very well. resulted maybe accepted, abyei might be the problem, and so on. but the problems in the north are going to eruptfaster than in the south, and that might jeopardize the situation in south sudan. that's what i want to say. thank you. and we have a discussion more. [applause] [applause] >> thanks very much, for your comprehensive analysis of the picture, the very confused picture right now. i'm going to open the floor up to questions in a moment. perhaps first of all, i could ask you tothink about -- let's look at the very short-term picture and the actual referendum process itself and perhaps the role of the international community in that process. we're told it's going to take -- obviously if everything takes ple over the whole of this

week, the final outcome won't be known for several weeks after that. we might have some results trickling out, i suppose, in the mean time, all of which ceates conditions for uncertainty and perhaps instability. and perhaps the worse-case scenario, the outcome itself might be contested. face with the potential pitch, what's the role for the international community, do you think? and how -- particularly how should it be coordinating it's response if the outcome is somewhat uncertain or is challend by perhaps the north or one of the other parties? who should be ting the lead in this process? while you think about that, i'll maybe take a couple of questions from the floor. please identify yourself, and microphones should be on the way around. up the front here please. >> thank you. that was a great talk. i'm doug brooks with the

international stability operation association, and to follow up on that question. specifically with the united nations, what should they be doing at this conture ight now? >> we'll take one more. gentleman in the middle there. >> thank you. i listened to priorites about the recent involvement from the ncp side. we all know that the cp is reluctant to do any arraignments to the referendum, and even accepting the referendum results. the recent that the ncp started to publicly say and accept the results and be recognized, why d you think the southern shift?

the second question, can you elaborate more about the african union implementation between doing the negotiation between north and south? tha you. >> okay. he wants to tackle some or all of those questions? >> don't ask me challenges questions. [laughter] >> i want just to say hello to my friend there. it's good to hear you. i think that all of the international communities is extremelyimportant for the results. the observers of the european union, the center, a lot of observers, plus the u.n. has a special place separate because

they are working on the logistics and te technical support. so it cannot be the body that -- or to make a statement n their process. because it is part of it. that's why there is the part led by president in kabul, former president, what is important for the international community and especially the role of the u.n. plus other observers and monitors to keep on the day day-to-daybasis to the sudanese, on the international community, how is it going? i think this is very important. not to leave it until the end where then the results are going to be contested. in terms of contestation, i don't think so. if the ncp wanted to contest it, they could have derailed e

whole process. some of the grounds second to the constitutional court, it could have deraed or they could have. i think thanks to the ncp president, and president bashir, he didn't want to stop that. he said that in a speech. he wants the referendum to go. they areoing to access the results. of course, the petitions are there. still it can appear in the coming days. it might surprise us. but i doubt and i hope not. but the international community, i think, is very important. especially the part coming together on the day-to-day basis. how is itgoing? if there's anything to mention it so then the results is not contested. :

>> so how to get that within the parties ofe organization itself. the second thing is address the issues of the economy, economic situation. to build up reserves and also to negotiate the referenum to negotiate other things as we

know. the issues of sudn, relation with the u.s. and all the issues in between, the terrorists and the other functions and so on. and also the issue of the icc. so to buy time, and also issues, but it doesn't go anywhere. some counts have been provided that was very, very supportive. i don't think it speaks well. i don't think so. any thinking of another afghan, iraq or sudan doesn't work. so i do't think, but that was one of the reasons that they start to think that, okay, these issues is very difficult to delay, delay, to delay because of the region is going to go against, even they were going to lose leg of african -- lose the

league of african nations. i think more they decided, more than pressures. they think more intelligent regions that may be beside let it go, let it happen and then we deal with the consequences. >> thank you. comfort, is there anything you would like to say? in that case, we have another round of questions. anyone up front here? microphone is on its way. >> i am with csis. i must confess that i think there is pretty gross ignorance in this town about sudanese politics. and little understanding of problems of khartoum.

i was interested in what you said, and i would like to issue a little further about what is probably the fundamental proems from the perspective of resident bush year. and that is actually the divisions within the ncp. there is a tendency to see the ncp as a uniform block, and i think thas fundamentally wrong. there are serious fault lines. and that islam, as an ideology, is very attractive to many northern sudanese, not only in the nile valley but in the periphery as well in the 1990s. and that the islamists agenda still has many supporters who may well be mobilized by what they see is perhaps a

compromise, a sellout, over the independence of southern sudan. and 200 years of sudanese history. so my question is, what do you see as the strains and the pressures from the islamists within the nc, and, indeed, without the ncp, those who followeto opposition? how potent a challenge are they? obviously par four, -- the door for, the blue nile are issues. but in the khartoum i would be much more worried about these guys. and what they are likely to do. and i think the international community does not pay attention to this problem that the regime faces. so i would be interested today in what you think about that. >> thank you. second question right at the

back. >> i am jeremy. a question about the post-referendum reconstruction of the south. there's been a lot of criticism about world bank, the u.n. and ngo community in terms of some of the department activities that have occurred in the south and that the limited success in going beyond just humanitarian service provision to get to actual development and reconstruction. and some recent criticism, particularly at the world bank. with the government of south sudan, as you pointed out, still spending upwards of 90% of its revenues on security sector issues, not able to invest very much in social service provision, what do you see as the prospects were actually getting beyond a paradigm assorted ngo provided services and getting to the point where the government of south sudan has both adequate revenue and

adequate capacity, and will to start providing the services, funding the services? and what do you see as a donor structure aren't international funding structure that would be more effective than we've seen so far in getting both the aid community and the government of south sudan to that point? >> okay, and let's take one more question. the gentleman at the front here. >> yes, marcus, u.s. department of state. i wanted to follow-up on part part of the question of the second gentlemen. i was a little bit surpsed, by help pessimistic you were by the framework that the au had brokered. when moon was back here and spoke to a group, he was far more upbeat in terms of saying he ft that although no

framework agreement had been signed, that there have been large agreement on major issues, including areas such as wall sharing. he cited citizenship and abyei as being the two outstanding areas, but he was upbeat. for example, on demarcation. he uses the 80% figure in terms of agreement. thquestion really is how you view the au with all of this, particularly on north-south, specifically your thoughts on the rle who serve has emerged as both the south and for door for in major role -- and darfur for a major role. at how do you think in a general will continue after the referendum? thank you. >> and let's also, we have representative from the government of sudan, deputy

chief of mission. what you like to say something as well? >> thank you. thank you for -- sometimes your views might be having, you're onerous is on some views that might give -- >> is the microphone on? >> i would like for us to in this critical time of sudan in history, there is both points which i think it might be raised on this. that political side of this historical moment, there is a friend which is recognize an outcome is expected to e recognized by the whole parties.

the president said this, and vice president commented. at this moment also people should view optimistic about, before they were very worried about this critical moment, how it goes. positive direction of recognition of this time, the piece of evidence on this time should be also recognized. there's also some worries, rumors and disinformation about this critical moment also here and there. but the challenge, this critical time, the challenge of the outcome which is coming in the coming weeks, and the worries

about this new state might be in confrontation with the north. i think the visit of the president said it clear, the outcome we be recognized. the challenge of issues regarding the citizenship, the security arrangements between the two in the area, abyei, and many other legal issues which you've mentioned here. the two sides now are negotiating. thabo mbeki is working with group, and the two sides now both are working on discussing these issues. vice president from center, they are negotiating.

they are tabling these issues one by one. and one of the things mentioned, optimistic about many issues that we so go forward. but what you hear of it, now people are optimistic that some of the overcoming the coming times. is this recognized, also did another satisfaction would be if the people of the citizenship also agreed upon, the constitutional vacuum which you mentioned, that there is now legislative i thesouth and the north. election come with parliament, regional parliament. and this issues also be discussed. of course, the other political,

political parties as president said, that brought government, discussion with political. but also regional and central parliament that would be in power. but this post-referendum issues is now under negotiations. locally between cut inside the country with the north and the south. these comments are waiting in abyei and now committee for us to get up to come with, there are many other challenges that you mentioned here, people know they are working. there's a delay also when the disagreement, so there is delay

of, on, this is a challenge. but i think the people starting to flow within a week will give, people are optimistic, are optimistic about the results. and how the people would respond to this would make the peace process, and not to go backwards. what i want to conclude, i think that the views which he shared, i think of it -- i hope that the people would adhere optimistic about themselves. president said and vice president also said it. i think there might be some good

in the whole peace process. even in the north and the south. i hope that many will come, the other side, the politics, the action. there will be peace in the coming time and we'll hear more cooperation between the north and the south in the coming times. spirit thanks for that, for those remarks. any responses to the questions we had, more details from ncp, internal dynamics and strength of the islamists, questioned long-term development in the south, whether the south will become economically self-sufficient, and then a question from the state department representative about are you being a little too gloomy about the efforts of the high level implementation and

the post-referendum negotiations. >> thank you. let me start with the question from the state department, which is a little bit also touching on my brother here from the embassy. actually i'm a little bit worried for what you say, because that's actually, to problems in suan. but insurance of the au hiv, i'm not optimistic. the framework is very important but what i've seen, this is what happened so far. and it remembers the decision was taken in septber last year en presented the report, the peace and security council mandated that a partner to become a high and limitation parliamentary and they did an excellent.

much has been aieve and i think the framework itself, including the principles he is very important come and what important now is that those principles be communicated to people because a lot of people don't know actually what is in this and what were in those principles. for example, the communities at the ground where now the recent active mobilization of the pdf the tribes, along the borders, is that if that is communicated that there is no need, because issues are going to be resolved as my colleague here said. there is no need for military buildup. no need for -- on the contrary, efforts to go for something positive, something else. so those principles need to come. but still the referendum issues need to be discussed in the coming six months. and i think the african

supported by the international community partners and so one is key, and is actually important that i think we saw that. but the point is that unfortunately it is not mandated. they cannot bring the two parties to say come here, i need to discuss with you. there to facilitate the two parties to discuss and when they want, they can ask and they get to come at that process to give support. i don't mean here to imply they need to be mandated, but i think in the coming period the african union needs president to push these two parties to seek and discuss the referenda. i know there is this community, committees and so on, discussing a positive -- possible referenda. no discussion on referendum

issues unless it is resolved. this is somebody that it sits next to the president. so anyhow, but still it is a very, very important, and so i don't pessimistic, but if there is strategic relationship of which i alluded to in my presentation, if the two parties esn't agree on what kind of form in principle, what is the former relationship? is a union? political separation but going into a union in terms of economics, the currency will be the same not only for -- will agree. the issue of citizenship we agreed. everybody remains if y want to be here or there, no need to keep the 24,000, no need to push the seventh or so one. so that is negative. it is not a positive.

