows faster than the economy and tax revenues make it better because they grow faster than the economy. it has to be the case that spending is going to get more of the emphasis than the revenue side because they're growing faster and that is what is causing the challenge. but if you look ahead and ask and we go back to a historical 18% of gdp tax level and finance types of things are government and society appears to want our government to do, my answer to that is no. the arithmetic does not add up. that finding a way to raise

more taxes in the future seems inevitable given introductory whereon. if you are going to do that, scaling up our existing tax system is not an intelligent way to do it. as you just described, what you want do is revisited and ask what that system makes sense the economy we have today, if we have decided instead of 18%, we're going to raise 20% in terms of tax revenues. >> thank you for calling this meeting. i think this discussion is critically important to our committee and to our country. thank you for doing this. i welcome all three of our witnesses, particularly dr. reinhart, but i thank all three before your testimony. the bottom line is, what are we doing about the standard of living for people living in our nation. i know we cannot rewrite what

happened in the past, but we need to understand and learn from our mistakes. i find it inexcusable that when we had a growing economy, we still allowed the dead to go up. there was no excuse for cutting taxes and increased spending without paying for it. we had a booming economy. dr. johnson's point about savings, when our economy was performing the strongest in the world by far, when we were a leading indicator on every good economic indicator you want for america, during the 1990's, into 2000, then defined our savings ratios during that time to be among the worst of the industrial world, and we said that's ok. we have to worry about saving because americans are saving because they're getting the value of their homes increasing

by a dramatic amount. then to find out what happened to the value of our home, we need to learn from the mistakes we made when our economy was growing. it is the mismanagement of debt and the failure to enact policies that encourage savings. many of us, including the chairman, tried during that time. i was proud of the work we did on the house side to try to focus on policies that would increase our national savings. we did not do what we needed to do. now we're in a recession. so now it is difficult to get attention to reducing the debt or cut spending or increase taxes when you are in a recession, or it's difficult to develop policies for americans to say because you want them to spend when you are in a recession. my concern is, as we look at how

we're going to deal with the national debt, and the german's commission is by far one of the most credible proposals to address focus on national debt and had to deal with it, i am concerned the focus may be short term rather@@@@@@n#@ @ @ @ @ @ b they have to deal with issues that the chairmen raised about tax policy that encourages savings i know my friend senator white house raised the issue of health care. the canoes above the bill will be considered good to both the house and senate is that there two principal goals were to reduce the growth rate of health

care costs in america to reduce the costs america and reduce the federal government cost costs so that we are reducing health-care costs and reducing the budget. my concern is if you look at health care costs solely in light of the federal government's budget and say we have succeeded if we can reduce the entitlement costs of the federal government. we do not look at it as to how much seniors might be asked to pay. we don't look at as to how much businesses might be asked to pay. we don't look at it in the context of what individual workers are going to be asked to pay. at the end of the day, we might be weakening the economy, strengthening our federal government budget commitment as far as reducing cost. reducing our economy, certainly reducing the standard of living for people in this nation. i have a concern as to how we

focus today in a recession and focusing on how to get and what our debt. we're all saying the right things, we want to bring the debt down and increase national savings. but what to increase the standard of living for people living in our nation, but if we tunnel vision this health care debate in to the federal budget and don't look at health care costs as growing, long term, we're doing a major disservice to the people are country. how do you put this in context? how do you deal with the current recession? how do you deal with the current crisis americans are facing and still allow our economy to grow and deal realistically with the problems americans are facing, of whether a small business owners trying to maintain health insurance for employees or a senior is struggling to decide whether they can afford madison

this month for workers find themselves falling further and further behind, when they look at their payroll and look at how much might have to spend on health care, they are wondering what happened during this prosperous time and why should we trust you now to get this right when you didn't do a when the economy was growing -- didn't do it when the economy was growing? >> my view is if you create a fiscal commission with everything on the table and people regard that as being a credible step forward, which i think they would if it came with the right framework, that gives you the scope in the short term -- >> if the commission's charges to deal with the federal budget deficit and we are in recession when this commission is required to issue its ruling, how does it

overcome those two major obstacles to the long-term issues that you raised on the tax code, for example? >> the good thing about being the united states in our current position in the world, we have the only reserve currency. the euro is seriously under pressure. this gives us time. it means, to go back to the german's mask, we will be able to run up more debt -- the chairman's comment, we will be brought word that are unsustainable tax base. we have 10 or 15 years, maybe the budget, we have 20 years to confront those issues. the fiscal commission's mandate would not be to slash the budget now. it would be to get the budget on to a sustainable basis and take

it on according to cbo projections. will allow us to -- >> i am not sure we have other options. i'm not sure there are any better suggestions that have been made. all i can tell you is a lot of us worked on the savings issues and we did not have a lot of support out there to try to do things to bolster national savings. we got some things done, relatively minor when you look at the overall problems that a nation. it was not easy getting that done. i just hope the political will will be there to deal with some of the fundamental issues that have been raised here. when you start looking at we shouldn't be talking about how much revenue to raise but how to raise its, -- how to raise it, i

happen to believe our tax code does need major revisions of lead to rely more on consumption-based revenues and we have to do it in a progressive way. i will be interested to see whether the type of political support -- dr. reinhart? >> i would like to address the issue you raised that in good times, our policies have tended to be pro cyclical, namely in good times, there are two things the government can do. can save during good times directly and that it can create incentives for the private sector to save. during the last boom, we did not do either. i think the role of the commission to ensure during boom times, we did not congratulate

ourselves too much. the seeds of the next crisis are sown during the boom. that's when over spending has this directly to ending -- tended to take place. i do agree that -- i said earlier, no stone left unturned, the tax code, this is also simon johnson's point -- we need to address the issue of low savings rates and dependent on borrowing from abroad as part of the medium term issue. one last comment i have is i do not know that we do have 10, 15, or 20 years. we just do not know. the sooner we can articulate a plan -- you raised the issue of uncertainty -- people today, if the debt is perceived to be

growing out of bounds, that will create uncertainty not only about future investment, but what people expect as to future benefits. so a credible plan cannot be articulated. >> thank you. i would just say this to my colleagues. i have just gone through an exercise to get the deficit down to 3% of gdp by the fifth year of the budget and to balance by the end of a 10-year budget window. i've just gone through that exercise. i ask all of my colleagues to go through that exercise before we get into our budget negotiations. i think you will find it as sobering as i have i think you will find it as sobering as i have. what it really takes, in 10 years to get the balance, on a very modest downward trajectory

of deficits and debt to gdp. it is very sobering. when we go to the question of political will, what is going to be necessary to get this under control. that means to get back down to 60% of gdp. by publicly held basis. -- on a publicly held basis. it is very sobering. senator sessions. >> that is an insightful challenge to us, mr. chairman. i think you are correct. i would just share a few thoughts that -- i think we have to light a treatment to the wasteful spending now. contain spending now that is not producing much for the economy.

the $800 billion for medicaid, welfare, many things that need to be strengthened, but the extent of it was so great that we have not had enough emphasis on job creation to pull out of this. i would just ask you to think about how will we pay back $800 billion? the president proposed at the state of the union, saving $15 billion this year and that might amount to two under $50 billion over 10 years. that's a lot less than $800 billion. now we're talking about another stimulus package. these numbers are so large that you cannot spend today in an unlimited way.

we will pay this back one way or another. going to be a burden. my democratic colleagues have to recognize that we just cannot ignore the year that we are in and the next year as if we are in this severe recession and therefore all the rules don't apply and the money we borrow is not going to be a burden on us. will be a burden. -- it will be a burden. dr. reinhart, i would like to follow up with your comments and that of the chairman about the amount of debt that we have. maybe all of you discussed this generally, between the internal debt and the public debt. would you not agree that 30 years ago, 20 years ago, there is a bigger difference than there is today because we did not see quite the dramatic

actuarial and soundness of our entitlement programs? . .

since it is clearly heading to the fall and will call that debt pretty soon, it seems to me we have got to understand that this is not the reality of the internal debt. it is more significant than it may have been when lyndon johnson for started doing it. would you comment on that? do you think this is the vacant? -- significant? >> i think it is significant in a major way. the work that i have done, gross federal debt ultimately we feel that it is ultimately the federal government what did the debt is held by other branches

of the government or by the public. i would say even using gross federal debt does not take into account all these important liabilities. >> your gross debt does include the internal debt that the treasury opposed medicare and social security tax cut partially for us who are worrying about the health of the american economy t think we should consider the gross debt

>> i think that when one looks at the debt issue, we are going to be the thing and very different measures of debt. i would start out with a gross debt. i would that into it gross debt. you take into account medium- term debt since -- dead sustainability. it just so happens that gross debt is something that we can measure more readily and more transparent layer than some of these other explicit or implicit liabilities. >> would you allow me to interject on this point? for those who are listening, it is a hugely important point that you are making.

the publicly held debt. that is the money we have borrowed from the public is at 60% of gdp today. the gross debt is at 90%. the difference is the gross debt that you're referring to includes the money that we owe to the trust funds it's confusing. so it's important they understand that the gross debt. the reason you're focused on it, i'm focused on it is because all the debt has to be repaid. and from a budget standpoint, debt can only be paid out of current income. by definition the only money we have to the social security has to come out of current income. so there is a real budget consequence when those trust funds that have been producing more money than was needed all

of a sudden flipped and now all of a sudden they are spnding more money in social security and medicare than is coming in trust fund income. that has happened to both those programs today. both are cash negative today. that's why i wanted -- sorry for interrupting. it is so important -- >> i couldn't agree more. >> to understand the implicailingses of this. >> when i came here i kind of ackquiested into the idea that public debt, we'll argue over it as a basis, the public debt, and use those numbers. as i have come to realize the actuarial unsoundness of medicare and social security you really can't do that. of course they do show up, mr. chairman, as you know to be fair, they are showing up on the surge of the public debt increase as these bonds that are the treasury executes to these trust funds called.

that's one of the reasons is it not, mr. marin, that's one of the reasons the public debt is moving as dramatically as it is. >> right. the debt subject to limit. >> it's beginning to move. transfer. we are having less and less internal debt, i assume, because it's being converted to public debt inevitably as we go forward because there's not enough money to fund social security, medicare without calling the bonds that are out there. i'm just -- would say that anybody you would -- my time's about up. so if any of the two of you who haven't commented, i wish you would -- >> just a couple thoughts. you notice whenever i speak of the debt i focus on the publicly held debt which is the notion of debt we need to go play with

world capital markets to finance ourselves. it's not because i don't worry about the other ones. when you worry about the other issues, the gross debt understates the scope of the problem from those programs. we have raised money for social security into a much lesser extent for a part of medicare and labeled them as trust funds for budget accounting and adding those up we can have a larger measure of debt. if you take seriously the commitments we have made for medicare for the other parts of it not covered by a trust fund, you have seen these numbers millions of times. here people come in with the $40 trillion number, and $60 trillion number. these guy nantic numbers which are an attempt to measure the overall commitment. i won't call it a debt because we can dial it up and down, hopefully down in the future, i think even the gross debt understates just how severe the trajectory is that we are on. >> understates. do you agree with that? >> yes. i think dr. marin said it very

well. in addition the conbegin tent liabilities of which we know is there, that doesn't fit our sentiment as all. we have one or two more crises we'll change that methodology. dr. marin, i think is right. don't think of the gross debt as the extent of our problem. focus on the -- focus on the publicly held debt for what you have to sell and find for the market will or will not buy. then you have to look at the projections going forward, including the contingent liabilities. >>ç briefly, the uncertainty tt dr. marin and others have mentioned, i believe a lot of that and throughout the entire economy, throughout the entire financial world is the concern over the debt. would you not agree it creates a cloud of economic growth and productivity psychologically as well as otherwise, and that the sooner we get a clear path out

of this fix we are in, the better it will be for -- to restart economic growth. >> i think one of the scenarios that i alluded to earlier is one in which if there is no plan for -- containing debt and deficits medium term, i think uncertainty is a enactor -- factor why we get the results that we get. that higher debt levels are associated. >> you are factoring that in. yes. dr. johnson. >> i think we should take events of the past few weeks in europe, senator sessions, as a wake-up call. exactly on the lines you are suggesting. you need a fiscal commission,

you need it now. if you don't have it, in the second half of the year it is a substantial slow down, which i'm expecting, you room for maneuver. the root doesn't matter. whichever way you want to go you won't have that room because financial markets will become more difficult. that's what the europeans have woke yield back the balance of my time up to. tomorrow they have a big meeting in europe, summit, this is for them is the topic. how do you limit the damage. how do you make the fiscal judgments credible. we don't want to go there. that's raising tax, cutting spending, you don't want to do that in the second half of the year. if the financial markets force you into it, that's a disaster. >> do either of the other senators want a second round? senator whitehouse? >> if it's not too much 6 an ordeal -- of an ordeal for our witnesses. >> they are here and ready to

answer. >> thank you. dr. marin, in your written testimony you looked at the 11 million households that are under water on their home mortgages and conclude, a, they are likely to default, and b, that that will eat away at the thin capital cushions of many banks. to what extent do you believe that the liability for these mortgages has already been written down by the banks, and would you distinguish between mortgages that have been securitized and mortgage that is are actually held by the bank? >> i don't have a good answer to your first question. maybe dr. johnson does. on the second, there are, as you know, some of these mortgages have been secure advertised and have been moved in various places including back on to the

federal balance sheets. you have other ones out there held by the banks. the reality is, this goes back to the uncertainty point to what extent have we realized the difficulties we are in. financial institutions still differ in the degree to which they have recognized their losses. some have been more aggressive about it than others. and that that cash continuing uncertainty over the financial viability of various firms is ultimately hard to track this through. >> isn't it advisable to move through that uncertainty as quickly as possible? >> at some level the ends that you want is where everyone honestly appraises what their losses are and moves on in life. the difficulty we faced over the last couple years it's very -- very hard to get people to go through that process. >> go ahead. >> i think the lack of success of the government programs have had, particularly the one that's supposed to buy distressed assets from the bank, just haven't got up to stale because the banks don't want to sell. i don't think they have written

this down. but i think that the strategy that they have had, been encouraged by the previous administration, this administration, sit on your losses and wait for the economy to recover. that works unless you have a double dip or further losses or more strategic default which i think is, to my mind, what we are looking at here. >> the reason that i was asking that question is that it strikes me we are prolonging the agony by continuing to forbid the residential mortgage holder if they are in appropriate financial circumstances to simply go to bankruptcy court and settle their debt the way everybody else does. in fact, i saw a news article earlier today, the mortgage

bankers association argues developmently against allowing -- vehemently against allowing regular folks go to bankruptcy court and get that debt settled the way every other debt can go to the bankruptcy court and get settled. i guess it turns out that they may have written down their own mortgage on their building here in washington. because it's a commercial mortgage, they can get away with it. so they are -- they know it's the right thing to do. they know it moves you quickly to a market based solution. then everybody can adapt and move on as opposed to being in this sort of throws and states in which banks are asked now to determine what their losses are going to be mortgage by mortgage and then the nightmare begins for the person on the other end. we don't have a balance sheet that quantifies the nightmare for the family that has to put up with this, but clearly it's a nightmare. we don't have a balance sheet that quantifies the loss in property values around that house as it gets forecasted and abandoned and stripped.

quantification of what that means in revenue to municipalities that are struggling. there's a whole piece of collateral damage that i think is avoided if we solve that problem. in addition to moving quickly to a market base for those. it's so disingenuous of the mortgage association to be here lobbying against it for regular people when they are doing it with their own darn building themselves. and i would just -- i would be interested in your thoughts on -- wouldn't that be the quickest way to find the bottom. as soon as people could cut to bankruptcy court and have a quick, fair final determination of it, then everything adapts. there's your finality. mr. marion -- marron. >> i'll take a stab. i'll confess i haven't thought about chapter 13 in those issues for some time now. my memory is hazy. i'm an economist, i'm going to invoke many.

on one hand i'm generally reluctant to do things that are changing the rules in the middle of the game. i'm sympathetic. i may not find it dispositive, but i'm sympathetic to the argument the mortgages were initiated under a set of expectations about what the rules of bankruptcy here. >> over the past year -- >> i know. i'm going to be whatever the many handed right thing is. i'm sympathetic to that. with the passage of time, the emphasis i place on that goes down as we seem -- i don't know what federal program we are on, six, seven, eight trying to address this problem. i no disparagement to the previous administration, current one, and the congress it's a hard problem. it's not surprising it's taken this long. i don't remember -- there is an issue that houses are different than most of the assets that normally go through chapter 13 bankruptcy procedures. you need to think about ways -- most of those things are cars, boats, whose asset value is depreciating rapidly.

it's more challenging to apply that to housing. you need to figure out a way to do it. over time i have become more sympathetic to the notion that some reform in bankruptcy could be part of the help. the numbers i saw a year ago when i used to think about this more seriously suggested that even if you did kind of your dream scenario on that front. it's still only a relatively small fraction of the homeowners who are facing these difficulties. but would be a portion of it. >> can you think of any other circumstance, ever, in which there are actual market losses that need to be processed through and a system whereby you didn't get to the actual market loss but instead allowed an interested party to be the definer of how much they are going to lose on something with an efficient or effective way of finding -- letting the market operate? >> the first part is, yes, i can think of folks trying that separately. the commercial real estate is an

example. there are plenty of balloon mortgages under water for which the lenders are doing things lie extending--- extending terms by year. the problem is certainly not unique to residential real estate. at the end you have the second part of your questn@@ rrrrh, this is a no recourse loan. the more people who default, the more people walk away, the lowerer cost of other people walk away. this will change over time. most of the bankruptcy laws in this country has emerged been

response to big debt crisis. this confrontation and crisis. this will change, too. in five or 10 years you will be able to modify first leans in bankruptcy. won't do us good right now, throw. >> extremely briefly, i think when we talk about overleveraged households and financial institutions, restructuring is a viable way of bringing down at least partially that overleveraging. and part of my remarks about forebarons, delaying the inevitable, in the case of banks, and the common -- your comments delaying the inevitable on the parts of households are doing just that. delaying the inevitable and making the slowdown much more protracted than need be. >> making the slow down much more protracted than need be. thank you. >> thank you. i would like to just conclude by

trying to make sure that we clear up for those who might be listening the gross debt publicly held debt, then we got into unfunded liabilities which is a third category. so that we don't leave that confused in the record or confused perhaps in public mind. the gross debt is all of the debt that is owed by the federal government to all of the entities, publicly held as well as to the trust funds, medicare, social security. for example. the publicly held debt is just that debt that is due to the pub lick. that doesn't count the debt to the trust funds. the unfunded liability is still another concept that looks at the differences between the promise that is have been made in legislation versus the revenue streams that go with those spending commitments.

that is a more future oriented look at where we are headed. and the unfunded liability of the united states is in the trillions of dollars. and the biggest part of that is medicare. medicare is the unfunded liability, my memory serves me correct, in medicare six or seven times the unfunded liability in social security. so they are three separate concepts. the reason that we were focusing here i think, i can't speak for senator sessions, but we were talking about that as from a budget standpoint. from what we have to deal with. we have to produce the money in this committee to meet those debt obligations. both the publicly held and the gross debt. because those obligations to the trust funds are backed by the full faith and credit of the united states.

they are real obligations. but they can only be funded out of currentok resources. so when medicare's cash negative, social security's cash negative that has budget consequences. we are the budget committee. i know economists like to look at publicly held debt. dr. rhine heart -- reinhart is demuring. but we have a special obligation to our colleagues to deal with the revenues that are going to be needed to meet these requirements. not only of the publicly held debt but also the gross debt, the obligations to the trust funds. and that has significant budget consequences. we have been in this long-term period where the trust funds were producing more money. there was more money coming in than going out. that has been a very happy

circumstance. that is all changing now. and i think when the changes occur that it's often least recognized. it kind of gets missed by our colleagues. this is going to have very, very significant budget consequences. it's important for our colleagues to know that and it's important for those who are watching to understand. let me just -- >> follow up on that. with regard to -- the way we account for the money in our government allows this confusion to continue. it was very dramatically revealed to me, and i didn't fully understand it until just before the final vote on the health care bill, president obama submitted a score from the medicare that said if you raise medicare taxes and you cut medicare benefits as they

propose to extend the life of medicare for nine years, i believe, i think -- as it was stated, that is a true fact. but in the report from the c.m.s. chief actuary from medicare, he had a little parenthetical and it said, but of course you can't simultaneously use that money to fund a new program. and also extend the life of medicare. all right. but the c.b.o. score, dr. marron, you used to be at c.b.o., the c.b.o. said that you could. because the c.b.o. scores does not score internal debt. and so the president also used the c.b.o. score to say that he could fund his medicare program and extend the life of funded new health care program, extend

the life of medicare by nine years. and he had a c.b.o. score that agreeed with him. and basically what -- they don't score the internal debt. so the -- you had an increase in revenue out of medicare and it was spent on the health care, new health care program, and it didn't score as increasing the debt. where didi] the money come from? it was borrowed from medicare. a debt instrument shows that debt.

>> thank you. thank you.

>> thank you all very, very much, for the very kind welcome. lieutenant governor daugaard, mr. speaker, members of the state senate and state house of representatives, mr. chief justice gilbertson, justices of the supreme court, and other constitutional officers, and the people of south dakota. welcome to the 2010 legislative session. i am, i'm sure, as well as myself, all of the other elected officials that are here are very grateful and humbled by the trust and the confidence that the people of south dakota are putting in us to serve them. so to the people of south dakota, thank you for allowing us the privilege of serving you. seven years ago, i stepped up to this podium and i told you what i believe the people of south dakota wanted us to do

for them. i said they wanted us to be mindful of the basic responsibilities of government, helping care for those who can't take care of themselves, protecting them from those who would do harm, educating our students because they are our future. i said they wanted us to increase tourism, to turn more of our agricultural commodities into finished products, and boost wind power, ethanol production and other alternative energy sources. i said they wanted us to improve health care access, increase economic development efforts and help create more job opportunities. i also said they wanted us to make state government more effective, provide more property tax relief and always, always protect their rights and their freedoms. pd they told us the biggest challenge we face is to keep

our young people here within our borders in south dakota. anybody who has ever been on the campaign trail or had a cup of coffee at the local cafe or just plain liened up against a pick-up truck to talk with friends knows those are not just republican goals or democrat goals, they're the common goals on which almost every south dakotan of every generation would agree. those are the reasons that we find ourselves here in january in this very beautiful building. the people have elected us to get those things done and i'm proud to al say that all of us, democrats and republicans, east river and west river, city, town and rural are getting those things done. so no matter what the congress or the national economy dumps on us in the next year, i am still optimistic. we will recover. we will have more jobs and we will continue to improve our

quality of life here within our state. now, we're enduring tough times. our most recent unemployment levels in south dakota are at 5%. the national level the unemployment level is 10%. we've always been lower within our state. from 2004 to 2008, south dakota was consistently lower by 1.5 to 1.8%. last year, south dakota was lower by 2.5%, so with the national rate at 10%, you would think that south dakota's unemployment rate, based on this historical spread should be somewhere between 7.5 and 8.5% unemployment. but we're not. we are at 5%, one-half of the national rate. i believe the reason why things are not worse in south dakota is due to the hard work of many of our business owners and the managers throughout this state. instead of laying off more people, they have worked hard

to keep people employed. some people may say that they have just kept their employees because they want to make sure that they can take full advantage of the business opportunities as this recession ends. and i suspect that that's probably true. but there's another reason, as well, because in south dakota, business owners and managers they see their employees a little bit differently. because they are not just employees to them, they are their friends, they are their neighbors, and they are the people who have made their businesses successful in previous years. they want to help their employees make it through these tough times and so they have done everything that they can to minimize the layoffs. we need to say thank to you our thousands of business owners and managers very much for their concern and their dedication to their employees. but of course we also have a lower unemployment rate because south dakotans have a fantastic work ethic. our fellow citizens want to

work. we see value and dignity in every kind of work. because our people are hurting, state government is also doing what it can to help people during these tough times. first of all, we are helping with the basic of life, such as medical care and food. from december of 2008 to december of 2009, the number of people being helped by medicaid has increased 7% from 103,626, to 110,734. the number of people using food stamps has increased 36%, from 67,299 to 91,915. for other necessities, as of last week, we are providing 7,992 people with unemployment insurance payments. of course, the best solution to

unemployment is a job. since april, the accident of labor has provided one-on-one intensative case management for 4,197 newly unemployed people and 39% of them are already reemployed. we are also working with technical institutes to provide institution assistance for students and to create special short-term retraining programs in areas such as truck driving, welding, energy, electrical and mechanical and machining. support and tuition assistance for technical students has almost tripled to 2,250,000 dollars, and another $1 million has gone to our nursing schools and to both public and private universities and technical schools. we will also be proposing a change in law to give more help to people who's unemployment benefits have expired. if they enroll in approved training programs, they will be allowed an additional 26 weeks of benefits. if you can't get a job, the

next best thing is to increase your knowledge and upgrade your skills to get a job. we're helping people to do that, too. public university fall enrollment has increased, again, by 836 to an all-time high of 33,779 students. public technical institute fall enrollment increased again by over 900, to an all-time high of 5,951 students. we are also offering nontraditional students easier access to education with new attendance centers in pierre, rapid city and sioux falls. and last year, over 21,000 south dakotans also participated in online distance learning courses to increase their knowledge and improve their job skills. because of increased university system enrollments, 8 1r6 full-time equivalents or

f.t.e.s also known as jobs have been added to the regents' rosters. that accounts for nearly two-thirds of all of the increases in f.t.e.s over the last seven years. most of the rest of the new f.t.e.s since 2003 were added for essential government services such as prison staff, child protection services, firefighters and the homestake laboratory. additional education and training is also one of the best ways to create more jobs in the future. we already have a great business climate, but companies recovering from the recession will also need a well-educated and skilled workforce. our public universities with advanced degrees in research programs create a better workforce. our technical institutes with their targeted training and programs, they're creating a better workforce. we must continue to grow these

opportunities, especially now while other states are cutting back. the department of state and tourism has also been working hard to help business estée in business and to grow new jobs. during 2009, 8 redi loans and two apex loans have been extended and 57 companies have committed to expanding in or relocating to south dakota. 72% of those companies are south dakota-based. we have also developed over 380 new prospects in the past year for future growth in south dakota or rethroks to south dakota -- relocation to south dakota, but beyond business and government efforts, there have been thousands of private actions that have been taken by people to help their relatives, friends, neighbors, and even strangers to survive these tough times. during this legislative session, we need to do what

most south dakotans are doing themselves during these tough times. they're being frugal, yet they are being optimistic. i'm proud, and you should be proud, too, that today our two reserve fund balances combined are still greater than what they were at the start of my first budget back in 2003. the budget i presented to you in december will use 31.8 million from the 1078 million in our two rainy day funds for the 2011 budget. in the two months since we made our revenue projections for 2010 and 2011, some of our key revenue sources have grown. but most are down, which means that our structural deficit may actually still be growing. even the weather is interfering by keeping people from shopping during the holiday season. the way to start solving over

structural dev sit problem is to hold down the ongoing spending as much as we can without hurting the people who need our help the most. by holding spending down this coming year and maximizing the recovery, as it develops, the next legislature confident resources to balance the fiscal year 2012 budget without future tax increases. we need to hold down spending as much as we can and not taking any more than the 31.8 million out of the reserve funds. we are now hearing also from washington once again that that a possible amendment to the health care bill might include a stimulus 2 for states. this would take the form of three-quarters or about 9 months worth of extensions of the enhanced title ix freights for states, additional medicaid funding.