it is started by one of the senior ncp people saying not a single injection for sthern. that is the government of national. but i don't think, it is ncp government. then president bashir says no, no, no. we will protect with this, we will do that. and then comes, he merely followed by 20% have to go out from the secret service, consider them as foreigners. what kin of policy is this? i don't know how to describe it. if this is a policy for mutual and peaceful, you are setting a tone for very difficult confrontaon on the positive round of discussions. >> i agree that there isa fundamental problems. and it's very difficul to shift

from humanitarian assistance into, i have been in this field r a couple of years, and before coming to crisis group. and definitely people need to shift the assistance into long-tm, to adjust the pipeline of the human intelligence assistance and to get doctors for long-term so that it doesn't go out. and that's always the debate of that continuum. but for the south, get their independence, become a member of the uned nation, the ss by their imf and in recommend world bank to give money for development, which is going to include employment. at the employment -- at this moment, there is no money for major development that can create jobs in south sudan. so the priority is to work with

the security sector, to reform the security sector, to continue building the institutions. y. fostering date can political conseus to accommodate those against the splm, so that when they are finished at least they can have a common ground where they can all move together. first, they need to address the issue of identity. a lot of people think seven is homogeneous. there is no souh sudan identity i am again, when it becomes to elections, everybody goes to the constituency. that's why the issue to of some of the southerners say why do we need just because of that? small thing. but the people, the leaders at the top of the splm who are from abyei said no, no, no.

this is very important. because imagining two years in south sudan, people say go to your constituents who are you? where are you from? if you say i am from part of the noh, who will vote for you to be a member of the government? you go to your constituencies on the other side. so that's why they won't be able to remain a part. so there is the issue of identity. they need to work. and the beginning of it is to set up the rule of the law. the rule of the land. where they need to agree and to put the political system for the inclusiveness, and then definitely if that is their we will be able to create the conditions from shifting from humanitarian assistance into a long-term rehabilitation, reconstruction, which is, it's going to be ideologically of course, on what ideology is the splm or is it an inclusive government to put that framework for reconstruction of

government. definitely it is a challenge. finally, i come to the question i think which is a very serious question, and the issue of the islamists. and i agree with you, it's not the uniform block and not a lot ofeep understanding to the issues of sudan. people tend to think of ncp, south sudan. but if you want to really understand you have to go deeper into the islamic movement, then you'll understand why t cpa, it happened during the discussions, or maybe do a little, when there's possibility of fear agenda of sudan was lost and it was lost during the agreement. when the islamists didn't go on the agreement. that was the theory, for real united sudan, after the regime.

islamists did want to go. then it was a transition come into the was an election. all forces in sudan agreed o postpone the elections, but a constitutional conference to discuss abut the constitution of sudan. the nature of the sudan a state and to abolish the september laws which is the sharia laws when they joined bashir. islamists refused, and when, imagine, when one became the prime minister, he formed maybe about five government, three of them are o them with islamists, brought back the islamists and that is whe pdf and all hese, splm was about to take. but when the iternational agreed support for splm, they were about to take these, that became a problem. and that's when they brought the military, route the message to

prime minister singh either do something or we will change the regime. so they madethe agreement. they agreed on the agreement to go and impment outcomes. they agre and that, abolishing, not abolishing but to suspend the sharia laws come except to sudan as an array big, african but not an islamic. and to go for the constitutional review conference to review and put these constitution form an interim government with splm, political parties and all the civil society, the trade unions and so one can't add including the traditional. they all agreed. so after pressure, they moved

from pow from the government. he formed again i government. and he areed finally on the constitutional conferenc that would have led, but who then, really quickly, made it coup? they did want that to happen. theyremoved a democratic. no, close the door for democratic conference and we know what happened. so that's why halfway the idea is to create that islamic country with the islamic organization of the islamic vement that, you know, how do i say, that it into that thinking, solidify the organization. of course, creating a system related to all the tribes and groups and so on.

and then the rumors of the state. and then to go for federalism and decentralized, but they took it wrong. the military was supposed to move after three months, three years. they disguised military, the islamists into military form th office. it was supposed to move after three years. that's what they agreed, to make the coup, put them in prison to nobody knows he has an islamist. but they were hidin they were doing that. they were driving the whole thing. and then the military took a three years come and to start to put the constitution of sudan, federalism, decentralization. the military refused. they like it because they have been three years there. so they refused.

so okay, president bashir become the president. his vice president who died later, forgot his name, vice president. anthen the military became the power. president bashir remained and that continued until today. and so they d discussion and division until when the agreed on the federalism, and the decentralization system. and also that the army could go back to the civilianso will and to go back to the shura. it is divided. and so what remains now with ncp, it was always a problem, always a problem when oil is discovered. and so that became a problem. and so when the money start to float up, the system became so strong, and it bit by bit that system, it went into ethnic

pattern is -- patronization. you will see whose type is this, to the government, to the position, to everything. they clinched the secret services, the ar. they fired the generals, the police, the civil serve and everything. that's a system now very serious. but now with the cessation coming of course people are asking questions for coup so. you ruled for 20 years. you did a couple of agreements. the cpa came. you didn't maintain sudan and you want to continue ruling sudan. on what basis? on what basis do you want to continue growing sudan? so the ncp have got a question. the present versus the future of the party and the political party. thparty versus the future of sudan and its filiates again. also the stability of finding solution to darfur.

and also the president versus the whole future of sudan. between brackets and issues, those three fundamental questions need to be asked. we think islamists, if they want to maintain, to continue as a viable political party to play, that's why there is a those divisions within even the current. and i can go further ,-com,-com ma but i can see eyes looking at me. but it's a major, major question so that's what i question here talking about the presentso on. i understand i'm cities. it is about what arethe key issues you want to do in the coming very. possible referendum issues you have to address the full of the other partners to become state. that state has to be separated from the party. are they willing to do that? if not, that will continue to struggle to find a viable lasting peace in sudan.

spectacular much. i'm very reluctant to stop in mid-flow. i very much appreciate your analysis. i'm afraid we're pretty much out of time now. do you have anything to add? fair enough. look, i would just like to thank you, both of you, for coming and going to takepart on what is a momentous time rightnow with a referendum on the way. and i'm sure you'll agree, despite the notes of some gloominess and pessimism that sudan has come a long way to this point at least. but, of course, as the challenges, big challenges lie ahead, both internally within north and south, and how these two areas, if they are two separate, manage the diverse people, the interest within their borders. so please join me in thanking our guests fouad hikmat and comfort ero. [applause]

spin and thanks for your interest and we will be llowing the referendum and beyond and you can find more information on our website. they will be putting out a new report on sudan shortly within -- [inaudible] >> there is a report that someone is working on it. actually on the big question. islamists and the future of sudan after secession. on tomorrow's washington journal, chavern will discuss

jobs in the u.s. economy. after that, representative don edwards on her party's agenda. later, as -- and olsen joins us. washington journal, each morning at 7:00 a.m. eastern here on c- span. >> of the national commission on the bp horizon will still will meet tomorrow. later in the morning, remarks by the judiciary committee chairman. he will discuss the upcoming senate judiciary committee agenda. live coverage from the museum begins at 11 eastern. >> middle and high school students, it is time to unload your videos for the studentcam documentary competition.

the short chance to win the grand prize of $5,000. there is $50,000 in total prizes. the competition is open to students in grades 6 through 12. >> defense secretary robert gates is in china for talks on military cooperation. the nixon center hosted a discussion looking at china is growing military and what will secretary gates might accomplish on the trip. this is one hour 40 minutes. this is an hour, 40 minutes. >> i am pleased with this turn

out. we have a fantastic group of people in the audience. i would like to remind everyone to turn off yourself loans please if you can, please turn them all the way off, not just vibrate. that will reduce electromagnetic interference in i will introduces and moderate the question and answer piod. we will try to wrap up by 2:00 p.m. eastern, if not earlier. first,et m welcome our speakers. we have a great panel of experts, and definitely coming to talk about a complicated and very important issue at exactly the right time. as all of you know, secretary gates left foreijing this weekend and is spending two days, three full days in beijing. he met yesterday with -- had and hewith a geneareral

met with the vice president. tomorrow, he will meet with president hu jintao. secondaryit the pla artillery headquarters and he will make a trip to the great wall. this is not tourism, but it is a great opportunity for him to see the long history of china's defense infrastructure. [laughter] so i think his trip marks a fairly important moment in the bilateral relationship. it's been a rather tse 12 months since last year when high-level ties were virtually at a standstill, cut off after the announcement of arms sales in taiwan at the beginning of last year. i think there were a lot of incidents that we watched carefully, snubs both ways,

insults' in a very public forum, and a mismatch expectation. hopefully, this is the first or one significant meeting that will help but the relationship back on track. i do not think there are any expectations for civic and breakthroughs on this trip, but there were two -- for significant breakthroughs on this trip, but thereere two that were announced last night. the pla general who is the chief of the general staff will visit washington, d.c., at some point this year. a date has not been set. i think there was also an agreement that was written up in "the new york times", as they put it, "an establishment of a working group to talk about more talks." so at least we see a consensus building on both sides that there should be more talks. that was one of secretary

gates's key messages, that talks should be sustained and not cut off for political purposes. obviously, there is a great deal of uncertainty and mutual distrust between the two sides. we have three panelists that are our watchers of both the u.s. and chinese defense establishments. who can give us a their interpretations and their impressions, expectations on both sides and outcomes for this visit. i will briefly introduce them both. their biographies are out front on the podium, so please help yourself to that, as well as a guest list for the event. but i wi first start with mr. vago muradian who's the editor "defense news".

he was previously the managing editor of "defense daily international," and he covered global operations at "air force times." next, we have the director of the chinese national affairs of the defense university. previously, he worked at the monterey institute for international studies, where he served as the director of the east asia and noproliferation program from 1999-2003. previously, he worked on asian policy issues at the u.s. air force as an officer. lastly, we have dr. james mulvenon, the vice president of defense group inc's intelligence division. and he is one of the foremost experts on chinese c-four isr,

and defense research and development organizations and policy. he is the author of "soldiers of fortune,"which detailed the rise and fall of the pla's ventures in capitalism. with that, we will start with vao. o. >> thank you very much. as the late richard holbrooke one said, the most important bilateral relationship is the one between the u.s. and china, and how to shape their relationship is something that has consumed an enormous amount of time by success of the administration's, given that that relationship touches every element of u.s. policy, global interest, and just about everything and all -- involving china seems to be hard. china is essential to progres

on the thornie issues on that north korea, iran, energy, etc.. in the eyes of some in washington, it is a growing security issue in its own rite. while tactics continue to be debated, there is consensus that they need to work to engage china to foster a greater understanding and a greater openness. the last thing anybody in washington wants is to have this relationship go sideways and return chianna into an enemy. improving the spirit of understanding is one of the secretaries goals. nobody has any of it -- any illusions that there will not be more significant challenges coming down the pike. and, obviously, some of the

progress we have seen is something very important. everybody in the administration has continuously said that to build a lasting relationship you really need to increase the dialogue, increase the openness and communication, reduce the risk of this population and reduce the risk of misunderstanding. china has used that as a bargaining chip, unfortutely. while improving the short-term is a valuable through new working groups, the future is somewhat more challenging. transforming -- china claims to want a military befitting its global stus as a rising power. the trouble is its actions, is lack of transparency, and clear intentions replace the u.s. as asia's hegemon are what are worrying the region and folks in washington. under the hide and bide

strate that china has adopted for some time, there has been steady progress to what folks in washington viewed as the anitti- to force theiial u.s. out of asia. whether it is to rely on a wide missile arenal in the region. the aim has then to convince america's regional allies to cozy up to them.