we can't count on it and we will not plan on getting it. if it happens, we must send those federal dollars -- spend those federal dollars instead of spending the reserves that we have proposed to use in the fiscal year 2011 budget. we must not use any of these one-time federal dollars for new spending. if we use these federal funds for new spending, the 107 million structural deficit that we face in the 2012 year will become larger, which is not acceptable. because this is my last state of the state message, i want to begin by thanking all the legislators here and your predecessors here for working with me during my time as governor. since 200311,919 bills were

enacted into law and just a few were vetoed. i thought about listing them but some of you have already suggested that i should not. some of those bills were cleanups, adjustments, responses to federal law or minor things but the people of south dakota through us proposed for many bills, bills that have improved the quality of life for all south dakotans. i'm not going to list all 1,917 for you but here are a few that have passed because i want you to see some of the great things the legislature has done for the people of south dakota over the last couple of years. we adopted new uniform child custody procedures and passed new sex offender laws to improve child custody proceedings and better protect our children. we changed our births certificate law to expedite more adoptions. we took actions to save innocent young lives in south dakota and to help people better understand the act of

abortion before it may occur. we made it easier for children having hear loss to get cochlear implants. we made it easier for small businesses to provide health care insurance for their employees and their families. we created the health care risk pool in 2003 and have improved it since then so that many more people can use its for health insurance coverage and we also created a competitive insurance marketplace so more people could afford to buy health insurance coverage for themselves and their families. we adopted common sense consumer protections that helped consumers and also encourage companies to do business in south dakota. we adopted moderate rating bands that curbed some of the excessive charges for people with health conditions. we also held high-risk individuals who had lost elgibility for insurance with alternatives such as the health care risk pool. so we already provide for portability of health insurance, which is more

comprehensive than current federal law and which provides for insurance alternatives for those losing coverage. we already have guarantees of renewability of health insurance that ensures people will not lose their health insurance just because they get sick. and we already have rating procedures and protections for people with preexisting health care conditions. the result is that we now have 13 companies selling group health insurance and 17 companies selling individual policies in south dakota. compared to 2003 when the state was faced with the individual market dwindling down to only 2 insurance companies actively looking for policy holders. together, we have expanded the 24/7 sobriety program statewide. we have created drug courts and teen courts. we have increased the numbers of doctors, dentists and other health-care professionals practicing in rural areas. we provided new way to fund public transportation for our

state's special needs citizens, seniors and children. and we authorized the creation of a statewide trauma system. we created the indian child welfare act commission in both state and tribal governments have implemented many of its recommendations. such as improving the child placement processes, improving communications and collaboration on child welfare issues, improving understanding of the indian child welfare act to further compliance with the federal law. and recruiting american indian foster homes with an emphasis on kinship. to commemorate and build on the reconciliation efforts started by governor mickelson 20 years ago. tribal leaders, have private individuals and my staff are working together to develop a plan to commemorate that effort in 2010 with a new year of focus on racial and cultural unity.

we will have a special kick-off event to announce our goals closer to the anniversary of the start of the year of reconciliation. in 2007, the legislature established a task force to study ways to create more access to affordable, comprehensive health insurance for all south dakotans. the e-health collaborative recently secured dollars to implement electronic health records and demonstration projects that will benefit us and other states. and we are also working with the tribes on an indian health care initiative. we are requiring kindergarten and compulsory school participation until the age of 18 and we increased statewide to local schools when we had extra money, we gave it to our local schools. the state also provided the funding to install anti-virus software and firewalls for 65,000 school computers, upgrade network video conferencing equipment and provide network management,

security management and student information systems, onsight technical support, website hosting and both internet access and ejth mail for all of our local schools. all at no cost to them. we also passed the indian education act and established the gear-up program for the oh shetee waukesha con sore thumb to help our native american students success. rather than providing remedial assistance, we allow them an opportunity in high school to see what they'll be studying the following year and to get an advanced start the following year. we improve our high call graduation rates -- we improved our high school graduation requirements and we also created the south dakota virtual school. this is take fantastic learning resource for students. last year there were 2,312 virtual school registrations for courses from students in 88

different school districts. we have also substantially increased scholarships, a richard hague and minerve scholarships for native americans, and the south dakota opportunity scholarships have given over 6,000 students the benefits of a postsecondary education. so far we have distributed over $15 million in scholarships. we are also providing more public university advanced degrees than ever before so that our young people can stay in south dakota. 24 new master degree programs and 23 new doctorate degrees. we are increasing the number of ph.d. graduates and students in order to promote more research and commercialization. we have 260 ph.d. students in 2002. now we have 551 ph.d. students, even though many of

our master's and doctoral degrees are just getting started. not only do these new graduate degree programs allow our students to stay here in south dakota but they also give the extra knowledge and skills to create new businesses and create jobs right here within our state instead of leaving our borders. this enables us to build our economy from within the state. together, we also strengthened our laws to prevent elderly abuse. we passed the first major revision of the criminal sowed since 1967. we changed the procedures in carrying out the death sentence and we implemented an intensive myth treatment program at the women's prison. we also revised the standards of all of our professional and occupational licensing boards, making them more accountable and efficient. we also started including them in our f.t.e. counts for more accuracy and accountability.

we created and increased many programs for our veterans and for their families. we created the south dakota certified beef program. we increased protections for our grain farmers. we changed the property tax valuation system to eliminate the problems caused by the 150% rule, and we created new incentives for biodiesel fuel, wind power development and transmission equipment. we revised our campaign laws, and we have increased public access to government records while still protecting the citizens' privacy. there is more information available now through the state websites, over 450,000 pages than ever before. in response to legislator concerns, we also created the open sd.gov to display revenue information. salaries, vendor payments. and a host of other information

not just from state government but from other local units of government, as well. there have been over 590,000 visits to the sd-- open sd.gov website. even though it didn't require a law, we also all worked together with our congressional delegation to save ellsworth air force base from being closed. we were able to accomplish all of these things without the higher taxes of other states. south dakota still has the lowest state tax burden per person of any state in the entire country. we were still able to move forward and to get things done

because of the hard work of both our state employees and our citizens. a great example of that is the 2010 economic development initiative, the state's business plan. in 2003, south dakotans came to eight regional summits and one statewide summit to volunteer their visions and goals for the veer 2010. they said -- for the year 2010. they said they wanted a south dakota that was economically strong, technologically advanced, culturally rich. attractive to visitors from around the world and enticing to scientist, researchers, business leaders and young professionals as an excellent place to live, work and raise a family. to make that happen, we created major goals. goal number one was to double visitor spending to $2 billion. since we established that goal, south dakota visitor spending growth has outpaced the region and national averages. in 2008, the national -- the nation experienced the higher

gasoline prices as you all recall, followed by the first stages of the recession. despite these challenges, we saw a 2.8% growth in visitor spending, and it reached $967 million. the figures for 2009 will not be available until later this month. however, anecdotal reports from our partners in the visitor industry indicate that south dakota held its own. we are cautiously optimistic that south dakota did well compared to national trends. we did several very good things in 2009 to boost visitor spending, such as a new social media campaign, further expansion of the fall shoulder season with the special roaster rush hunting promotion. special marketing with the search engine efforts and the creation of the statewide one-click, one-call reservation system. this is part of the digital revolution and tourism

marketing and will allow potential visitors to book vacation packages, rooms and tickets through the tourism website. we also increased partnerships and cooperative efforts. the challenge grants are good examples of these efforts. local people make local decisions on how to use the grants to promote tourism in their own communities. in aberdeen, marketing promotions were done, done for the brown county fair, the great aberdeen pig-out and the northeast celtic fair and games. rapid city promoted summer nights, the black hills stock show and radio and their pumpkin festival. sioux falls promoted the 2010 summit league tournament. mitchell marketed their gateway to the west fest. watertown promoted city monopoly and geo catching. acast california used their grant to attract more an leers to the south dakota walleye festival.

did he submit promoted their campaigned and vermillion used their grants to promote their ribs, rods and rock and roll festival. in the outdoors, the department of game, petition and forks substantially in crooesdz the opportunities for hunting, fishing and family vacations. we have 1.2 million acres of walk-in areas for hunting, 40 prosecutors mon in 2003. we built new boat ramps and extended others during the duty years and also added 314 camp sites, 110 cap bins along with upgrading over 1,000 camp sites over the last several years. a unique future project will be the potential acquisition and use of land at the blood run national historic landmark. this site is along the iowa border in lincoln county. the game, fish and parks department will give legislators a full briefing on this project later this

session. blood run was the largest oneota indian village known to exist and to be continues with usly occupied between the year 1700 and 1750. as many as 6,000 american indians were there for trade and significant cultural ceremonies. the area also has excellent recreational potential for one of the most heavily populated regions of south dakota. so we have an excellent opportunity here to preserve an important historic site, to teach the next generations about our history and to provide outdoor recreational opportunities, as well. we are at the beginning stages but i hope that eventually we can have a new state park that includes this location. the goal of 2010 was to increase the gross state product by $20 billion and we achieved that already back in 2007, three years ahead of schedule.

for 2008, our gross state product was $36.9 billion. we won't have the 2009 figures until this summer but in 2010, we will continue the successful giant vision partnership with the south dakota chamber of commerce to encourage entrepreneurs. we will be flex nibl reevaluating and restructuring our finance program to meet the needs of the new companies we are contacting. we will be more aggressive in recruiting target industries, and we will make financial assistance programs easier to navigate by working with our public and private partners to coordinate funding opportunities. and the certified redi site program will allow state economic development officials to do much of the preparatory work ahead of time for incoming businesses, such as zoning, utilities and easement issues. goal number 3 is to become a recognized leader in research and technology development. our 2010 research centers have

conservatively caused an economic impact of more than $184 million to the state of south dakota since july of 2004 when they were created. private sector partners have invested over $37 million at the centers. private equity investors are invested more than 20 million in companies collaborating and commercializing innovations generated by these research centers. and the 2010 research centers have already supported the work of 184 researchers and 576 students. in the new federal defense bill recent leap signed into law, 20 south dakota projects are receiving almost $40 million. 13 of those 20 projects involve south dakota's 2010 research centers. our graduate research assistance, or internships created by the dakota seeds initiative.

but i think our biggest recognition as a new leader in research has come from the national science foundation's selection of homestake as the site for the world's deepest underground science and engineering laboratory. we are moving forward with not only our own sanford lab at the 4850 level but also the deep underground science and engineering laboratory, as deep as 8,000 foot. on may 13th, 2009, the 4850 level was dewatered and today the water level is almost 5,100 foot underground. the davis cavern at the 4850 level is being enlarged. it is named after dr. ray davis, who won the 2002 nobel prize in physics for his experiments in the homestake mine. this month, crews are preparing to install a new deep water pump which would be online in

march. that pump will dewater home staying all the way down to the 8,000 foot level. south dakota also took a step closer to the national dues yelle last september when the national science foundation allocated $29 million for the does yelle collaboration for those delivering the lab's preliminary designs and $19 million of that goes through the south dakota school of mines and technology. accepting these funds involves the hiring of 26 people that account for 25 f.t.e. this is good growth that adds to our economy and will create other jobs, stopping it by eliminating these f.t.e.s would be a very bad idea. in total, the national science foundation already has invested more than $70 million in design and planning for the duesel and the initial experiments at the sanford laboratory.