as the w. director policy planning said last year, as the current war has dragged on for long time without a decisive outcome, this aggravates its strategic thursday and iv maneuvers on other issues. terms for growth is no surprise, but it is something that washington has downplayed for a number of years. you get more for your you on the new get for your dollar. their ability to expand has

focused on espionage a search and gaining a advanced technologies from the thousands of commercial and manufacturers that produce their wares in china. what is clear is that the capabilities that are being developed are significantly beyond what most people would reasonably assume china needs for its immediate consumption. all of this is bearing fruit. we have seen the headlines of the past few years. china is still finder surprised washington. -- china's stealth fighter surprised washington.

we do not know if they work. we do not know if they do not work. they show evidence of intent and china's trend to close the capability gap with the united states. to be clear, despite china's soviet-found military remains inefficient. there are a number of structural flaws. breathtakings commercial rise suggests that it would be a significant mistake to assume that it would not get its military act together, perhaps sooner rather than later. china's defense minister has said that china wi continue to press ahead in its advance of military capabilities.

it will also respond to security challenges or threats by cutting off trade but also the supply of vital minerals. the united states is beginning to respond accordingly, but it is doing so cautiously to play it needed to hot nor too cold. the most important announcement that secretary inmates -- the secretary gates made was penetrating bomber. i do not think the decision was a coincidence. but it is evidence of superdelegates reorienting to think that their weapons, including nuclear arms, will deny a sexist to their air, sea, land, space, and cyber domain. i think that china would have gotten away with it had it not

been for the bolder and more aggressive stance chinese officials have taken in the past years. it is grounded in the view that china is the sending and the u.s. is declining. there is a misunderstanding of several u.s. initiatives from the new administration's good- faith out of reach in the begiing to please beijing to keep u.s. debt. they did not approve fighters going to taiwan and they did not approve meeting with the dali lama. i think china's view of the united states is summed up by the reaction to the defense review which headlines described as "u.s. arrogance replaced by strategic contraction." by listening to their own rhetoric, the chinese leadership, some say because they are surrounded by superfast, dramatically over played before last year and the high progressive stance on core issues, bullying smaller

powers, and sweepg territorial claims, and prompting them to strike ties with washington, something that american officials have been all too eager to take a vantage of. america has increased its diplomatic and military outreach in the region. interestingly, regional states that have held long standing animosities are forging clos relations. obviously, north korea is the driver. they recognize that china is the fundamental element of those discussions. the challenges that china's military is being led out on a longer lease during a time of political transition during which nobody wants to appear to -- once to appeared weak.

this comes as the rest of the world deals with north korea. china does not see eye with the u.s. on the spirit leaves -- on this. its view of controlling the spread ofuclear technology is, i think, are different. it depends on whether those technologies will be used directly against them. it is significantly different from other -- from how other countries you it. as americans, we see as an assistant security guarantors'. as an open society, we do not see our selves as a threat. but china is a nation with long memory, a historic

superpower with internal strife and external meddling, including the western powers. that has bred a curious blend of areas, paranoia, territorial ambition, and concern of losing face. we have to be ready for a nation that, as it grows, will become more difficult as it becomes more assertive. we have to be attentive, clearheaded, and smart on how to engage china. on the part of u.s. leaders, unfortunate, anything else would embolden beijing, which may show weakness rather than prudence. i think secretary gates, the surveillance missions is another issue.

i think the secretary gat has it right. thank you very much. >> let's go back to 2008. let's do a review of where china was. they had a policy toward the region that was spectacularly successful. it showed that china's economic rise presented opportunities for them economically. it became the no. 1 trading partner, even for u.s. allies such as japan, south korea, and taan. with a new administration coming into office, it wa determined to not make the mistakes of their predecessors, not spin to the campaign, talking tough to china, and spent the first year in office repairing the damage. the obama administration was careful about what they said in the campaign and thought she teasingly about how they wanted

to engage china. the focus was recognizing china's importance in solving regional and global problems. you had administration coming into office the reached out its hand, wted china to play a greater regional role and their role with global institutions, was willing to facilitate china's entry and expansion of chinese voting rights in some of these institutions. and wanted to make china a cooperative partner on a range of issues that is a -- -- issues. that is a good position to be in. if you look at where we are today, a lot of that has been since thrown away. the essential question is why what explains that.

the initial peace with the global financial crisis, which panicked chinese leaders -- it's all their exports plummet. they sought employment -- they saw their exports plummet. they sout employment damaged by it. as the crisis went on, they saw they were recovering fasr than the u.s. and europe and maybe this was not such a great threat as they once feared. stead, they saw a shift in the balance of power that had been occurring over time, perhaps accelerating as a result of the stresses. that is a key factor. but the key thing is that, even as the obama administration reached out a hand and offered cooperation and engagement, the proper response was some suspicion. why are they doing this? why are they offering to expand

cooperation to give as a greater voice in instinet -- in international institutions? it must be to tie is down, to make is make commitments that will threaten our economic growth, to buy into supporting a u.s.-dominated system. i think there was a huge opportunity. the u.s. government -- the chinese government that that is suspicious and decided not to pursue it. instead, we have seen the balance of power within the region and globally shift in their favor. is became the opportunity to take more verbal positions on a number of sues and take action, especially within the region that reflected this perception. about the first year, the year 2009, it was focused on this. how china defines problems, they are always responded defensively to what other countries are

doing. one of the earliest manifestations of this was in the south china sea where a number of southeast asian countries with claims to these islands made a declaration under the un convention. they did it for their own particular reasons. there was a deadline in may 2009. but there was a concerted u.s.- led organized effort to challenge chinese claims in the south china sea and the east china sea. that is how it was framed in the debate and prompted what they characterized as a defensive response and what everybody else in the region sees as a much more assertive policy to reinforce and protect those claims. part of this was the issue is the impeccable in the south china sea when they harass of the u.s. navy ship operating there. but there has been a host of these kinds of things. the key is the resistance and the balance of power had shifted. there were no longer so bound by

u.s. demand. they did not have to be so attentive to what other countries thought. that has prompted a shift in policy that has cost a lot of concn in the region and caud a lot of countries in the rion to reach out to the u.s. and encourage the u.s. to play a mo active role to balance the chinese policy. another way of thinking of that is that, 10 years or 15 years ago, a very skillful diplomacy, listening to what countries wanted, tried to frame their proposals in light of that has been replaced by a tone deaf, assertive diplomacy focused on narrow chinese ierests, such as maritime claims in the south china sea, bullying other countries, sometimes publicly, sometimes in diplomatic regions military commentators certain ways.n a

i think aot of those games from the last decade have gone away. how does that relate to the u.s.-china secretary's trip? if the u.s. was encouraging china to do more, we must need china more. at reflected a shift in the balance of power and the balance of need and now china could be the commander if they wanted it -- it could try to set the agenda and press the u.s. on concessions on issues, such as taiwan, try to get restrictions on where u.s. navy and u.s. air force ships operated in of hours -- in waters and airspace and that they have the power to push these issue and have the leverage to try to get concessions. but if you look at the relationship, they have not gotten very much. they have not gotten anything on taiwan. what we saw were shifts in timing so that the president did

not meet with the dollar llama in one trip, but he did meet inth -- with the dali lama bu one trip, but he did meet with him and another. it has created a lot of tension in the region, a lot of concern in the u.s.. as we haveeen, some of the modernization efforts pay off, assertiveness coupled with the abilities payoff and what does that mean for the u.s.? i think thais the context in which strategic dialogue between the u.s. and china is important. you have a china that is now a big player, certainly within the region and sometimes at a global level, whose nuclear capabilities, whose space and counter-based abilities, it's expanding cable operations, whose cyber capabilities are

things that affect regional military balances and directly affect the u.s.. that has prompted an effort to take china more seriously. it does give them face in some ways. but it also potentially makes them a target. this is a key question. from the u.s. side, we view military to military dialogue and as an understanding on these issues, reducing suspicions, finding ways to operate in proximity to each other without damage or without risks of accidents or incidents. and so we see this dialogue is really important for working out a new strategicelationship where china is stronger global player. that is partly behind the call for a strategic stability dialogue to address some of these issues. i think they have been reluctant

to do this. if you look at their willingness to cut off talks ovenuclear arms sales, schedules were full and those kinds of issues, it shows that there is still a reluctance to engage seriously on this issue. will the secretary's visit change this? i do not think so if you look at the timing of it, it is kind of squeeze been. it is important to the chinese to have this as it happened before the summit between hu and obama. there is the importance of talking about the strategic

issues. but the chinese side has willingly -- has been cutting the sock. it would have been a u.s. talking point and focused a lot on that coverage. as it is, they have squeezed in before the summit yet without time for any agreements reached during the visit to really be implemented or to have the summit visit be a kind of follow-up "how are we doing on this?" i do not see a fundamental shift in the suspicion that they have or the view that the military- to-military situation is a practical lover that they can use to try to get concessions on the issues that they care about.

the dialogue will continue to be difficult. our first to talk about our ships and planes operate in proximity to each other, sending military -- maritime communications' agreement -- they have not been unsuccessful. they have -- if they're viewed as not operating in our space, there's not a problem. there is an exclusive economic zone that is part of the global commons. i think the secretary'sisit is an opportunity to talk about these things. i hope that a working group will lay the groundwork for more substantive dialogue. there are some positive signs that is a consequence of china's rare power. they phyllis laurel then maybe we're willing to talk about. there are some signs of that of the last six months or so. i do not see big breakthroughs

and i think this issue of how the u.s. and a china that is alonger militarily get with each other. >> thank you. james. >> all of you have been the third position of a three-person channel. there really is no point in preparing a thing. [laughter] you have about 15 minutes to react to the first peoples comments and then your off to the races. i think they have done a great job of setting a share to a teen cent. i want to look a the operational goals for the visit. if you look at the recent speech by secretary schiffer and the statement by the chinese and extrapolate out of it for the future as to whether any of the water in these will hold.

with many of the pioneers and practitioners here in the room, i think i will be brief so that we can have a good dialogue about it. i would like to reemphasize -- when we talk about our six principles and are four goals and are three characteristics and are key points from mike's speech, there is a continuous theme, which is the why it matters question. we think -- until we have gotten incredibly lucky last 10 years and we have not had a very significant accident or collision of one sort or another with the chinese mitary that has resulted in significant loss of life. i believe we had the hostage crisis in 2001 and then we had the recent unpleasantness, but all of those -- all oyou in

the room know that it could have gone a lot more seways than it did and it could of been a lot more dangerous. the dilemma for me is -- i still don't have any confidence in the protocols, if any, whether it is crisis management or strategic communications, which seem to have fallen apart and not work as we would ve liked in every single one of those crises. that would be very as look for a situation, especially if it involves tie wanted because the new have a triangular escalation. so i do not worry about -- something that signals to the national defence global

commission. i do not worry about that as much as i do another 83 or another impeccable where things go much worse than they did in the past. people buy. we float search and rescue forces to the area. and the net result of that is that we are out there trekking each other with radar. no one is entering a hot line. years of dedicated contacts and the military region and the national staff cannot match the phone and we are in quite a mess. you only need to look of the incidents that we the mentioned earlier. the u.s. senate and taxable -- impeccable is a good example. if he had to exited in getting that grappling one on the cable that has thousands of pressure on it, he would have either been ripped in half, driving under the water and drowned, so he is

very lucky that he had such a bad name in my view. when a chinese submarine ran into the thing behind the john mccain, that could have easily turn into what we read in "lineman's block." bluff."d man's whether in fact the chinese navy had asked the philippine government for a prior military transit to the philippines, exclusive economic zone come in that incident, i believe that point, we went immediately to lunch. why it matters for me is very much -- as china's capabilities have expanded, what they define as normal patrol in behavior, perhaps without having to ask mother may add to the civilian leadership has expanded both in

intensity and in tempo and in geographic scope. we are increasingly rubbing up against one another's military forces on a regular basis. even after the edt crisis -- the e p three crisis, they're still having arguments about sovereignty and our stalemated on the issue on whether the u.s. will conduct a strategic operations in international waters off of china's coast. that is why it matters. point no. 2, when you look at the rhetoric and the guiding principles that we have articulated before secretary gates is visit, you're struck by the phrase "sustained, reliable, and continued military-to- military relations." embedd within that statement, imbedded within those words is our frustration fulfilled by the situation being held hostage

by the crisis. when you look at the three -- get the preconditions but the jenny said that before for what they regard as a basis for a stable relationship, in other words, the cessation of all arms sales to taiwan, the cessation of the strategic reconnaissance operations in international waters off of china's coast, as well as the third principle, which, remind me -- the 2001 ndaa that restrains the activities of the military-to- military relationship. i see two of them not changing, probably not the third, depending on the composition of the ngress.

the chinese have automatically built been an escape hatch that allows them to the right back to the pattern of cancelling and shutting down the military-to- military in times of crisis. in terms of disingenuousness or in genesis of both sides going into this visit, i think that the tone from the chinese side has been very tepid. they argue it -- there being clearly forced to do this by the civilian masters where clearly trying to check that box to create the proper atmosphere for presidents visits later in the month. i think those were chosen with great care. they were not conditions chosen in my view that can easily be removed as obstacles. i think you do that in negotiations where you're not interested in making significant gains.

the areas that we highlighted as our areas of greatest interest by name in these discussions are also the areas we that are least likely for cooperation with the chinese. i don't think we did that to create a straw man that led to the failure provide it we derive our interest in their growing nuclear capabilities, other cyber capabilities. i would also add any satellite capabilities our strategic discussion appeared they are the issues that concern us most. once again, i am drawn to the distinctions of strategic discussions with the soviets in which we did talk about the fundamental areas because of parity and other things, the continuing chinese view of symmetry in those areas which is a major obstacle to us. what it actually highlights is

the breakdown in that reciprocal dialogue and the failure to get the commander struck, to visit omaha. i am sure they had a great discussion about recreation sure they visited a lot of chapels and everything else. but it was not the dialogue that we wanted. when the boss man why was so reluctant to come, was it because he was not comfortable with foreigners? i said, fundamentally meant, what i have read from their strategic doctrine, they have nothing left to say. they give us the "we will never strike first" briefing. if he came, he would have to come up with something different and we have heard that before.

he is not prepared to say anything further on that issue and does not want to pull himself in a position where they fail to deliver the most basic context. on the cyber side, as much as i would like to have to have -- like to have a cyber dialogue, the plausible deniability that lies at the heart of computer network operations always gives them an out. i spent two hours this morning dealing with china origins and cyber intrusions. maybe that is just in my cyber -- in my front will bring out. but the slipperiness of cyber, it is a very difficult issue with which to have concrete discussions, even when you can have one on the nuclear one. finally, at think it was important to talk to set an artillery, at least two depositions about second artilleries potential ownership

of that capability. but we will lgely be in transmit mode on those issues and probably not expect much in return. unfortunate, i share my fellow panelists pessimism. fox have been taken in the rose garden. i'm not sure that behind that will be a robust and sustained and reliable and continuous mill-mail for all the strategic regionshat we have outlined. thank you. >> thank you very much. this is sobering. let me ask the first question. while i'm doing that, please raise your hands and i will take names. i think it is clear what the u.s. wants. and recognizes the need for mutual respect. we have had trouble on all three of those.

can you think of a concrete example of what the two sides might do to build mutual trust and start there. what are the likelihoo of that happening in the next year or so and where do you think we might make progress on that? i would ask you to make quick responses. during the questions from guests, we will maybe pick and choose. why do not start? >> the light comes on. i think training exercises are historical a great place to start. everybody tends to be on their best behavior. you exit the glimpses of what they're like to operate with.

unfortunate, there is some experience with the kind of piracy operations of the african coast. it has been important for china. it has been important for everybody else to operate with them at sea. i think one of the things is that submarine rescue would be more interesting. it is somewhat more problematic, but it isn't in that other countries do to push boundaries with one another. >> i would say that part of it isaving a more frank discussion about military capabilities. in some other interactions i have had with the chinese, you talk to them and get answers that do not only produce confence or mutual trust, but sort of eroded because you hear flat denials of things you know are actually going on or statements that do not match what is happening with the

capabilities. i think the u.s. has tried, as the administration has produced its various policy reviews, to give china some sense of what is in those and why is there. i do not know that we have gotten parallel answers back from the chinese. but there is the fact that our military in these different domains are more and more attractive and there is a competitive element of that. it is not just that the tactical level where we are operating in some of their waters. it is starting to be a net fl--- and four-structured level. i take in mind with our capabilities. as a secretary said the other day, it is often the case that the u.s. is looking at things that china is developing and what we need too to protect our own interests.

i think that a franker dialogue about those issues would be a big step. that is why i hope that these efforts to really get a strategic stability dialogue with content in it -- had hoped that would develop positively. >> james. >> i will go against my irish nature and talk about some good news. if you look back even five years ago at the military-millet ferrmilitary, would it not be gt if we could get the chinese to cooperate with us on the peacekeeping operations. imagine if the connection get them involved in something witle piracy issue of of africa.

they threw those out as their standard fare for the things that they are interested in talking to us about and are serious about. that is progress. i think it is throwing bloody chunks in the water behind you for the sharks. but i think those are things we can capitalize. i know the administration had talked privately with capital hill in the first to use about actually making concrete changes to the national defense authorizatioact to prevent freedom of action to be able to do more things on the chinese side. but some of the things that we have talked about now are actually prohibitive. in terms of process issues, i think it would go a long way for us to alter some of the characteristics of that legislation to allow us to have greater freedom. otherwise, our own hands would be tied it in our ability to be helpful in the relationship.

if i can ask everyone to please identify yourself clearly. >> i need to ask a question and that it will cut in aid for direction. given the pessimism that you all expressed about the views on the pla side and their lack of willingness or at least a reluctance to engage in mil-to-mil. will current mechanisms -- what current mechanisms to have that are available to us and what future mechanisms which you propose? >> i think you ask the right question. as long as the dialogue is military for the sake of military, we will run into a whole series of internal bureaucratic and political issues on the chinese side. as long as they can frame it and

slice of life that, it does not serve their interests and it does not serve our interests. one of the things that i have been most disappointed with has been -- both in terms of protocol and bureaucratic rank -- the chinese participation in strategic and economic dialogue, highlighted as a forum where we could bridge across the civilian and military strategic issues. as long as we continue to send top for fighters and top leaders to this meeting and they keep sending foreign affairs officers, we will never be able to do that. that is a bureaucratic logjam. i understand it on the chinese side, but it will have to break it. we have an environment where we talk about security issues and a much more multi-disciplinary and multi-bureaucratic way. then been unwilling to figure out the key to unlocking that on the protocol side. >> i agree with that.

let me come it -- let me comment -- let me come at it from a different angle. they're focused on issues of dominance, vulnerability satellite, their strategies for dealing with the u.s.. that is a very competitive and contentious dialogue. what we really want is all of the cnese users of space, scientific use of space, commercial uses of space, satellite space, loss capabilities -- they have a different set of interest from the military. they need access to space to carry a commercial opportunities to kp the chinese satellite tv network operating in remote areas. what we really want is se kind viewsform were the pla's us

are balanced by a variety of other users based in china who have a different set of perspectives and interests and views. but that is one of the problems. i think the chinese system does not do well in cutting across bureaucracy and representing this particular interest and some of the programs that are kept pretty secure. it is hard to integrate across that. of the can find mechanisms to do that, i think that would be really helpful. >> one of the thingis that it does take two to tango. in these concentrated forms, if you have the wrong people show suddenly the wrong peop yourself. i do not know that that is the best way to do it. you can fight fire with fire a little bito try to focus the other side.

it would be to say, look, i am ready to have a serious discussion. but if you keep mickey mouse in me, i will do it with you, too. they advocate building trust and confidence with things like maritime cooperation and humanitarian assistance and disaster relief and whenever we can dos great. i wonder, looking added instead of from the bottom up to look at it from the top down and with the panel thinks of the prospects that secretary gates could come back and convince president obama that he should persuade president hu that he should overcome these loud voices that disrupt the

military-to-military relationship and other aspects. might we expect or could we hope for a realization by president couldn't tell that we do not want to disrupt the overall -- president hu jintao thawe do not want to disrupt the overall situation. do we think that is a prospect? >> is interesting to me that we have not so far talk about the military relations issue but i think it isignificant in this case. he staked out some interesting ground with the chinese military in my view. talking about his policy of new historic missions for the first five military task and the civilian origins ofhat leads to some interesting conclusions.