none of this would have been possible without the cooperation of the barrick gold corporation, a commitment made by the legislature and by the $70 million gift from t. denny sanford to the people of south dakota. to 2010, the lux or large underground xenon experiment will be installed at the davis cavern at 4850 level. the moo-- miorna experiment also will be installed. we'll continue to dewater the home staying and make improvements throughout the lab. most important, the dusel collaboration, a nationwide team of scientists led by the university of california at berkeley and the south dakota school of mines and technology will finish a document called

the preliminary design report, which will be submitted to the national science foundation in december. this document will be an extremely detailed plan for the new national research facility here in south dakota. the national science foundation will have reviewed this document every step of the way so when it goes to the national science board in early 2011, there will be no surprises. in fact, the national science board will hold its annual retreat in the black hills of south dakota in september of this year. we're on track to become the first home of -- i should say we are on track to become the home of the first new major national research facility since the ferme lab was created in 1967. we are also on track with education and outreach activities that have already included teacher trainings, lectures, seminars, onsight labs, videos and written information for schools, great website pages, three graduate

courses and an annual summer science festival. we have also expanded the davis-bacall science program in collaboration with the grand sasal lab in italy, the lab in switzerland and princeton universities, the ferme lab and brookhaven national lab. so many great things have already started to happen for science and nor south dakota. -- and for south dakota. and ladies and gentlemen, i believe it is only the beginning. goal number four is to develop and to brand south dakota's quality of life as the best in america. we all know we have an excellent quality of life but to brand it means we want the rest of america to know about it so people will come here to visit and help us create more job opportunities. our efforts are paying off. the small business and entrepreneurship council studies 4 indicators to determine how business friendly

the states are. they rate south dakota as number one. the tax foundation analyzes the impacts of tax laws on economic performance in every state. they rate south dakota number one. forbes magazine analyzes business costs, living costs to determine the best place to do small business in the country. they rate sioux falls, south dakota, number one. education week magazine studies how technology is used in the schools in the united states. for both use of technology and access to technology, they rate south dakota number one. the most recent business facility's ranking report measures 20 factors of quality of life, including low crime weights -- low crime rates, material well-being, job security, availability of

recreation, health care, education, and the cost of living. they rate south dakota number 1 in quality of life. goal number 5 is to uphold our commitment to the 2010 initiative as a work in progress. that means we will continue to challenge ourselves to make south dakota even better because we want to encourage more of our young people to stay here or to come back home to south dakota for their careers. to further improve health care in south dakota, we also implemented a prescription drug plan before the federal government did it. we started partnerships to encourage more students to choose health careers. we launched a childhood immunization program that is one of the best in the entire country. we reduced smoking and we successfully coordinated hundreds of thousands of flu shots, and outside of

government, the commitment to better health care by our hospitals, clinics, nursing homes and health care professionals has been nothing short of fantastic. they say they're on the doing their jobs but we know many, many instances when the people caring for us and our loved ones have gone well beyond just doing a job. there are five other areas that also have an enormous impact on the current and future quality of life that we have here in south dakota, and we are working hard to improve all five of them. they are water, energy, transportation, agriculture and education. this year, i am proposing an omnibus water bill of $14,200,000. $275,000 of that is federal funds, $13,925,000 come from the other funds dedicated to this work. so that we can continue to

provide good, clean water for our people, livestock and economics development, and opportunities along with needed funding for waste water treatment, solid waste facilities. this proposal appropriates 6.3 million to complete our pledge to prepay the state's cost share commitment for the lewis and clark regional water system. also included is the establishment of $12 million in state cost share as a commitment to the southern black hills rural water system. the costs of energy and its availability are also major forces in creating south dakota's future. we need access to a wide variety of affordable energy for our economy to thrive. we also need to do our part to help our nation become energy independent from the middle east and venezuela.

since 2002, we have made several changes in our laws to promote and accelerate wind-powered development. in 2002, south dakota was producing only 4 megawatts of wind power. currently, we have wind power production capacity of 314 megawatts and another 309 megawatts are under construction. when these projects are completed, south dakota will have enough wind power generation to power 170,000 homes. baseon electric is now in the permitting process for an additional 150 megawatts as a wind farm that would be located south of wessington springs and they hope to start constructing this project this summer. but our greatest roadblock to creating even more wind power is the lack of transmission capacity for the future. it can cost as much as one to $3 million per mile to build

new transmission lines. unfortunately, the big stone 2 project has been killed and it would have provided another 1,000 megawatts of wind power transmission lines. that's enough capacity to carry the electricity produced by almost 700 wind turbines. but other projects are still on track. the 300 megawatt deer creek station near white south dakota is on for completion in 2012. the hyperion energy project is also on track to break ground in 2011 and start refinery production in 2015. it will create thousands of jobs in its construction and operation. it will also process 400,000 barrels of crude oil per day to make you will ra low sulfur gasoline, does yelle fuel and jet fuel. this $10 billion project will

be the largest private development in our state's history. transcanada's two pipelines are also on schedule. together they'll carry over 1.2 billion barrels of oil from canada to american refineries. south dakota also continues to be a national leader in farmer-owned ethanol plants and ethanol production with a capacity of producing 990 million gallons per year. that's tremendous growth from the 165 million gallons that south dakota produced in 2002. all of these activities will help south dakotans have affordable and reliable access to fuels while helping our nation become more energy independent. the future of our state is also very dependent on transportation, preliminarily our roads, bridges and railroads. transportation is the key factor in where the most

economic growth will happen. year to date, since 2002, we have spent over $2.5 billion on new or rehabilitated state highway projects. $1.8 billion in federal funds, $76 million in federal stimulus funds, and $646 million in state tax dollars. over 40% of the state's system has been constructed or repaired since 2002. that includes re-surfacing 2100 miles of asphalt, re surfacing or reconstructing 630 miles of concrete, reconstructing 460 miles of highways, constructing 180 bridges and culverts and repairing 550 bridges and culverts. we have also successfully negotiated the railroad losses so that our shippers have better access to markets. we completed 5 * 556 local transportation projects worth

over $200 million. we completed the mitchell to huron, aberdeen to i-29 and pierre to i-90 expressways and the rapid city heartland expressway is almost completed. we also received $15 million in extra federal funding because we effectively and efficiently issued our stimulus funded contracts. during 2010, we will be spending $45 million in state funds, $240 million in if i had funds and $107 million in federal stimulus funds on highway improvements. we will also be working with our other rural states to secure the passage of a new surface transportation act by congress that will be fair to rural america. and we will also continue to manage increased construction costs, increased maintenance costs, and decreasing revenues.

agriculture has been the staple constant in our economy for decades. but in recent years, it has become even more for because we are adding value to our commodities to create more ag income right here within our borders. government primarily provides certain services to people but our farmers, ranchers, processors are growing, creating and producing the food and fuels that are the basic necessities of life for us and for many millions of other people. many people don't realize that the extended drought period that we've just experienced recently was stakescally worse than the dirty '30s but we didn't experience the devastation because our farmers over the years have implemented many conservation actions that decreased the impacts of that drought that occurred in the early part of this decade. south dakota agriculture has an annual economic impact of over

$21 billion. over 170,000 south dakotans are employed in agricultural-related industries and record-setting farm and ranch in this case in 2008 helped lessen the downward impact of the recession in 2009. and while commodity prices are down in 2009, particularly for livestock and dairy, our farmers, once again, set new grain production records this last year. that took a lot of hard work, but our farmers and ranchers would be the first to say that they're most thankful, first and foremost, to the good lord for the blessings that they have received. in the long run, i believe that we are on the right track in turning more and more of our raw commodities into finished

products. corn into ethanol and distiller's grain, milk into cheese, grapes into wine and turkeys into finished products ready for the grocery store. the dakota provisions plant in pierre -- i'm sorry, the dakota provision plants in huron is an example of this success. since 2006, which is the year that it started in operation, the number of turkeys processed has increased from 3.2 to 4.6 million. payroll has increased from 4 million to 16 million. employment has skyrocketed from 270 to 640, and sales have increased from $69 million to $155 million. and all of those numbers will increase again in 2010. the state helped by making that

happen. we provided the funds to do a feasibility study and by awarding a redi funds lone and a bond for permanent financing on land and building and equipment in 2005. the state also helped by awarding a workforce development grant to help train 382 new employees in 2006 and by providing an apex loan to partially finance a new administrative office building in 2006. dakota provisions fully repaid its value-added ag subfund loan last september. we're also helping ranchers plan and design environmentally responsible feedlots so we can feed the caves here within our borders instead of exporting them. about the 50 calves left south dakota last year to be fed and marketed somewhere else. if we had fed and finished them and marketed them right here, it would have meant an additional $6-- an additional 6,650 new jobs right here. in the accident of agriculture,

we also created a regional type 2 incidents management team that responds to our own fires and fires in other states. it has also worked in other disasters such the new orleans hurricanes and fargo floods. this required 22.5 fr t.e., but you made the right decision when you approved them because we would rather have them located here in south dakota than in another state so that south dakotans will hold these jobs and are closer to the black hills when we do have a fire. i think our people appreciate having that team here even if it means that we have to count them as f.t.e.s, and by the way, the federal government is paying 100% of the cost. we have also trained over 1,000 state, federal, local and volunteer firefighters in the past year. we're also improving the state fair. attendance is up 22% over the last three years.

campground revenue is up 34% and sales tax collections are up 86%. corporate sponsorships are up 90%. the number of vendors is the largest in the last 10 years, and the total number of 4h exhibits has grown to over 15,000. we also have a responsibility to provide educational opportunities to all of our citizens. my budget proposal has over 607 million going to education. 390 million of that goes from the state to local schools who will combine that with with local property taxes and the federal funds and then spend approximately $1.1 billion in local, state and federal taxes on educating approximately 123,000 students this next year.

each so, seems like we talk about that money a huge amount of the time instead of the goals and the results of education. so let's look beyond the money for just a minute and see what's being accomplished. the most important achievements belong to our students, their test scores are improving. since 2003, the number of students who are proficient or advanced in mathematics has increased from 59% to 75%. the number of students who are proper -- proficient in reading increased to 84% in 2008. in 2009, a more difficult reading test was started and it will be the new baseline for future years. american college testing or a.c.t. scores have increased from 21.5 to 22.

in all 4 categories of english, math, reading and science, our south dakota students scored higher than the national average. in south dakota, 74% of our students take the a.c.t. test and the higher the percentage, the greater the chance that composite scores will be lower because you have more and more of your students taking them. but in the 11 states where at least 74% of the students take the a.c.t. test, south dakota students have the highest composite score. in other areas of comparison in 2009, we had a high school graduation rate of 89%. that's good but we can do better in the future. but the percentage of our high school graduates going to college has also increased from 69% to 72%. in the gear-up program for native american students, 87% of the participants have gone on to postsecondary education

and 65% have already graduated or are still enrolled. our four locally managed technical institutes are also doing a very good job. they're working together as a system which shared goals, a strategic plan and partnerships with businesses to meet their workforce needs. enrollment over the last five years has grown by 14%, for the most recent year, the combined placement rate was 97% with 8% of those graduates being employed in their chosen field and 83% of those graduates stayed in south dakota. 29% are in the growing career field of health care. classes are also expanding for energy related careers such as electricity distribution and dance mission, natural gas and propane production and distribution. wind turbine construction and

repair. pipefitting, mill writing, and automated controls. our technical institutes are also working together with high schools on dual credit courses, the technical institutes also have over 220 articulation agreements with the universities for course credit transfers. i've already mentioned the great job our public universities are doing for our students with new master's degrees and doctoral programs, new outreach facilities more online courses, more research to create jobs. the articulation agreements and great collaboration with the sand ford lab at homestake. but our public universities are also growing their enrollments and preparing our people for essential careers in south dakota. fall enrollment in 2002 was 25,533. fall enrollment in 2009 was 33,779, or up 14.3%.

the number of graduates has also increased from 4885, that was in 2005, to 5445 last year. all the things i've mentioned, and much more, just don't happen on their own. we have a hard-working, dedicated workforce of state employees who care about their fellow south dakotans and do a tremendous amount of work every single day. so at this time i want to say thank to you all of our state employees and our local employees, because they truly have done some very very good work as servants to all of us. 2010 is the 100th anniversary of the opening of the state capitol building. 100 years ago, its construction symbolized the end result of a

long, difficult struggle for statehood. it was also the ending of fierce battles between several towns to determine which town would be the permanent home for state government. there will be two special event this year to recognize this building and what it symbolizes. everyone here, and all the people of south dakota are in created to attend. on monday march 1st, from 5:00 to 7:00 parliamentary, there will be a special reception here in the capitol rotunda and on saturday, june 19th, there will be a grand celebration all day here on the capitol grounds. about this building. governor cole crawford said that as the people come and go and linger within its walls, they will see in it an expression of the soul of this state. i think i know what governor crawford meant because i feel it every day when i have the privilege of coming to work

here. last year, i mentioned a wonderful history of our state entitled "challenge, the south dakota story." it was written by a gentleman by the name of robert cor. levitz. he wrote that south dakotaans have a fierce but quiet pride in solving problems, achieving beyond anyone's expectations and not only surviving but prevailing against every challenge that they are given. fires, floods, influenzas, droughts, winds storms, tornadoes, mud slides and blizzards, they challenge us in south dakota. they don't defeat us, they make us stronger. i remember so many fires in the black hills where volunteer fire departments from all across the state, even hundreds of miles away, would rush out west to not only battle the flames but also save the homes and businesses of people that

they didn't even know. i also remember one large prairie fire near marcus where a small army of ranchers with their converted pick-ups were fighting it as best they could. one rancher was returning home with his 3-year-old son and spotted the firefighting and immediately drove towards it. he found a state trooper and asked him, since you have to stay here and man the radios, would you mind watching my son while i go sand help this fire. of course, he did. and that fire was quickly put down. during the aberdeen and james river valley flooding, over 600 state workers left the regular jobs in shift to help people recover. another time an elderly couple hung on for their lives when a flood and mudslide came through their held side home after they were rescued, someone said, so what are you going to do now?