one of the unheralded reasons for new historic mission to be put out was to provide the pla with a vision of a future telate to ntinue to receive large-scale central government financial resources for missions well beyond resolution of the taiwan situation. in other words, their modernization program, which had been so successful,rimarily in my view because they finally had a concrete planning scenario, it could now have a wider range of planning some areas that we continue to justify double-digit annual increases in the to expenditure without having it all be tied to tie one. we are already in the election season. i think it is horrible that are presidential election season is two years long. we are already in the session. i think it is a very delicate dance going on with his relationship with the military, with the implications of that for the succession, particularly

the estimation of whether a fact he wl hold on to the chairmanship of the central military commission after the next party congress for that transition of power. in that kind of environment, given that kind of sensitivity, given that they are in a political season, it is very unlikely that he would then expend political capital to try to force the chinese military to do something that they are disinclined to d for a whole variety of valid, strategic, bureaucratic, and financial reasons in their own minds. >> let's keep going. >> this may not be the right place. with the republican takeoveof the house, there will be very different way of focusinon all of these issues. hearings are designed to make sure none of us miss any of the provocative things from every level, a human-rights trade,

etc., etc. in a sense, it is the bad news if you worry about managing the noise level. but it is potentially good news if you can shave the conversation in a positive way instead of just banging a drum. >> first, i have absolutely no idea it will go in. right now, you have a lot of neophyte's coming into the process. you have centers of voices who are no longer there. you have folks who will try to score as many political points against the administration as it possibly can over the next two years. they have already said that. i think you'll see one more -- a lot more oversight hearings, whether the provider of really -- provideeal oversight is another thing. you have certain folks who are saying, well, we will try to look at this and we will try to look at this and it does not relate -- it does not appea

that there is a lot to look at other the and the fact that your to grandstand. it is a shock that politics would actually be happening up there. aughter] what am i thinking? i think it will take a little bit of time to shake out. you have a lot stronger and louder and more polarized voice out there right now. i think the question is whether those voices continue the way they are or they start to moderate. there have been great examples that the new members have been having. there is a retreat where everyone went out and talked to a secure line. what ship is that evolution taken the coming weeks and months and years >> when you look at the house foreign affairs committee and you look at the membership of that committee, there are half dozen people on th cmittee that have long established

bureaucratic legislative track record of interest in china. i would expect that that committee in particular would have a fundamental change in its town and focus in the next two years. >> let me add something. what ever global or international issue you were looking at or economic issue you're looking at, there is a china component to this. it would be less the case that is a foreign affairs or security committee that is really when dealing with china. to keep the focus on a range of global issues, china will be a part of the. sometimes, it will be a positive contribution and sometimes it will be negative. the committee will be digging into issues that are at the port

-- and of a part of their responsibility. >> i said it was hard for a reason. it is not just applying the electors to it and getting beijing to start changing direction. -- electrodes to it and getting beijing to start changing direction. we have already concluded that the united states is doing stuff and china is doing stuff, all responded to the other. this can ship itself in a positive direction or can go really, really long. >> i want to comment on david's point, which i think is really critical about the issue of mil- mil and how instrumental that might be. there is a suggestion that there is real limits on how far on an

official tourney can go in a dancing it in terms of deepening understanding in a way that changes strategic thinking because the situation is so deeply enmeshed in politics on both sides, as well as military attitudes that are increasingly hardening. to me, what needs to happen is there needs to be a real serious think through on the u.s. side about how you can engage the chinese on significant strategic issues that are not just simply narrow- issue-based, but questions of power and purpose in the pacific over time that are not all official. you cannot do this on an official level. you cannot engage in no official dialogue on questions like that that are somewhat open-ended, that are somewhat conceptual, and that are somewhat flexible in the way people dress them.

you have these responses back and forth often. we can think of how you can develop in nonofficial yet not authoritative track. something that is not led by official predicted by official statements. that is a harthing to do. that is one reason i haven't got it. but i think it will be increasingly important. it is hard to get around these problems on the chinese side and maybe on the u.s. side and they can feed into specific questions on the mil-mil level. that will not happen if there is

not an understanding of the senior level of both governments. you have to reform this kind of -- you have stood reconfirm this kind of understanding. what comes out of it can really determine what happens in the u.s.-china relations, at least on the strategic level. there needs to be a strong suit -- a strong message sent by both sides of a commitment of discussion engagement of these issues a others that freckly that the military'are not in control. they're not dictating the direction of this relationship. the chinese, to some degree, the civilian leadership have indicated that in the last several months. i think there needs to be a broadening and deepening of that recognition of both sides.

it would then allow for this kind of movement forward in these kinds of dialogue. >> when i walked into this room and looked at these photographs, i always have that feeling. maybe i am romanticizing an earlier area, but the idea of being able to have conceptual dialogue about power and purpose that are not tied to publicly stated the levels that have to be discussed -- it would be a completely new tenor in the relationship. the problem potentially is due the strategical conditions apply now. is there a unifying common threat to? those sorts of things. or are there -- are they simply not the?

>> presidents and administrations have marshalled their veteran talent all the time to open different tracks and negotiations. you can have them do back channel even better. you can get somebody who will be somewhat more seen as neutral to go ahead and do this for you. have the vatican get involved if you want to open an avenue of discussion. [laughter] that was just to make sure that evybody is listening. ultimately, there are all sorts of mechanisms you can use to do it, any and all that can, the better it is. i am not sure that the other side is really listening. we are really quite open.

generally, what we say is what we say. interpreting our interest, there is another agenda that people have in washington. people have to be pretty dense for deaf to not get it to carry that far. >> as a veteran and organizer of track to dialogue -- first, the chinese and u.s. government need a lot. all the different departments of the government and different departments and ministries have the various dialogues with china on different issues. there is a constant stream of official visitors coming in. it is harder to talk some of these -- talk about some of the strategic issues because you get into issues of secrecy and sensitivity. but there is a lot of dialogue happening routinely between the

two governments. and number of peoplin this administration have participated an official dialogue, as well as official once and they do try to think systematically and strategically about how you use the two. we have tried to help a little bit with that. the unofficial dialogue can be a means, as michael suggested, for dealing with bigger picture and conceptual things come exploring areas that are not ripe for official meetings where governments have to live up to what they say in those meetings. i think the administration is trying to think strategically about when do you want things to be official and you're willing to live by the agreements that you make in those settings and also recognize that we're talking point will be cleared and it will be a more formal setting. when he wanted to on official, where you can be more exploratory in trying to find a common ground.

and how do use the two parts together? they are thinking systematically and someone strategically in terms of what the the right mix is of those two things. when you highlight some of these issues, such as space and cyber, that is good to talk about an official level, but maybe some of this unofficial dialogue in breaking ground in those areas. another thing it can do is it can bring different parts of the chinese system to the table. on space issues, the milary's interest is different from a commercial user or a chinese broadcaster. i think you want both of those in the room. sometimes, that is something that i as an organizer and others have been able to do, invite the right chinese from different parts of the system. somemes, you can achieve a cutting across of bureaucracies that is very hard to do in unofficial contacts.

>> on the cyber side, we have had similar dialogue. we create the usual track 1.5 kind of shield where the government people are there and they are in the back chairs and they can make comments and those comments are not considered official policy. it sets up proxy channels and everything else. unfounate, sometimes, i think it allows the side that is reluctant to do talking -- it gives them a communication channel without responsibility and authentication on something that is as sensitive as cyber or nuclear. i would just point out that everybody in the room knows that the chinese side tends to be more systematic and harvesting the information that comes out of those meetings and developing a broader picture whereas, it tends to be more unilateral and

there is not as much of an attempt to systematize the information and insight -- and messages that are coming in. >> please wait for a microphone. but it does not so much these issues. there is plenty of dialogue on that. my concern is more on the broader sense of how power is distributed and how it is changing in asia in particular and what that means for the primary strategic interests of the two countries. we have an incompatibility between the nine states and the chinese. the u.s. believes that stability in asia is based on predominance. the chinese do not accept that notion. at least, they want to qualify it significantly. they haven't said they rejected outright, but they do not accept it entirely. they want to reduce their

vulnerabilities. those vulnerabilities are based will large extent on what the u.s. sees as its predominance. that flows through a whole host of issues thate're talking about here. yet, it is never really in gages by the two sides. >> i think there's a big challenge their we have to grow been our allies in that discussion as well. it makes it difficult to talk big picture without including the rest of our northeast asian friends. >> first, i want to compliment the panel on what i thought was a first-rate presentation on this question. i wonder if one or two or more of you could comment on the psychological factors. 35 years ago, there was a fense strategy consisting of a

people's war, storing gra everywhere, targeting missiles on our own soil because that is where you would have to engage the enemy. i went to china in 1976 with the house armed services committee for the first contact we have had since the nixon visit and it was impossible to have a dialogue. the terminology made no sense. they did not know what we were talking about. over the last 35 years, the we have made enormous progress, they have not been able to develop indigenous first-rate military equipment. they had to purchase it from former enemies like russia. we are talking about relations between that military and the united states military. when we were rising as a great

power, it was recognized as being the military in the world that has the strongest capabilities and that is most advanced. yet we are talking about relationships as though the chinese can resume to deal as an equal under these circumstances with the world's best. what you have described is what you would expect from somebody who has not proved themselves. the chinese navy has been a coastal defense force. now, they are in the gulf and they are getting miniscule experience. their senior leaders are provincial in terms of the world tlook because they have not have the exposure or the contact with advanced military groups that you expect. if we wanthis military to

military relionship to develop, we cannot have a great leap forward. we have to make incremental steps. we have to deal with each other in ways so that they can gain conscience -- confidence that they can deal with us in the types of dialogues that we would like to have without losing face because they are constantly demonstrating that they are not up to our standards in terms of understanding what we want to talk about. maybe i am misrepresenting this. my experience is that the psychological factors play a powerful role. have i misrepresented the issue? i would welcome some thoughts. >> i think that is a good point. if you meet with chinese military officers, sometimes you meet with colonels or lower ranking officials and they are really smart. a totally understand what is going on.

you ask them why they are not teaching in beijing. they say that they are a colonel and no one would listen to them if they taught in beijing. the kind of limits that are in the system, which is covering your butt, there are a lot of places for information to stop if it reflects negatively. i think that those are all factors that we need to consider in our own thinking. we sta -- some people have ph.d. s and the trouble around the world and study. i think that we should do more about that. our focus should be to travel and spend a year in china traveling and doing whatever and then coming back and shading your beard of and cutting your hair and going back to work.