they didn't think twice about it. simply said, we're going to rebuild. a few years ago, when we had a blizzard and an ice storm that broke over 11,000 electrical polls, many workers went door to door to make sure everything was okay and people were safe. you remember the blizzard. small towns were without electricity and we were concerned about some of our elderly population and we had groups of teams of members, local folks with state help going door to door and noplows driving them through to touch base in each of those outlying little houses. and in one particular case, the group of four went up to a door where they thought somebody should be at home and they knocked on the door and nobody answered. they knocked again and nobody answered. so this is south dakota and door was open so they just walked on in. they came in and sure enough,

the lady of the house was there. do you remember the story? she was 97 years old. she didn't want to leave, she was in bed. the temperature in the house was 37 degrees. but she was okay because she still had hot coco. and she didn't want to leave. and the law enforcement officer that was with them said, ma'am, you don't understand, we think you should leave and said you should get to someplace that's warm. she said no, this is my home, i think i'll be okay. the social worker said, ma'am, you don't understand, the governor sent us and he said you got to come with us, and she said if the governor says i got to go, i guess i got to go. they took care of her. all across south dakota people were helping one another face the challenges that mother nature delivers to us. i'll also always remember the incredible image that i saw on

a television screen during that same storm. it was an almost whited out picture but there in the white, you could just barely see kind of looked like a truck in the distance and then you could see the stub of a power pole and some movement. you had to kind of focus on it, and then you could very, very faintly make out him two figures, two linemen, in a whited out blizzard with their utility bucket replacing a pole. the wind chill must have been at least 920, but they were there, starting the repairs already to help their community. every year we see that one of the most important things that state and local governments do is to respond to emergencies to save lives, to prevent harm and to minimize damage and to help people recover.

so i want to say thank you to you as a legislative body because you gave us the tools, the training and the funding and the flexibility to respond to numerous disasters. you combined the training of 11 agencies into the new department of public safety in 2003. and you approved the building of the state emergency operations center in 2006 that has made our emergency responses more effective, once again thanks to you. it is true, south dakotans do have a fierce but quiet pride in solving problems, getting things done and prevailing against every challenge and disaster that we are faced with. that's the legacy that our ancestors have given to us. it is a legacy that we are carrying forward to the next

generation. and that legacy is not only symbolized but carried out in this beautiful building and it's where the people of south dakota meet and work to solve problems and to create new opportunities. i'm looking forward to working again this year with all of you so that we can get even more done for the people of this state. i suspect that that's where this speech could probably end but there's one more thing that we should always remember. since 2002, more than 4,200 national guard soldiers and airmen have deployed overseas. these are south dakota citizens. during 2009, 811 members of the south dakota national guard

served on deployment to fight the global war on terrorism. 337 were in the air national guard and 72 of them have returned. excuse me, returned home. 474 were in the army national guard and one has returned home. we currently have 266 air national guard airmen serving overseas in iraq and 6 additional members serving in three other countries. we also have 482 army national guard soldiers serving overseas, 114 are in afghanistan. 367 are in kuwait. and one soldier is stationnd kosovo. 28 soldiers, 28 soldiers and airmen, and one civilian all

from south dakota have made the ultimate sacrifice. 7 were members of our national guard and 21 were in the regular armed forces. two of those 29, one a soldier and one an airman, died in 2009. they were staff sergeant brian d. burke, u.s. air force, and sergeant leroy o. webster, u.s. army. we should also say a prayer for the family of sergeant duvey wolfe, u.s. army, who is not a south dakota native but was buried in farmer, south dakota, this past year. for all of the years that i've served as governor, our nation has been at war. this war to stop terrorism has

lasted longer than world war ii. but it is a war we must win. i'm grateful that i was given the opportunity to carry forward what bill janklow started with his creation of the world war ii memorial. with your help and the help of many, many thousands of south dakotans, we created the korean war memorial and the vietnam war memorial on these capitol grounds. when this current war is over, a future governor and future legislature and the grateful citizens of south dakota will have the privilege of creating a memorial for the current generation of soldiers who are fighting to both defend our freedom and give the precious gift of freedom to many millions of people and their children in far-off lands

during the last 20 years. let's never forget that we are a privileged group of people. we live in a country where we have freedoms and opportunities like nowhere else in the world. we talk about it but let us never take for granted the right to bear arms. let us never take for granted the right to speak our mind on issues that are important to us, to talk about the direction that our country and our state are going. let us never forget that we have the opportunity ourselves to choose our own leaders. i wonder how many other people throughout the world wish they only had those freedoms but we have the opportunity not only to choose our own leaders but to offer to them ourselves in service as we have done.

we have the opportunity to choose the job or the profession of our own choice and to succeed or to fail in that chosen profession. our kids, boys and girls both, have the opportunity to a marvelous education. and every one of us has the opportunity to worship the good lord the way that we see fit, whether it be in a church, synagogue, mosque, mountaintop, or cathedral. those freedoms, those opportunities have never been free. they have been defended and fought for by the men and women that have proudly worn the uniform of these you united states of america. lady and gentlemen, today -- ladies and gentlemen, today, let's once again thank them for their sacrifice and their service for all of us.

veterans and current members of the armed forces of this country, please, stand and be recognized by all of us. veterans and members, please stand. [ applause ] >> may the good lord continue to bless the state and may he continue to shine his blessings on this very special country,

these united states of america. thank you. [ applause ]

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>> good afternoon everyone and welcome to the hudson institute. my name is christopher sands pan am senior fellow hudson and it is my great pleasure today to introduce michael chertoff, who was the main speaker and also anne mclellan who was on her way, still coming down from canada. she says it is the americans' fault that they want the land, not so much the canadian's fault because they wouldn't let her leave despite the weather but hopefully she will have-- joyner's mitt program. michael chertoff is among many of you know. he is today chairman and managing principle of the chertoff group a security risk management advisory firm with offices in washington d.c. and

new york for good judge chertoff is senior counsel at covington llp washington d.c. office and a member of the white-collar defense in investigations practice group. most recently mr. chertoff served as secretary of the department of homeland security as secretary he led a 218,000 person department with a budget of $50 billion. mr. chertoff's developed into month security promulgated homeland security regulation and spearheaded in national cybersecurity. he also served on the national security in homeland security councils and the committee on foreign investment in the united states. bridges appointment to the cabinet mr. chertoff served from 2003 to 2005 on the u.s. court of appeals for the third circuit. before becoming a federal judge mr. chertoff was the assistant attorney general for the criminal division of the u.s. department justice pirg oneth position ubersauve investigation of 9/11 terrorist attacks in pharm.d enron task force which

produce more than 20 convictions including those of ceo's jeffrey skilling and kenneth flight. mr. chertoff's career includes a federal prosecutor including district attorney first assistant attorney for the district of new jersey and assistant u.s. attorney for the southern district of near. as a prosecutor mr. true-up investigated and personally prosecuted significant cases of corruption organized crime in corporate fraud and some of you may have notice on the way and he has a new book, "homeland security: assessing the first five years" which he will talk about. with no further ado let me turn this over to secretary chertoff. [applause] >> i am very impressed by the turnout on a day of i think what is a record, perhaps, since the 1880s, a record snowfall in that jurisdiction of colombia so it is either a tribute to the intrepid this of the people in the audience for the fact there is nothing else to do.

the super bowls over nuf got tired of watching television and you are getting cabin fever alitha rayann delighted to be able to address you today and i want to thank christopher sands for the introduction and the hudson institute for hosting me for this talk. anne mclellan who i think is anne mclellan who i think is dey#@@@@@@@ @ @ @ @ @ @ @ @ @ @)

and secure you are during any kind of natural event of that kind is a function of how prepared you are. people who have water, who have the battery operated radio, who had food, it had filled up their gas tanks were in a better circumstance than those who hadn't done any of those things and we'll certainly a big snowfall isn't comparable to the disasters we have seen here in the united states or that we saw in haiti recently, each of these events is a moment to reflect upon the importance of preparedness which really lies at the heart of pretty much everything you do in the area of common security whether it is dealing with terrorist acts or whether it is dealing with natural disasters. the more prepared you are the better able you are to deal with an event when it actually happens. that is actually one of the themes of a book that i have written, which is entitled "homeland security: assessing the first five years." and it was an effort on my part

really over a period of about a year in 2008 to write a series of articles, looking back on where we were in 2001 and where we had come in 2008 as a way of both judging the progress that we make but also trying to draw some important lessons for the future. as it happens we are in a period of time of renewed focus on terrorism. in 2008 and much of 2009, perhaps understandably the public was preoccupied with the economic crisis. there was a lot of discussion about an overhaul of our health care system and comparatively little public attention paid to terrorism. but of course that is not because terrorism wasn't in existence or had disappeared or even diminish. it was merely because the vagaries of the media prioritizing was driven by what was the latest new thing in washington. that change however in the autumn and winter of 2009.

first we had a series of arrests that were carried out by the authorities here in the united states, including the arrest of an individual from afghanistan it was a cabdriver who has been charged with plotting a terrorist attack, the rest of david headley in chicago who was are originally from, thought to be with respect to carry out terrorist attacks in denmark but more recently was tied to the 2008 mumbai attacks, the fort hood shootings which tragically ended with the death of over a dozen people and wounding of over three others and of course the christmas day bombing plot which resulted in a great deal of controversy. all of these things seemed once again to focus the attention and the media and the public on the issue of terrorism and as a consequence there has been a lot of discussion in the media about terrorism and the appropriateness of our response and they think it is a good opportunity to look back on what

we did during the first seven hour eight years after 9/11 and what we face now and 2010 as we enter the second decade of the world in which terrorism remains one of the most potent in serious threats to our well-being. that me begin by talking about the kinds of threats we face, because frankly it is not terribly different from what we faced in 2001 but we have seen some evolution both in terms of the threat and in terms of our capability to deal with that threat. in many ways evolution and dynamic adaptation is the story of terrorism. terrorism isn't about astatic fret that remains the same over time that we can simply address and resolve once we of put together a comprehensive strategy. instead what terror of-- terrorism is an adaptive strategy. ... to see how we respond and then it takes account of the lessons that the terrorist learn in order to change the strategy

and the tactics. and it is incumbent upon us to both recognize what is consistent and the way terrorist the hague, but also to recognize what has changed and i think as we look at what we have seen in the last year and compare it to what we saw five, six, seven are even ten years ago you will see underlying consistencies but he was also sea change and evolution. first, it remains a case in 2010 as i believe it was in 2001, that the underlying the kind of international terrorism which is what we principally focus upon when we talk about terrorism, is an ideology that is extreme and its outlook, that purports to use the language of islam but that in fact is a distortion or a perversion of islam, but nevertheless an ideology that has an appeal in recruiting people who are disaffected,

whether they are disaffected because of a personal psychological issue, because of their sense of political alienation from society in which they find themselves or because there's some larger grievance based on the circumstances in a particular part of the world. that ideology is not necessarily consistent lateef pollitt bin laden's statements over a period of years, they have a little bit of the characteristic of a person who tries to see where the parade is headed and then runs to get to the head of the parade. those of you think back to the earliest statements of bin laden in the '90s will recognize lot of this book is at that time had to do with the presence of american military forces in islamic lance like saudi arabia. views uwe for example of the israel palestine dispute was not a very high issue on his agenda. but that change more recently when it became evident to bin laden into al qaeda that that was particular grievance that

applied at least to a subset of the potential pool of recruits. more recently we have seen bin laden, zawahiri his number two talk about the intersection between al qaeda and said globalization to try to draw connections between the economic crisis in the west and the ideology of the al qaeda and what it's agenda is. in fact, i wouldn't be surprised to see bin laden take credit for the earthquake and the snowstorm in his neck statement. and i say this not to mock and, but to recognize that at the core of what al qaeda is about is not so much a coherent ideology of what they are in favor of as it is an ideology of what they oppose. and they are prepared to modify their message in order to retract a greater number of people into their orbit. as a consequence, as we think about the ideology we face it is important not to confuse it with