you still have to figure out some way to have a dialogue. a functioning dialogue with folks that you really don't have a lot in common with. that would be a very long wait for us. you have to figure out ways to bridge a justified. it is difcult, but it is something that you have to push through. >> the big question is of the chinese threat perception of us. the more that we engage with them, the more we reveal tha gap to ourselves that they know is still present. does that increase their leve of concern i do not know how you overcome that. at the moment, they have some very advanced platfor, but on a network with the rest of their system? do they have advanced software on top of the hardware? if we find out mor about that

for cooperation, does that reduce their deterrent? is that e way to overcome that? the very early stages would be joint force operations. they have seen that this is vitally important in order to conduct modern war. this is an area where they are feeling their way. they have made remarkable progress in recent years. but i do not want to use demeaning language, i just want toapture the idea. is like taking someone from the country and sending them to new york city. the way that they behave shows that there from the country. -- that they are from the country. >> let me speak to two aspects. i am not to talk much about

psychology because he has written books on that topic. you can look at two pieces of it. one is the experience of training officers. that has changed. they would spend their career in one military region into the got to the senior level and have very little contact with foreigners. we now see an officer corps that is becoming more educated. there is a premium on credentials. there is more opportunities yeas that the chinese military it really started doing of exercisd deployments for this kind of purposes. greater comfort of individuals in being able to operate at this level. it is much more sophisticated and effective.

that is one piece. education, training and experience. they have made progress on that. the other side is the capabilities peace. -- peaiece. they worked in favor of the strong at the expense of the week. they are stronger. you are starting to see a greater willingness to show off those capabilities. sometimes that is a very negative way to try and intimidate neighbors. but it also means they can be more open without fear of giving away vital military secrets. that is also an underlying condition that may permit greater dialogue. it does not ensure that that will happen. it is, perhaps, a condition that

will support that over time. >> exactly. a that is the key issue. >> they are changing. they say that you do not ever asked us what we think of anything. >> i am fascinated by the psychological aspect of it. perhaps more than i was in the past. that may just be a residue of the fact that in parenting preteen girls and trying to train a golden retriever at the same time. everything you said is right. it fits very much with dick's book. there are new ingredients in this goulash. in my view, it is a very clear triumphantism that is being led by people in the pla as a

consequence of the olympics and achievements along the way that suggests -- that was in full voice a few months ago. it is interesting to find elements in this system backpedaling. perhaps the premature unveiling of this new confidence. whatoncerns me most at the psychological level in our strategic dialogue -- it is difficult to talk about this without appearing to be paternalistic. a combination that i feel in my personal interaction with people in the pla, a combination of a

cocky swagger combined with continuing insecurity and caution. you can define the chinese leadership as feeling that triumphalism. not wanting to deflect it. but also understanding that they are sitting on top of huge structural problems. they have huge problems in military development. it creates a psychological divergence is that some people would seek to exploit and other people are trying to heal. we talked about the spokesman. i continue to be fascinated by the . .he growth -- by the laggar this is a system that is so imprisoned by its stated

principles. it is in desperate need of names. emerge.watching them a mo they do not have the words to communicate why they are doing things. you cannot say not interference in the internal affairs of other countries. that is the purpose of being a great power. yet they want to say that they are not interfering in their internal affairs, but they are interfering in internal affairs. it causes strategic confusion and increases the possibility of what gates called the calculation -- miscalculation. we are having a lot of difficulty matching actions with

words. that is this unfortunate pubescent kind of process they are going through. that is why i think that some of our leaders in this area have said that we cannot react to everything that they do. we have to take more strategic manager role. we have to take more of an adult posture on this. we can get sucked into that drama as my 11-year-old daughter would say and then just spiraled downward -- spiral downward. we do have a deal with a china that was concerned about face. we do not know how to deal better with a china that is concerned about face, but also has all of these triumphal list witnesses. ist weaknesses.s

>> there are looking at our economic system and laughing. that was until they started having their own food problems and then we can laugh at them. >> i think that hermann first said that. >> two a very brief interjections. let's start here. >> the pchological discussion -- of the fundantal question that we came here to talk about, in terms of the chinese psychology. what does the plahink that it is going to gain by cooperating withhe u.s.? what ithe pla by not doing this? >> my favorite term from cold war political science is famed

compliance. -- feigned compliance with civilian desire for a dialogue. it is more about talkingnd talking and setting up meetings about talking. the shell will be there, but i am not sure that the content will be anything solid. >> it is absolutely parental thinking. i was summoned to the chinese embassy a couple of years ago. for some reason, they asked if they could do something with the dalai lama. when we talked about and, if the first words out of your mouth is the so-called dollar llama

fallout, -- dalai lama. >> mike bills vary, please -- mike billsery billspllsbury -- pillsbury, please. >> it seems to me that this is much neglected topic in the study of what they are like. that is to our detriment. i have run across a number of chinese military ridings where the attempt to assess what our american psychological views are. one article was called, "how

american strategic culture drives the world." we are compelled to try to dominate the world. the general goes on with what to do with this kind of power. it leads me to ask a question. do each of you think that our own debate in washington about the nature of china -- u.s.- china relations is as sharp as i perceive it to be? ere was a preface to a book of writings by me on military issues. they used the word vicious debate. there is a vicious debate going on in washington about china. the characterized it in various ways. either you agreevo

with each other, or there is not much of a sharp debate about china. that strikes me as a pity. if there is the calculationsnd misperceptions between the u.s. and china, if i were drafting president obama's talking points, i would be inspired by a the point that they seem to see a shift in the balance of power. both regionally and globally. this dates back to 2008. if that is true, do we agree with that? do we agree that america is in decline. are we adjusted our policy is -- policies to the attraction?

that would be a paper to hand to the chinese side that says the reason we want to dominate the world, if we agree, then bob sutter iright. i hate to use the word, we need to reduce our role significantly. there is a clash here in the washington d.c. community. the panel ses to be the same. >> there is a laughable cartoon version of what is going on.

to your int about decline, i think that secretary gates very carefully chose s words before he left when he said, "there are many nations in the dustbin of history who have doubted u.s. resolve." >> he did not say we are not in decline. it is not the same thing. secretary gates did not use those words. >> i still like the tone of it. >> do you have something profound is a? >> i really do not have anything profound to said. i yield the balance of my time. >> we have three questions left and we have about 50 minutes if we are going to wrap up on time. >> my question is to make a

comparison. in china, there is an increasing number of young people and even much more influential people who are extremely well educated and travel throughout the world. it has been mentioned that young pla officers are showing up. it is not clear to me at the senior level that that is very general. i guess my point is whether it is a comparison of the role of the isolation of some of the plo leaders, could it lead to misjudgment? the second part of that, whether you have seen a change in recent years where the pla has gotten higher with the

development of a sort of military industrial complex within china and to what extent that development is starting to impact on policy, whether it is or isn't? >> first, familiarity is a good thing. i think that countries that have knn each other really well, it is not in their economic interest to go to war and they end up going to war. britain and germany are a good example. i think -- it always good to make sure you have as much dialogue as possible. he have to make some of the right decisions in terms of making sure it used to that course.

-- you steer the course you have to be in tune with what is going on and connect those thoughts regarding chinese policy. it givesou an multiplicity of ways to communicate and to give you a multiplicity of ways to screw u. in terms of the military industrial capability in china, the greater the military industrial capability, the greater the broader industrial capability is a significant issue. increasingly, you have components and parts on the subcontractor level -- china has components that are dual use components. am i going towitc producparts that -- what does

that mean for us? china is going to become a self sufficient supplier at some point. that reduces the number of points you have on china. >> i think there is a lag between the caliber of the officers and the senior people in decision making. that is one benefit that we get here. we expose some of the future chinese leaders. it is not that we are one to tell them any secrets about how we do joint operations. part of the value is that they come over with a very suspicious attitude towards the u.s.. we expose them to broader u.s. society and they see a u.s. military that is not as hostile as they imagine. that is one piece. on the military industrial

complex, broadly, there has been a tension between the pla and chinese defense industry that could not produce something. various pla services preferred to procure it advanced weapons overseas if they could get them. as for the defense industries improved, there has been more of a synergy there. i think that the navy is the issue where i talked about developing a naval lobby. some of it is a navy and some of it is academics. there is a public debate about what kind of naval capabilities china needs. should they have carriers or not? that is not something that you saw in the past. whether you call it a military industrial complex -- maybe there is an element of that.

i think that is starting to emerge. >> if you read this book, it points out that militaries and their personnel in their officer corps, because of the mission and their training, tend not to be as cosmopolitan as their civilianeadership counterparts. that is not necessarily a bad thing. i think that the same light clearly occurs in the pla. the one caveat i would make to that is that i have found, talking to senior pla members, is that their views of the u.s. is deeply colored by their children who are here studying and making money and making business. there are those connections at a familial level. in some cases, we unrestimate the extent to which these vast networks of country children and

the economic and personal relationships here in the united states act as a constraint upon russia's behavior. it really goes to the heart of this issue of our mutual equities. on the defense industrial side, it tends to be conservative by nature and very insular. it is important to note that the most successful sectors in the industrial base is the most integrated. it has been the ones like commercial aviation that has had the least amount of total interaction. in many cases, it has made the least amount of progress. so, they provide another window and another set of the entitlements into the global economic system. it is critical tonderstand to think about why the crisis has

not gone further. >> thank you. going to take the two last questions together. randy, do you wa to go first and an answer? >> the general mood is pessimistic. a kind of makes me feel optimistic. i do not think there is a bosch anything wrong with a male to male relationship. -- nothing wrong with a mill to mill relationship. sure, we have things to gain, t every time there is an arms sale and want to cut things off, we should thank them and

recovery of the relationship in a way that better service to our interest rather than do what every administration does and become the ardent suitor solve the problem. the problem is the problem as defined by the prc. we start talking about arms sales and reconnaissance flights and legislation. the question is, what is the downside of something that is a lot more modest, incremental and slow over time as long as the rest of the relationship is more robust? i frankly do not see it. they have a lot more to gain from this than we do. i can see the military relationship with about four meetings a year. what is the downside of

something less robust? >> there is nothing wrong -- from the previous question, is there anything wrong with having a modest relationship? i do not think there is. what is important -- back to something that james said, i worry about a crisis spiraling out of control. what should be really important is having a reliable channel communication. a hot line that can be used. a few years ago, i was talking to people in beijing and they thought it was really cool to have a hot line with the most

powerful cntry. it was not about using the damn thing. i was talking with friends of mine. i said, "is the problem here? what you guys ought pickup?" all you need to say is that the message is received. take months. if we do not have that basic channel of communication, that is what i worry. >> final thoughts. giving it to their conditions with a full and robust relationship those costs are too high. for solid strategic meetings a year and a delegation orwo is fine, particularlif the cost is giving up sro off the coast

which they will never do. to every sport, i am not sure -- to interest point, i am not sure that it provides that crisis management mechanism it may just have to be taken over by civilians as it has over the last 15 years. >> you do not want to let the program drive neat mill to mill. certainly, there is value in strategic policy dialogue that we have tked about. there may be value in limited operational things such as working on search and rescue,

counter piracy deployments. even in the narrow concept, it exposes some chinese offices to that and it levels the relationship. there are levels where we can cooperate. you do not want to go overboard with it, of course. with my experience, over the seven years that i have been there, there has been a careful effort to manage the mill to mill. some of that has paid off in terms of the discussions. with respect to the crisis management, i think that we need to have modest expectations of what we can achieve through mechanisms such as hot lines and mmunicate those to the chinese. we should not expect the commander to pk up the hot line and call his counterpart and resolve the crisis.

those are vehicles for passing information to china and not necessarily expect a response. we should be car about that. if they do pick up, have the note pad handy and pass it on. we do not expect a substantive response. at the presidential level calls, that would be a report and -- that would be an important part. th could be an effective tool. >> eventually there is still an impact. if you look at what we have discussed, the unofficial channels, the direct conversation, the evolution of the officer corps with a larger global view. generally, the more people come in contact withmericans, they

like us. eventually, they get a sense that these guys are not monolithic. they are thoughtful and they do not wake up every morning a want to declare war on us. they are in a completely different place, intellectually, then we are. -- than we are. that is one to have an impact on the way the next generation of chinese leaders look at it. no one is really a communist at all. the number of chinese that mock the government is surprising to me. i think every single opportunity for you to drive your message across that we your view does, wenow where you are going, we are listening, here are the counter concerns that we have.

on taiwan, you can look at it -- look at a lot of the capabilities. eventually, there would be a unification or whatever you want to call it. on the surveillance, we are the superpower. as the superpower, if you tell me that you do not want me near your coast, i am going to have to do it. i have to send a carrier to steam into the south china sea. the thing is, it is an obligation. you have to show everybody that you cannot take that sitting down. if someone asks about chinese servant of flights over the united states, i grew up in the

united -- in new york'. from a broader standpoint, the more that you communicate, the better it is, ultimately. even if you think the other side is not listening. here i what we are up to. these are what our specific concerns are. there are sitting there saying, "level." that is the moment you are looking for. >> that is a fantastic way to end. i would like to think the participants for coming. i would like to thank our sponsor. please join me in thanking the panelists for and lhting- enlightening us. [applause] [captioning performed by national captioning institute]

[captions copyright national cable satellite corp. 2011]

work of congress, also politico and partners with us on today's briefing is the regional reporters association. we're grateful for their help. in addition we have funding for today's program from the david

swit endowment and the swit family is represented by zhu zhu macker in the back of the room. we're very happy to have her with us. given the tragedy this weekend in tucson, i really appreciate that all of you are here. i know many of you as journalists had other things you could have been doing, so we appreciate your being here. unfortunately, i'll note that several members of our original speaker lineup were called away to professional duties so the second portion of our program today has been modified somewhat. i'm confident despite those modifications that the program will be extremely useful for all of us who really want to have a better understanding of the federal budget process and how it fits into the larger economy. if you are among our c-span viewers, you'll find two things on our website that will be helpful to you. the website is

www.nationalpress.org. national press, one word, org and you'll see an an alert about the program. click on it. it'll take you to the program page where you find the updated agenda and also a link to the pdf document used by our first speaker. if you access and open that document it will allow you to follow along with the first presentation. it will be delivered by one of the foremost experts, how it all comes together. as we know, the federal budget is voluminous and complex and it's not a static document and changes during the year and every year. because it is so complex it's ripe for misunderstanding and

are often related. when they don't understand how we pay the nation's bills it's a lot easier for politicians and others to sort of spin the budget. the half truths and that can have huge consequences. that's why we're here today as journalists. your job is to look at the budget and give them the information they need to make the good, informed decisions that grease the wheels of democracy. so to get us started i'll introduce dr. joe minarik, director of research for the nonpartisan committee for economic development. he worked with congressional democrats for five years on efforts to reform the federal income tax. he's been widely published. he's testified before congress. in the early '90s he was chief

economist of the budget committee and became associate director at the office of management and budget. he worked on president bill clinton's economic program and was a driver of the clinton administration program which became the bipartisan balance budget agreement of 1997. those are strong credentials and honored this morning to have dr. joseph minarik. >> thank you, linda. i'm very happy to be here under what i guess are about as unhappy circumstances as you can have. i'll try to do what we can to accomplish all the goals which includes having a strong and sound federal budget. i see in the room a few faces

that look familiar. i just to help me out, have any of you attended any of these earlier annual briefings in previous years? we've got a small number so most of you are new attendees to these events. i guess one other question, how many of you have not yet as reporters covered a federal budget? so most of you have been through the budget and through the process of releasing the budget. not many of you have been to any of these briefings. what i'm going to try to do, we have an hour which is not an awful lot of time. what i'm going to try to do is to move through your handout fairly quickly, please feel free to ask questions if there's anything that you don't understand.

you will have the ability, of course, to work with this document later on. i believe you've got my contact information. i will be delighted to try to answer any of your questions later on if things should come to your minds at another time. let me start out before explaining to you to the best of my ability what the federal budget is and there when i say budget i mean the book that you're going to be confronted with at some time early in february. i do have a couple of pages in the beginning of the handout which are intended to give you a sense that you should be scared out of your wits. when you think about the current budget situation and i'm talking about you as citizens of the united states, not you as reporters who are going to have to tell the story, there are a couple of charts in the beginning of the handout and if

i could suggest that you look at the first one, which is this thing, this is intended to give you a sense of just how rapidly the federal budget situation has deteriorated. if i can skip quickly to the bottom line, back in december of 2007 under reasonable projections of the way the congress and administrations behave, we would have anticipated that the nation's debt would grow to be 60% of the size of our economy. by the year 2022. now, there are reasons to look at the debt relative to the gdp. it gives you -- sorry. okay. we are printing more copies of the handout for those of you that do not have it handy.

the thing about debt you have to service it. you've got to pay interest. the bigger the debt, the more interest you have to pay. the gdp is our collective income as a nation so that's the resource out of which we have to pay that debt service. the bigger the debt is relative to the gdp, the harder it is going to be to pay that interest cost and to keep the united states government honest relative to its creditors. 60% of gdp is an arbitrary standard, but it is recognized for example by the european monetary union up until very recently if you wanted to be a member you had to demonstrate your debt was 60% less than your gdp or you had a pretty good plan to get below that level. right now there aren't too many country tass would qualify if that were enforced firmly but it also is a reasonable level of where when the debt gets higher than that you start having

problems. so as i mention at the end of 2007 when the financial wave broke on the u.s. economy, the anticipation was that we were going to hit that 60% of gdp trouble signal in 2022. in the three years that followed, the federal government did essentially nothing to solve that problem and meanwhile, our economy and our budget deteriorated seriously. at the end of fiscal year 2010, which was back at the end of september of last year, the debt had already exceeded 60% of gdp. so in other words, we had 15 years between us and the wall, the figurative wall of debt back in the end of 2007. we moved three years towards the wall. the wall moved 12 years towards

us. so folks like me back in the end of 2007 were saying we have a serious problem and 15 years is not much time to turn the country's mentality around and address the problem and deal with it. we now have no time at all. and the debt as you can see in that chart has just about gone vertical. it is rising extremely rapidly and we have very little time right now. we need almost immediately to begin to get a grip on this problem. that is not to say that you take precipitous action sui likely to destabilize the economy. it is rather that you get into very serious discussion and you begin to make plans as the economy improves to make changes throughout the budget to limit the growth of debt and ultimately to turn it around and bring it down again. the second chart that you see will give you a pretty clear

picture that by the end of this decade, we can anticipate that our debt will absent significant changes in policy we can anticipate that our debt will have grown very nearly two 100% of gdp. the full size of our collective income. and to give you perspective, that is about where we were when we came out of world war ii. all of the progress that we made between the end of world war ii when the debt was approaching 110% of gdp and 1974 when it bottomed out at about 24% of gdp, all that progress in reducing the burden of debt on the u.s. taxpayer will have been lost. and at that point you're getting to even more concern about the possibility of a crisis in the financial markets brought on by the inability of the united

states to convince its lenders that it is a reliable borrower who can service its debt in the future. you should have, i hope, a little glossy publication of my organization, the committee for economic development, which -- in which i climbed into your shoes and tried to write some future newspaper stories of what might happen if, in fact, we lose control of our debt situation. and there's one story at the end where i tried to tell how we might, in fact, turn this situation around. i hope you have a chance to read it. i'd be interested in your comments and your reactions. but that's to give you a reason why you should be here. apart from the fact that you're going to be working to cover this budget. beyond that, i'd like to talk to you a little bit about how the budget is presented, give you a

head start at where you can look in the budget documents for the information you will feed to report the story and what i'd like to do if i can is to go through this document relatively quickly as i said, please feel free to wave your hands and ask questions if there's something that is not clear to you and try to leave as much time at the end of the session so you can ask questions and i'll try to get to your specific issues and concerns as much as i can. as i do every year, i will urge that you look at the book that is called the budget of the united states. that is one of five books that you're going to get or at least be able to access online when the budget is released. the statutory deadline for the release of the budget is the first monday in february, which this year is february 7th. however, there was a news story over the holidays that the

administration expects that they're going to be a little late this year, this will be the first time in my memory that an actual budget is being released late. we can speculates to why that might be true, some say it was because of the late confirmation -- the delayed confirmation of the new omb director. it's possible the administration is contemplating a little change in direction from what they originally anticipated. i don't know anything for sure. i don't have any stories that i can tell you, but at some point probably in the second week in february, you're going to see that budget document, you are going to see before that another document from the congressional budget office, which is going to be cbo's take on the budget outlook. this is a distinctly different document and one of the things that i tried to explain to you in the handout is that the numbers in the cbo blj outlook and the numbers in the budget itself cannot be compared

directly apples to apples. the reason is that the budget is the president's economic and budgetary program and it presents projections of future numbers on the assumption that the president's program is adopted lock, stock and barrel. however, the cbo document does projections on the basis that current law as of now is continued indefinitely so the difference between the two is not only cbo's possibly different perspective of where the economy is going and how the cost of particular programs will change because of that, it is also different cbo assumes the law today without change. the president's budget assumed the law to be changed according to everything that the president wants and presents in his budget. so keep that in mind when you look at the numbers from one document to the other and that

will help you to convey to your readers what those numbers really mean. cbo's document will be released probably sometime this month. i have no information about the particular date. next page in the handout, one of the things that is foremost in everybody's mind is what is the budget deficit going to be? looking at the budget as a whole, what you want to keep in mind is that the significance of the deficit is that it is approximately the amount of money that the federal government has to borrow from the public to raise cash so that it can continue to fund its operations. i have a little explanation in there of the approximately part of that last sentence, the difference between the deficit and the amount of money the federal government has to