a religion which is different and which has a very coherent and obviously admirable world view, not to confuse their religion with the ideology which is much more tactical and much more driven by the desire to make sure the latest fashion has been incorporated into the doctrine. in 2001 when we look at the threat from al qaeda, moving from the ideology to the physical, we saw that the central area of planning, recruiting, training in launching at tax was in south asia, particularly in afghanistan. that of course change dramatically after the american invasion in 2001. in fact i think that's invasion was significant in a number of ways. not merely because it a lot-- this lot in enormous national safe-haven in which terrorists were able to train coming keep people in safehouses and

actually also set up laboratories to experiment with various kinds of chemical and biological weapons. it was not only significant because it dislodge them from the physical space but because they think it was a shock to the system. bin prior to 2001 that americans would react to an attack on american soil the way the americans reacted to the blackhawk down episode in samole yet in the early 1990's, by withdrawing, by appeasing him by running away from the fight and i think that, when america responded with many multiples of force in afghanistan, that not only shook the confidence of bin laden but it actually caused some of the people who had been in the adherents of al qaeda to question the wisdom of bin laden's leadership. at the same time, before we congratulate ourselves on the immediate effects of afghanistan we have to recognize that the

characteristic of the al qaeda and similar organizations, and that perhaps their greatest strength is their resilience in their persistence. whereas people on the west sometimes requires that backs is an opportunity to engage of a crisis of self-confidence. for people to hear-- here to the ideology, setbacks are merely turning the wheel that they expect will turn again in their favor. and fact as their confidence in their ultimate success, as misguided as that may be is one of the strongest components of their ideology and therefore something we need to pay close attention to as reformulate our own strategy. in the case of al qaeda, what they did is they retreated into the frontier areas of pakistan and over the next several years there was a back and forth. at times, the use of american power coupled with pakistani power was able to press with a great deal of vigor upon the capability of al qaeda to

function in the frontier area that lies between pakistan and afghanistan. during that period of time and number of plots were disrupted or destroyed because people who were the plotters were eliminated, but it is also the case that particularly in the period of time from 2000 to-- 2007 to 2008 is the pakistani government began to pursue the prospect of various kinds of truces or accommodations with the taliban in the frontier area, a safe haven, a greater say haven began to be treated in the frontier area and in fact that is something we spoke about in 2007 and 2008 when we talked about a heightened period of ferrette, a recognition that within that geographic area is sufficient so that safety had been created that we began to become increasingly worried about the pipeline of recruits who would be moved into the area of pakistan, would be trained,

would be indoctrinated and then be returned to their home countries in order to carry out plot. indeed if you look at some of the western plots that we uncovered during that period of time in sense, i dare say you will find that many of them, not all of them but many of them to have their roots in the frontier area. neligan, in the last year it appears that the cycle that turned again and this time some for the better part of the pakistani government after considerable amount of prodding as move forward with greater energy and even perhaps aggressiveness again certainly some of the taliban in the frontier area and that has caused a shrinkage of the safe haven and has returned the leadership they are to become more concerned about their own safety perhaps then about striking at the west. at the same time it is not surprising that the greater pressure on the frontier areas from pakistan has resulted in a

tax on pakistan itself. one of the hallmarks of the terrorist is there an immediate reaction to pressure is counterpressure in the hope is to wear down the will of the public that supports government pressure so that they will eventually be a roll back and client in their own domain. but what we have seen is not only pressure back in the struggle over waziristan. we have now seen that al qaeda is increasingly a franchise. it is broaden itself not only in south asia but in parts of africa and the middle east and encourages other groups to form at least a network kind of alliance. in many ways this is in fact what 21st century terrorism is. does not about a unitary organization with a command and control system. is about it network of organizations that enable each other, that support each other, that may not necessarily always be 100% aligned, but will

certainly be closer in their world view and closer in their efforts than makes it comfortable for the west. so we have seen for example the somalia, another area that is poorly governed, has become a save covin for al-shabaab, and al qaeda linked group that has in one way become very successful as a recruiter of westerners to come and and train and actually carry out terrorist attacks. we have seen a greater presence of al qaeda in yemen although this again has been a feature now for a couple of years. and even in democrat, north africa, we now have the phenomenon of al qaeda in maghreb which is the successor to some of the terrorist organizations in north africa and there's some evidence we have seen that they are forging links with drug traffickers coming from south america and providing safety and security for drug shipments that are being transmitted from south

america through north africa ultimately to be sold in europe. this of course is an economic arrangement that is beneficial to the terrorists and much the same way the taliban in afghanistan finally we have to look at the issue of home grown terrorism. this topic has been much discussed, certainly for the last four or five years and it has been manifest in many countries throughout the world, particularly in countries in europe. it has not been a big problem in the united states until recently but certainly the recruitment of somali young people into the fight in somalia and what we saw recently with the fort hood shooting suggests that homegrown terrorism may be a greater problem here in the united states. that is not to say at this point in time we have anything like the dimension of homegrown terrorism like you see in parts

of western europe but it is to suggest in keep with this theme of dynamic change, we can't simply assume because we haven't had the problem in a significant way in the past that we're not going to have it in the future. fi in the past that we are not going to have it in the future. this means we need to ask ourselves what it is that is allowing al qaeda or similar groups to begin to recruit somalians to go to somalia, or a u.s. army medical doctor and with medical training. what is it that enables them to convert this individual who comes after all from the elite of american society and turn him into a terrorist assassin. and that is going to require us to think hard about not only what we do socially in order to try to assimilate all of our communities in the country. is going to require risk to think about how to deal with the

process of using the internet as a recruiting tool and as a training tool in an environment where the capability may trigger an train lone wolves may become an increasing problem. so in many ways, what we have seen is the threats we face now are different than if threats we face five or six years ago in specific application but not in terms of their fundamental core. in fact many of the things that had been set in the last year could have been said five or six years ago about the prospects of what we face but there are some things that are different. one thing that is different as we have got much better at preventing attacks. our intelligence is better, our infrastructure for protection and preventing attacks is better and while this is by no means the suggestion that we are to pat ourselves on the backs and say the job is done it doesn't just that we have progress, it doesn't do us any good to say that nothing has gotten better but at the same time we have to

recognize the progress we have made has prompted the enemy to change its approach in that need to remake further progress. one of the major elements of our success and strategy. we have to begin by saying, and i alluded to this earlier, that the battle begins not here, but begins overseas. obviously if you can eliminate safe havens, and he can eliminate those people who are leading the effort to carry out terrorist attacks in the west, that is the best way to eliminate the threat. connecticut activity we have taken overseas in places like afghanistan, pakistan and iraq have served to reduce the threat and have served to disrupt those who want to carry out the threat. it is not to say it and forces them to give up or eliminates them but it does push them on the run, particularly in those instances where we are able to work with our allies to keep the pressure on them.

a second element of the strategy, and again it is not a total solution but it is certainly an important ingredient in the solution, is enhanced use of intelligence, better integration of intelligence and better use of some of the screening and scanning tools that we built up over the last several years that make it more difficult although not impossible, for bad people and that things to get into the country. let me just give you an illustration of this point. in 2001, if someone wanted to come into the country by flying into an airport, if they had a passport and if they had a visa that was pretty much all they needed to get into the country in the last line of defense was the border patrol, i am sorry, the border inspector the came face-to-face with the person seeking it mission looked at the papers, had a conversation or an interview and then made a judgment on the spot with the to

it met the person or not. much has changed in the last 89 years. first of all the process of getting people begins much earlier. not only do we have pieces in place that but we have the ability to correct commercial information from the airlines that tells us a surprising amount about the connections that travelers have with the people who fund them, the people who communicate with them and perhaps even common addresses. ..

years ago that we only intermittently took fingerprints from my and americans coming to the united states. now every nine american who comes into the united states gives his or her fingerprints of the border or if they get a visa degette his or her fingerprints when they get the fee set to be the value of this is not only that it better enables us to determine whether someone is using a false identity because we compare their fingerprints over a period what time with their travel documents, but we are now able to compare fingerprints with a latent fingerprints. that's to say the fingerprint

residue we are able to pick up unsafe hazards or battlefields all over the world. that means if someone has been in a safe house or has built a bomb and has put a finger print some place they have some risk that we will have lifted that fingerprint and reviewed to a database and we will be able to identify them even though we don't know their name. again, none of these is foolproof or perfect but the addition of each of these layers of security has dramatically decreased the threat from where it was. what has been the terrorist response? again it is to react and that is why you see increasing emphasis on the part of al qaeda and similar groups to recruit westerners, people without a prior record, people who are citizens of the country to which they are going to return. people who as far as the terrorists are able to determine haven't left traces around the world and that's why we

increasingly need to not only update our capabilities but to do a better job of sharing with our allies overseas to make sure that our information collection and analysis capability keeps track with the effort of the adversary to continue to avoid the various traps we have laid. in the area of protection we've also done a lot more than we've used to do. we have air marshal's now to a greater degree than we had before although not as many as we need. one area where i think we have simply not been as successful as we should be and not have the urgency we need is in the area of cybersecurity. only recently there was dramatized, series of intrusions into american companies that captured the attention of the public and the media but i want to tell you that the issue of interest in and to our secure systems and commercial systems has been a problem for years. we've talked about it for years.

in 2007 and 2008, we launched a comprehensive national cybersecurity initiative which was designed for the first time to bring together all the capabilities the american government and private sector to build a comprehensive way to deal with these cyber threats. president obama recognized the importance of this in one of his early speeches but it seems this effort has been somewhat becalmed and this is an area of we're failing to keep pace with the threat will result or could result in the virtual world to the kind of catastrophic loss we saw in the physical world on september 11th. finally i would like to know about the area of response which is the author of the three legs we typically talk about when we deal with the issue of homeland security. we talk about response because we recognize we can't prevent everything and we can't reduce or a eliminate every

vulnerability and if we fail to prevent an attack and if an attack in fact is successfully carried out the consequences that are felt will be a direct result of the amount of preparation we've put into response and mitigation. simply put if we can sustain an attack because we've mitigated the damage because we are reserving it to my basically blunted the attack and while it isn't as good as of right it is the best we can do. it was a good sample of this is the area of bio threats. we see a lot of discussion of biological threats that occur in nature whether it is avian flu or the h1n1 pandemic we saw began last year. but those that work in the area know that as troubling if not more troubling is the possibility of a biological attack. the wmd commission which is jointly chaired by senator gramm and talent recently issued a report in which they were quite

critical of the status of our preparation for dealing with a biological attack in this country. and if you look at this issue closely what you will see is that prevention is only one part of the strategy of dealing with a biological attack. unfortunately, the ingredients of a biowebinar in nature. the difference between the ability to launch an attack and an ability to launch an attack lies in the know-how of the person he was trying to carry out the attack. if you have the know-how and the capability you can get the ingredients relatively quickly. not only that, if you get the ingredients it is virtually impossible to prevent you from bringing into the country. you can fabricate the weapon negative version of a biological attack mechanism and small vial which we will be year unlikely to catch of the border. in fact you could affect somebody and send an infectious

person across the border so how we deal with biological weapons requires not only better detection the ability to respond with countermeasures effectively and quickly. if you look for an example of the possibility of an anthrax attack which this country did suffered in 2001 be it in a very small scale but he will recognize is we do have countermeasures that are effective against anthrax but they are only effective if you get them to people and a very short period of time. now we stockpiled the countermeasures, we know how to make them work so what is the obstacle to would be in my view a very important step in mitigation and response namely the ability to get people remedy or countermeasure quickly. the problem is we have ended build a delivery system that can move the countermeasures from the stock pile into the hands of people as quickly as possible.

this is one of those examples of a problem which actually has a very easy solution if we have the willingness to accept the solution. the solution is this. you simply take the counter measures we currently have and to distribute them in advance. you put them in schools, and fire hoses, and other public buildings. you may actually distribute them in advance to first responders, to people who are critical to the response eckert to public health officials and tell them to hold on to the countermeasures and if and when the time comes they have to be used you will communicate and people will use the countermeasures. that would in a fairly short order fashion eliminate the distribution problem for a large majority of the people that we worry about. the question is why haven't we done it? the answer is not because we haven't tried. we ran a pilot program a couple of years ago actually three years ago in the u.s. government

to see whether this kind of advanced distribution but work, whether people would respect the need to keep the countermeasures without using for some other purpose whether they would -- not whether they would lose the countermeasures or somehow misplaced them, and what we discovered after we in the pilot and checked back in about a year is much better than 90% of the people knew where the countermeasure was, had and misused in some fashion, hadn't lost it and in fact followed the instructions they were given. this ought to have been desperate for beginning a more widespread process of advanced distribution. unfortunately, some people in the medical community disagree with advanced distribution. they have a medical model which operates in ordinary times that says that you should and that'sñiñr obviously a veryd rule in ordinary cases. it is not practical, however in

betweenñi the time that weñi le of an anthrax attackçóñr and hao deal the county measures to tell everybody to go and seeñi a doctor.ñiñiñi it is not a goodçó time to ask ourselves whetherñi thatñi work this is something we urgedñrñi pretty much literally through last day of the bush administration andñiçóçóçó i ho administration is taking a very hard look at because the time thatçó it will take beforeçóçó r learns ts$weapon niesñiçó anthrr a similar type ofñ$r biological think and when that happens,ñi i believe it will happen at some point,ñi if we he it will be a very unhappy day for theñiñi peopleçó who face w will be a catastrophic incidenti let me close by saying th

havdó no doubt that after theñr events of theñi last couple of months chrks have spiked interest in terrorism, that other issues will come on the public radar and the media will move on to different topics and in two or three or four months if we can lucky enough not to have another effort to attack us, another effort to attack us, the issue of homeland security and terrorism will once again begin to recede from the public view. but in many ways it is that phenomenon, the waxing and waning of public interest that is the greatest challenge we face and homeland security. the kinds of responses and defenses we need requires sustained investment over a long period of time. it's not a matter of a flash in the pan response. it's a matter of building capability, training countermeasures and systems that take months if not years to put

in place. if we keep our eye on the need to have that sustained investment, i believe we can keep ahead of the enemy. but if our ability to sustain the investment depends upon whether somebody happens to be in news headline or not, and if our strategy is reactive, rather than anticipatory, then i fear there will come a point we will have an attack and our response will not be adequate. we have lived through that. it was called september 11th. nobody who was involved on that day in the government and had responsibility for dealing with terrorism will ever forget that feeling of frustration that occurred when the attack came and we didn't have the appropriate response in place, and i think everybody that lived through that understands the importance of not letting that happen again. thank you. [applause]

>> while we are waiting for the minister the circuitry has agreed to take questions and offer it answers. there is amana back with a microphone and i'm going to call people out and then have to bring the microphone to you. it's important because otherwise people can't hear you on the recording. we have a number of questions appear. let me start with the gen >> thanks very much. i work for you -- had the pleasure of working for you at the office of intelligence for a while and subsequently a place in the state department called the counterterrorism communicationsxdñi center, whic brings mo toçó a point youñi m earlier in your speech about the recruitment of american citizens like the fort hood attack and so forth. the key to that appears to be the willingness of muslims to accept the al qaeda narrative,

which is that the united states -- killing muslims as part of that. it was designed for -- respond to that narrative and rebut it. i'm not sure i'm seeing that kind of activity going on right now although i'm sure there is some within the intelligence community and the c.i.a. in particular. i would be interested in your comment on that particular issue. particular. what i'm interested in your comment on that particular issue. >> it is a very important issue. i know people of the state park and have their heart in the right place. here's what my concern is. i think the most effective counter narrative comes from within the communities, within which terrorists tried to recruit. when people in the community pushback that actually has resonance and there are some

positive developments. for example, a couple of years ago, as our hearing held a town hall meeting on the internet and in the town hall meeting, he got quite a bit of negative reaction muslims and among others those who had seen the bombing in algeria of the school bus and asked him how it could be the killing innocent muslim school children advanced the cause of islam. likewise there had been some scholars who have supported the ideology of al qaeda have renounced it and ironically often renounced it because as one said when we see the reaction and the devastation caused in the muslim land there's a consequence of what we did baby it was a failed strategy. so within the community is where you want to build that capability. unfortunately, when the government doesn't it tends to have an inherently, create inherent skepticism in the part

of the target audience. so to me i think the right answer is to use our financial ability and assistance to seed the capability to the message out but we also have to engage with the community and say look, it is your sons and daughters getting pulled into this. it's up to you to make sure you give that counter meredith and counter the education. spec there's a gentleman over here in the corner. raise your hand again, sir, what you? >> i'm from the israel center. what i wanted to know from your experience about the dilemma between civil liberties and the

need for security for the homeland because it's something i think you didn't address in your speech and in israel it is a very big issue if we speak about the biometric database we start to implement and israel. how do you address when was the limit between the need for security and the need for civil liberties? >> welcome you know, this is an issue that is raised pretty frequently, and there's no question there are times you have to make some judgments about the trade-off between security and civil liberties. but i have to say a lot of times what is presented as a false choice. in other words what is viewed as a trade-off actually isn't much of a trade-off and i will use the example biometrics or fingerprints. i think the use of biometrics is a way to identify people or the use of secure identification, which some people view as an infringement on civil liberties.

i actually think aníbal civil liberties. anything that allows me to be confident that nobody can pretend to use my identity or masquerade as me. not only increases my security that actually increases my privacy because when people steal my identity they not only create a security risk but they actually invade my personal privacy and civil liberties. that's not to say that everything we do can be resolved by saying that it ferber's of the goal of security and civil liberties but in many cases civil liberties objections on closer inspection i think are not well-founded. now there are clearly times that we are required to put up with inconvenience and trouble in order to do with security issues for example nobody loves going through the magnetometer at the airport and taking your shoes off and having to a right to 30 minutes earlier than you would if you could just stroll into

the terminal and walk onto the plane. i think we all recognize we would rather get to our destination safely and make that minor sacrifice of 30 minutes. there's also clearly a point which you wouldn't sacrifice your civil liberties for security. but that is an issue that ought to be debated and of the public decides for the simple but there is some civil liberties they are not prepared to sacrifice that is well and good provided that we accept the consequences of that and often the debate doesn't involve that but involves people simply trying to assume a way or argue away the security benefit of a particular measure as a way of avoiding the tough choice. so i guess my bottom line is this: in many places what is perceived as a civil liberties threat actually on closer inspection i think it arguably enhances privacy and individual freedom. in those cases where it does we ought to have a serious

discussion about how important it is to protect ourselves in this particular respect. and if the public decides they don't want the protection, it's not worth it, that is well and good and we accept the consequences. what we can't do is assume away the problem or say it is never going to happen or try to pretend the security measure doesn't work because it's not perfect and it's those false arguments i think often plowed our ability to resolve these kind of the de lummis. >> there's a gentleman here. yes. keep your hand up so he can find you. >> my name is charlie, the council with the senate homeland security and michael chertoff, i want to thank you for your years of service in the capacities with our government. i want to first make an offer and then ask a question. one of the things we as a committee are looking at is how to deny access to firearms and explosives to terrorist suspects

and how the watch lists might be married up to the attempted purchases just to snuff out plots like some of the ones you've talked about and may be offline if you have time i would like to talk to about what your views are on that and whether we could work together on that. my question goes to your experience as a prosecutor and a judge and then as a secretary of homeland security or are your views about that the data that is going on now about how to detained and interrogated and prosecute terrorist suspects. >> well you know, i think what i'm going to say now was consistent with what i said when i was at the department of justice from to doesn't want 2003 and at the department of homeland security from 2005 to 2008. i believe first of all we are at war. i believe that means we use all of the tools in the toolbox. we don't use only military tools, we don't use only law enforcement tools. some tools are better served the because you did in certain

circumstances and others other circumstances. if you look at what we did during the years i was in the the bush administration we did use all the tools. sometimes we prosecuted people in court. sometimes we put people in the military system. sometimes we moved them from one to the other. it depended upon a lot of circumstances how serious the threat was, how efficacious one system was or another for various purposes. whether the person was a u.s. citizen or not tends to make a legal difference, and of course what the state of the law was because the law [chanting] free period of time and that required us to make adjustments. generally speaking, my view is you should never take any of these possibilities of the table. what needs to happen is the people making the decision to look carefully at the tools and assess what is the right set of tools and the right circumstance and then use them. i don't have a cookie cutter one-size-fits-all answer for

each particular possibility. >> we understand that the minister has landed so she hopefully will join soon. there's a gentleman here in the road if you can keep your hand, sir. come over to the front and then over to the site. >> i have around 37 students hear from israel as you heard from one and we've been debating with a variety of different people about the issue of the sources of the terrorist inspiration. the question has arisen to what extent will a settlement in israel and palestinians affect the central message. i'm allin lowden changes his message but his recent concern about global warming doesn't seem to designate quite as much as perhaps the anti-israeli message would be. in terms of the importance of a cylinder of that issue -- settlement of that issue how do

you drink it? is it feasible? partial solution say exempting the gazzo strip diplomatically hell do you view this issue as a big issue in fighting terrorism with the terms of this message? sprick the settlement of the middle east and passed between israel and palestinians would be a good thing and it would certainly remove some of the grievance for some people. but i think it is a mistake to believe there is any solution the screen to take this issue off the table, and again i return to the audiology in question. the source of grievances that have been cited by people counting on terrorist attacks is very long. we've had a number of cases where people put together plots to carry out bombings in denmark spurred by the fact that cartoonists in denmark had cartoons you to be insulting. so, you are never going to find enough things to give away to

believe seagate the grievance is that some people are going to have read that doesn't mean that it's not worth having a settlement. it will obviously eliminate a certain number of terrorist attacks in israel as well as a certain amount and grievance on the world. it would be a good thing for ãe by some palestinians in hezbollah or hamas who neverthe less believe it is not enough. we have had a settlement in kazmir for a period of time for decades now and other groups continue to carry out terrorist attacks in india. unfortunately there is no magic bullet. there is always value in reducing tensions and therefore as long as you're realistic about what the expectation is on the other side of that process it is certainly worth pursuing. >> i have a question from the gentleman in the front row.

>> hi. i'm mike with fox news. two questions. one is jumping off an earlier question. what is your assessment of the debate itself? the current handling of the case? >> well, i mean, i think it is worth discussing and debating issues like, is it a good thing to close guantanamo bay? what are you going to with the people there? are you going to send them to the u.s.? what is that going to do with our ability to hold them? ssion degenerates into a i told you this, no, you didn't tell me that and that becomes a little bit more heat than light. but i think underlining this is a fundamental set of issues that hasn't been fully discussed.

what is the vision about what do you do with guantanamo? why should it be shut? what would you do with the people there if they were not able to be returned to their home country? how much risk are you prepared in taking them back to their home country? if you bring them to the u.s., where do you put them? what does that mean for the local community? we just saw an instance where initially there was a decision to send khalid sheikh mohammed to new york to be tried and all of a sudden the authorities said we were not consulted. this is going to cost hundreds of millions of dollars. so what this tells me is we need to have a serious discussion and debate before the week before some of the decisions are made and the second thing he tells me is that congress needs to do some work laying out the legal framework for how you deal with terrorism and the 21st century. some of that work has been done in some of the legislation that was passed. but for the simple we still don't have a set of procedures

for dealing with detainees who want to challenge their detention. the supreme court held a couple of years ago they are entitled to do it but the supreme court didn't set any rules up. recently judge janis of the d.c. circuit wrote a very powerful opinion saying it is time for the congress to tell us what role is as opposed to making the district judges fabricate rules or fashion the rules on a case by case basis. so to me there is a blog opportunity but obligation on the part of congress to put together a set of legal rules and legal framework that is going to sustain for the next ten, 20, 30 years. >> a follow-up to the question raised about the 9/11 trial for other quote, should stay open, questions like that. what are your thoughts on that? >> will the bush at ministration looked at the possibility of closing guantanamo. it is very hard life. there are a significant number

of people there who are dangerous and still regard themselves as at war with the united states in the west. some of them perhaps can be sent to home countries you can be confident will make sure the are incapacitated. sometimes aware for the raise legal objections to going back and you can't send them back. our position was and i believe it to be true you don't want to bring them into the united states. once to bring them to the united states soil they will have a series of flights were set of rights under the immigration laws that could put you in a very difficult position of being ordered to release somebody had not be able to deport them and i think the last thing we want to do is in port terrorism into the u.s.. again there is a solution for this. congress could step up to the plate and say here are the rules about what we are going to do with these detainees and we get a fair carefully thought out plan and strategy for how to

deal with it. i haven't seen that yet and so under the circumstances i think it is public good news the administration has put the brakes on closing guantanamo. but in the end we are still going to have to have this debate and we haven't had a debt. >> why do they need to step to the plate? why you think that hasn't happened yet? >> i remember attorney general mukasey sent a proposal to congress in 2008 to start to deal with some of these issues and it went nowhere. it is the hard issue to talk about because there's a lot of strong feelings on different sides of the debate but i will say this in the early part of the decade there was a lot -- commerce did step past the patriot act which was a good thing and maybe some of the appetite for getting involved in controversy diminished. that is to meet why we have elected officials. it's not to take easy decisions. it is to look at heart problems.

there are members of congress who are active in pushing of the congress to take this issue up. i know senter lindsey graham tried to get this on the agenda. senator mccain and people on the other sides of the aisle. but i haven't seen enough willpower yet and i am not enough of a student of congress to explain exactly why that is what i can tell you the clock is ticking and not making a decision in this case is going to be making a decision in the problem of a very good one -- probably not a very good one. >> a gentleman here in the front row. >> good afternoon, psychiatry chertoff. my name is todd wiggins operating under this eminem revival media which is a blog id one youtube. i would like to thank for the opportunity and i heard you were here and try to make to the last minute. i have first question followed by complementary sidebar. the question has to do with

consolidation of the department of homeland security headquarters in southeast d.c. of the west campus of st. elizabeth's. i have a colleague who is vehemently against that consolidation because he believes is not necessary because of the virtual technology that we now have that can spread resources around a region and perhaps cover from the security aspect of the organization more completely. he also does not believe that consolidating is good for the community although i disagree. but he doesn't believe also from the security standpoint that it's a good idea to have. all of your eggs in one basket so to speak. i wanted to ask you to speak to that and also before you answer i would like to compliment you in an abstract way. i attended an inauguration party and in january georgetown for dr. gallo and when you walked in and was equivalent to a los angeles opening or hollywood party to see with your friends

and so on so i felt like i was arrived being the same party that were there. thank you for a thrilling me in some ways. >> i'm glad to oblige. let me take the second issue first. we don't put all of our eggs in one basket. there will be a redundancy element built into the process of pulling headquarters to get there. there is redundancy in terms of our servers and cyber capabilities without getting into the classified matters there are redundancies in terms of key personnel and that is part of our continuity operations plan at the dhs. i do think there is enormous value in bringing the headquarters together. i can tell you the community by and large is very supportive of this leadership for the district. and frankly we looked at the possibility of building headquarters out in virginia or maryland and district really wanted to have that because they felt it could be the cornerstone of economic revival in the area

including some additional transportation and additional enhancement of the subway as well as the economic activity of the merchants in the surrounding area. i think in terms of security it has to be a very good location and as to the point that out whether you could have a virtual headquarters, i've been involved in a number of large institutions over the last ten or 15 years and i've always heard people talk about you don't need to be one place. everybody can communicate by e-mail or telephone and therefore we can be widely distributed. and it is true that to some extent e-mail and telephone to allow for a certain amount of virtual come yaki but i have to tell you with all of my experience i've never seen a substitute for face-to-face interaction. when you are in the room with people it is when you are on the telephone or video conference and human beings being what they

are and maybe this is going to change in 50 years and we will all have avatars and everything will take place in the second life the world in which we currently live, i found a real impediment not to have the leadership in one place to build a set of come realty and allow the kind of informal interaction that is part of building up a spirit of community in any organization. so, i am a very strong believer in the need to bring the headquartered components of the dhs into one place. i think it will be good for dhs and will build a unity of spirit and of eckert and i think it is going to build the local community quite a bit. >> all right. now i have a question in the corner and one next to the camera.

>> richard white, hudson institute. a question to you about the way the u.s. government is restructuring how would deals with the cybersecurity threats. as you know the administration did an extensive review and had to deal with several competing models about how you would distribute the roles and the missions for cyber defense especially on the civilian side in the united states. i wasn't sure how you assess the results and a brother you had any thoughts about which agencies should be most in trouble. >> i'm not sure we know exactly what the results are. i can tell you where we were as of 2008 when we put together the national labor secure strategy. it recognized there were different functions in cybersecurity. some are appropriate to the defense and intelligence community in terms of the domestic government what we call .gov. dhs had the authority and we

thought should build the capability to manage that process for the .gov domain. and also to interface with the private sector. the big challenge in the answer to your question is how to deal with said as a drain the private sector and i will offer a private opinion. i don't believe the u.s. government ought to sit on the internet and from the private-sector security except in a limited number of cases where certain private entities seek to have that kind of protection and because the government contractors are operating than in the military domain it is appropriate for the government to play that role. i do think we need to find a way i hate to use the word interface but happens to sit here, interface with a private sectors of the benefit of the government capabilities can be shared with private sector but without having the government actually operating in the private sector's domain directly. and i think that raises to use

-- make reference to the earlier discussion a civil liberties versus security trade-off which need to be probably not the best one. one model that i've suggested it's not the only model is to create trusted third parties, entities in the private sector that have proper classification levels and security clearances that can be the interchange between the government and the private sector in terms of come the necessary information and skills but not necessarily giving the government direct control over the levers of the private-sector. the architecture of how this is going to be developed is very complicated and could give rise to a lot of controversy. so again, i think it's something we would do well to debate and get out in the open. if there are people who believe the government should directly

sit on the internet we ought to hear what that case is and maybe it's persuasive. what i don't think is an option is to ignore its. it is a hard problem. one of the things i say in the book, and unfortunately it remains true when of the ways we deal with our problems in the government is to avoid them. it is the musical chairs pherae of government which is i know the music is going to stop some day and i hope i'm out of the room when a bus stops why don't fall down because i don't have a chair. that is a good model for a child's game and bad model for government. the hardest problems are the ones built be tackled. i think we took a good running start tackling cybersecurity in 2007 and 2008. i think the administration currently recognizes the problem and i know a lot of good work is being done. i do think though that we have got an increased tempo dealing with this problem because time is not on our side.

>> we have a gentleman here by the >> my question, is in regard to cybersecurity. can the u.s. government improve to manpowers to deal with it. with cybersecurity, it seems that the -- has become a reactionry agency. now when cybersecurity becomes a bigger issue then you need more people to start doing job. going forward, what do you think is a good idea with the h.s.b. head? it is the same thing with the f.b.i. or justice department. you go forward looking for people. what are they? good things? good pan powers? good techniques. >> you're right. there is a tendency in the government to be reactive. i think my original point when i was speaking was all too often

strategy driven by what niece the headline last week. in the area of cybersecurity i will say in 2007-2008, we began the process of really taking a hard look at where we were and where we ought to go. we had done god things before twen but we sensed there was a lot more that could be done. i used to get asked the question who's in charge. it is a complicated question to answer because at one level in the federal government the president is in charge, although i think presidents are often surprised to find that there are real limits on their power, not only within the federal branch but in dealings with state and local government in the private sector. in a civilian domain where you deal with a lot of divided authority among different agencies what generally works is a degree of coordination with

someone standing as the coordinator. ator necessarily being the commander of all of the assets and that is because the legal framework tends to divide power and all kind of good reasons to do that as opposed to centralizing. that being said, i think the conclusion we've reached a in 2008 was that it was worth having a court later in the civilian side. dhs had authority and relationship with private sector to be the appropriate place to put that. i think the intelligence community and military were quite happy to have the dhs be the interface with a private sector but at the same time there was a period commission that we needed to bring together all of the elements of the community. intelligence, military and dhs and the department of justice so they could coordinate their activities together and that we

would do that through a cybersecurity center which what kind of be the focal point for this kind of effort. it's an architecture that is designed to give you a unity of effort will you do not have unity of command. i still do not fear is the right model. some people suggest the white house ought to be the operator of all of this all the writing of the white house is appropriate as a policy-making location. experience has shown that when the white house, and this is not specific to any particular administration. when the white house becomes an operator that's usually a rescue for some serious kind of problem and you don't want the white house being in operator particularly in the area of cyber where you're dealing with issues very delicate from the political standpoint that is my suggestion we stick with basic architecture and put together in 2007 and in 2008. it seems to me from what i've

observed of the current administration that they are more or less in the same place. they have a sidebar coordinator in the white house but it seems to me this is somebody who is going to be a policy-making coordinator and not an actual operator which i think is probably the right decision. >> the gentleman of the we in the back with his hand up. >> [inaudible] mr. chertoff, it's good we had this opportunity to talk to you more than just a one-way lecture because another speaker hasn't come in so i congratulate hudson and the moderator for his not taking a public and ask new questions. you've mentioned that one of your first top priorities of the solution is abroad in a foreign country which means more war

which in my opinion i've been in this country since 1970 and this country has always been somewhere or the other in terms of military operations and my opinion is a lot of that does cause a source of terrorism or has a germination of feelings that lead to the confines of the terrorist. given that and you're putting the high priority that the u.s. would continue to be in some kind of a war for ever and not go into isolation my personal feeling after watching this country from 1970 to today it is better if the united states went into isolation for some decades maybe 20, 30 years. >> welcome to know here is the lesson of 9/11. it was the time of may 50, 60, 70 years ago people argued that the two oceans protect the united states and we could isolate ourselves.

in 9/11 of the reasons it was a pivotal event in american history is the first time of american history maybe since the war 1812 fi enemy came on to our shores and found us and the was it very vivid lesson that isolationism is not an option. you can't retreat far enough to isolate yourself. let's look at the historical fact. 9/11 occurred before we were in afghanistan, before we were in iraq. there wasn't guantanamo. all of the things which are sometimes cited as being spurs to recruitment or inflaming people against us, those things didn't exist prior to 9/11 with the embassy bombings in east africa. they didn't exist prior to the u.s. siskel. in the 1990's, we were basically minding our own business. you know, and bin laden's original grievance is we went to saudi arabia to help defend

kuwait against invasion by saddam hussein. for those who believe that we somehow cause these things we would have to pull out of the entire world and even then if you look at the plot against the cartoonists in denmark we have to start to sense your work television, since your our books and newspapers. we will never be able to appease enough to satisfy the people who want to strike us. so, i have to say the experience we have seen in either having ourselves or allies strike against safe havens has been that has produced very positive results, and frankly again if i go back to even some of the ideologues who have now turned against al qaeda even though the original the support of the ideology, one of the things they cite as a cause for their turning against al qaeda has

been a strong reaction that came to afghanistan and the fact that the community al qaeda is operating actually suffered and they launched an attack in against the u.s.. so i'm a believer soft power is important. i also believe hard power is important as well. and you cannot expect the commander with respect of the world if you are not prepared to defend yourself. against others to come looking for trouble. >> i know i compliment for being quiet but let me ask one question of the chair if i might. mr. secretary, when you were in office one of the big issues that came up was immigration reform. your president was in favor of it into a strong congressional leadership that was in favor of it and it was difficult to get done. now the current ad ministration with its strong democratic leadership said the one to take this on and your successor is charged with trying to carry this forward. do you have any advice on tackling immigration reform, just sort of your perspective on what might be done to move this

forward and why it is important or perhaps why we shouldn't talk with at this time? >> this is a question of the legislative process than it is homeland security. i would say the lesson i learned from our experience in 2007 his first of all there is a comprehensive bill that i think would satisfy most people on both sides of the oil but not everybody and certainly significant minorities on either side object for diametrically different reasons. the one lesson i take away from our experience or a couple of lessons which i think are reinforced by what i've seen the last year parties, first of all i think it was very important to push with enforcement notwithstanding the failure of the comprehensive approach because i think what enforcement was designed to do and has done to a significant extent is to demonstrate to the american

people we come to you and ask you to allow us to find a way to accommodate some of the people who are here illegally or some of the temporary worker program. we better convince you we are prepared to enforce the law we the way it is now. in other words we are not going to simply come up with some kind of a proposal and then failed to enforce the parts that are hard and just go with parts that are easy. so i think the down payment on credibility which came with enforcement is hugely important in setting the table for this. that's one of the reasons why i think it was remarkably important to finish building that cents. we said we wanted to build 650 miles of the fence along the southern border. i believe there are now 643 miles that have been built. and it was very hard to get that done. there was a lot of the legal objection, a lot of complaining from the local communities on a

kind of not in my backyard pherae and there was frankly a lot of ideological position. but the fact is congress voted for it, congress funded, and by getting it done we demonstrated to the american public that when we commit to something we can live for up to the command and. this the first lesson. you've got to show you are prepared to live up to your commitments. the second lesson is on the other side of the spectrum on the reform side we did think it was important to deal with a problem comprehensively but it strikes me we may be better off in the future dealing with in stages in other words one slice of reform first. see what goes and then go to the next slice of reform. one of the things i think even the current health care debate demonstrates is that although in theory a big problem needs a comprehensive solution is very hard to persuade people who are naturally and perhaps appropriately skeptical about

government to do everything all at once. sometimes a big meal is best digested byte by byte and so i might suggest taking a look at the proposal and beginning for example with a couple of slices, temporary worker program, some kind of a temporary visa program for people who are here illegally but whose mother was committed a violation. but instead of immediate pathway to citizenship, give them a three or four year temporary visa, have a temporary worker program and see what works and then it to go back to the american public and say this has worked three or four years now that's extended or modified perhaps you get a better audience. >> excellent. there is a young lady here. >> my name is nina, second used in israel. i also serve in reserves for the medical corps but the home front command. and you mentioned before handing

out medicine for civilians, for citizens. we actually do something most of the citizens get a gas mask and syringe that has adrenaline but you can't distribute any medicine to any disease out there and my question to do is of the measurements we are taking in the airport's some of my professors claim and i agree it only escalates the terror because the moment you are achieving -- when you stop that they find another way. >> two questions. the first is the happens to be a relatively small number of countermeasures that address most of the things we worry about a biological threat. saddam door right you don't have

an infinite number of medicines, but we could eliminate 80 to 90% of the problem pretty easily with a small number of countermeasures which would be very easy to distribute and for those who are uncomfortable putting it in the hands of each family at a minimum you could put it in firehouses and schools and local town halls. this is an issue which i have to say it astounds me we haven't been able to do this. there's a lot of interest in the last administration in doing it. the medical and public health, and he was strongly opposed. it's one of the great lessons when you learn that sometimes presidents can't do what they want to do because there's institutional brakes on it. but in this case it is so important to do and the argument against it is so well-founded -- bill founded in my view. we have the countermeasures enough to invent them, the