borrow. we are in a time with the response to the financial crisis when the difference between those two numbers is, in fact, much larger than it had been historically. this is because of programs like the troubled asset program, where the federal government bought private securities and it is beginning to get a return on some of those securities. there are flows going in and out of the federal government in cash that affect the amount of money that the federal government has to borrow in financial markets. i've explained to you there in the very first table in the summary tables what is called appropriately enough s-1 where you'll find the amount of the deficit but then also going back to the last table, traditionally in the summary tables last year it was table s-14 and if you

want to know how sick i am, i live for table s-14. this is just the most exciting thing in the world to me and if you look at table s-14 you will see an explanation of how much money the federal government needs to raise in the financial markets, you'll get a history -- a short history and a projection of the amounts of debt held by the public which is what economists are concerned about. that's how much money the federal government must borrow in the financial markets therefore it's the indicator of how the federal government affects the financial markets and affects the economy. you'll also find numbers there for another number, another concept which is debt subject to limit. debt subject to limit is not something economists look at very much but it is something you will be concerned about -- i assume many of you will be concerned about over the course

of the next three or four months. that is the amount of money that the federal government is allowed to borrow. it extends beyond the money that we borrow from the private circuit and from the rest of the world from the financial markets and includes the amount of debt is held within the federal government, the securities that are given to trust funds, notably the social security trust fund but there are more than a hundred trust funds within the federal government that hold special treasury securities. you take all of that debt together, the debt that economists care about which is the debt that is held privately, plus the debt that is held within the federal government and you get to the debt subject to limit. we anticipate that debt subject to limit is going to come very close to the statutory debt limit, sometime between march and may, the treasury secretary wrote a letter to the congress

shortly ago explaining that we anticipate that we're going to run into that debt limit and that the congress will need to take action to raise the debt lim limit. i can tell you from my own experience working with this issue quite closely when the treasury secretary says he's not sure exactly when we're going to hit the limit and it could be any time within a two-month band, he was speaking absolutely honestly. you don't know how those numbers are going to accumulate. you don't know what tax receipts are going to be. you can be incredibly surprised as you start getting into the tax season by the amounts of refunds that the treasury has to pay and the amounts of receipts that it takes in. the one thing that i will tell you is for people who owe money to the treasury, they are going to mail those checks on april 15th. they are going to mail them by the slowest u.s. post office

service that they can possibly final. back in the old days the story was if you owed the treasury a big check, you would take a vacation to key west where the mail service was by boat. you would go to the post office on april 15th in key west, get a postmark, the mail would be carried to a boat. it would make its way back up north to the state of florida, by boat, island by island and you would finance your key west vacation by the interest that you saved on the float on the money because you were sending it in by mail. so receipts, net receipts of the treasury are highly unpredictable. the one thing we know if you're owed a refun you want to file early. if you owe tacks you want to file late. one of the concerns is we could strike the debt limit significantly before april 15th

and we could be in a situation where the federal government is significantly short of cash. i'll just add for purposes of discussion right now. some people say that playing with the debt limit is playing with dynamite. i can tell you that is not true. it's not playing with dynamite. it's playing with plutonium. this is one of the most dangerous situations in federal government finance that could possibly be imagined. all we need right now in a time when the federal government's debt is sealingly out of control would be a spark of concern in the financial markets that the federal government could begin to default. and the consequences for every american citizen would be enormous and that's part of the story that i tried to tell in that little document that you've received and i hope that you take a look at that and it might help you along with that understanding.

so let me move on from the joy of table s-14 in the budget to some of the concepts that you're going to have to deal with and particularly for those of you who haven't covered a budget yet some things seem like niggly and piggly little things but you'll want to know them to keep your story on target. federal spend something divided into two fundamental categories and one of them is routinely subdivided. we talk about discretionary spending and mandatory spending. a subcategory of mandatory spending is net interest. interest on the debt. the terms discretionary are terms of art. they sometimes are taken to convey meaning that they really don't have. but the simple story is as

follows. discretionary spending is the spending that must be legislated earlier through the preparations project. a discretionary program if there is no action by the end of a fiscal year, that program must stop in its tracks. this is what we call the quote/unquote shut down of the federal government. mandatory spending is precisely the opposite. mandatory spending is created in permanent law and mandatory programs keep on going forever until the congress acts to stop them. absent a debt limit crisis, which throws everything out the window. the quintessential mandatory program with which all of you are familiar is social security. the nature of mandatory program is just like what you understand of social security.

the law creates a formula that determines how much money an individual or possibly even a business is entitled to receive. and if you file for social security benefits and you qualify, they calculate the amount of benefits you are owed and those benefits will be paid unless the law is changed. the other side of the coin would be discretionary program and the quintessential discretionary program is an appropriation to build a bridge. if appropriations run out and you don't renew the appropriation for the department of transportation, construction on that bridge will stop because the checks are not being paid to undertake that expenditure. so that's the difference between discretionary and mandatory. it is not intended to be an indicator of merit or an

indicator of the extent to which people ought to continue a program or ought to stop it. it is simply a question of how that program is created in law. now, a subcategory of mandatory spending is net interest. of all the mandatory programs net interest is the most mandatory. you've got to pay interest on your debt if you don't as i've noted earlier, possibly in excess of what was reasonable, the consequences will be dire. that is a quote/unquote default. so when you look at those categories of spending that will help you to understand what we're talking about and i cite in the handout a table in the supplemental tables in the budget that will tell you a little bit about that breakdown of spending. now, going beyond that let's focus in on discretionary

spending. typically in the budget tables when you get a little bit deeper, you will find a subdivision of discretionary spending. the current subdivision of discretionary spending most commonly used is a distinction between quote/unquote security spending and quote/unquote nonsecurity spending. in the handout i give you a little bit of history how those concepts evolve, but what they mean right now and i think if you look at the history it will help you to understand this, but what they mean right now is for security spending, we include defense spending and also selected spending outside of the pentagon that is pertinent to homeland security. and nonsecurity spending as the name would suggest is all other discretionary spending. this -- these concepts will be in play as you hear the debate about the budget this year

because we have competing proposals for restraining nonsecurity spending. one side wants to roll it back to the levels of 2008, fiscal 2008, the other side wants to freeze it for three years. when you get to the securities side there are differing views about the extent to which in particular defense spending could and/or should be restrained. but when you look at discretion nary numbers in the budget you're likely to see them presented in this security and nonsecurity division. beyond that, there is a question about supplemental appropriations. now, just to get you a head start on this, back in the old days when i was your age, a supplemental appropriation would occur when there was a hurricane or an earthquake.

and the money that was appropriated in the course of the budget process turned out to be insufficient because there were big sudden unforeseen expenditures that needed to be made to respond to some kind of a natural disaster. in recent years with the military activities in iraq and afghanistan, we have gone through a cycle of enormous uncertainty with respect to the amount of money that would be needed to carry on those war efforts. we have gotten into a circumstance where we have had relatively well anticipated but in their amounts uncertain very large supplemental appropriations bills that were necessary to fund the war effort. so one of the things that you're going to want to be looking at as you look at the budget is the degree to which the funding that is in the budget for the

department of defense reasonably could be expected to reflect the amount of spending that will be needed over the course of the year for our continuing but presumably winding down activities in iraq and afghanistan. so that possibly of a supplemental appropriation is going to be in the background of the consideration of the budget. now, one of the concepts with respect to discretionary spe spending going on to the next page in the handout that drives people crazy and it's one of the reasons why many people will tell you that they find the federal budget totally impenetrable is a distwins between the concepts of budget authority and outlays. it's really not all that complicated, but let me give you a little bit of background just

so that you're i hope up to speed on this issue. if everything the federal government did took less than one year, we wouldn't need the concept of budget authority. you would take revenues in. you'd spend them within a year. you would budget for one year. it would cover everything you're doing. there would be no problem. you get into difficulties because the federal government undertakes long-term activities that extend over several fiscal years. if you think about it, if you're undertaking a long-term project, there would be ways you could legislate for that project that would be tremendously misleading and would possibly get you into trouble. and as an example i wrote about a possible dialogue between you and a home seller and mortgage lender.

where you look at the cost of a house, you look at the interest that you would have to pay on the mortgage, and you come up with a mind-boggling number and you say i can't possibly afford that. and the lending and home seller says to you, well, payment, look at it differently. we're in september. you're going to make your first mortgage payment more than a front from now in november, so, you know, you'll only make two mortgage payments this year. you look at the sum of those two mortgage payments and it's very small so you can afford this house, go ahead and do it. the -- what you need to do, however, is to take into account the entire commitment that is involved. in signing that contract to buy that house, when you look at the federal government, there are a lot of things that are similar. you can buy an aircraft carrier. in the first year of the program of building the aircraft carrier the amount of money you spend will be relatively small.

you're drawing plans, you're, you know, possibly having conversations with potential contractors. before too long, however, that starts to be extremely expensive. if there weren't a way in the budget process to recognize the total long-term cost of that project, we could find ourselves starting all sorts of things, all sorts of expensive long-term projects that we could not ultimately afford so to provide that control in the budget process, there is this concept of budget authority and that represents the total amount of the cost of these kinds of long-term projects like building an aircraft carrier. and what that says is when you look at the defense budget, you will see an amount of budget authority that will be larger than the amount of outlays. that's because the spending on that new aircraft carrier in the first year, the outlays will be small. but the budget authority has to be large. there are other parts of the defense budget and all other

agency budgets where the amount of money spent does go out within one year so defense manpower is an example. all of the salaries get paid in one year. but you want to be conscious of this distinction between budget authority and outlays and that will help you in describing the federal budget i believe to give your readers an accurate picture of exactly what commitments are being made. some of you will probably find that when it comes time for the release of the budget, you are going to want to be able to know whether a particular project that is important to the geographic area for which you write is included in the budget. what you need to do to accomplish that is i would suggest and i am not the world's foremost authority on this but you should get to know the folks

in the appropriations committees in the congress who cover the areas where projects and i assume that in many instances it will be highways but certain other things and the people in the appropriations committees who work on those issues, because they are going to want to know what's included in the budget and you can possibly get information from them. you'll want to go to the relevant agency, for example, the department of transportation, see if you can develop a relationship with people who work there and will be knowledgeable about your particular project, see if the department is going to offer a briefing at about the time of the release of the budget to explain what the agency's budget looks like and there are some little pitfalls and traps of which you'll want to try to be conscious where there might be some happy talk in terms of trying to describe how much a particular amount in the budget

can pay for. i've got a page in the handout that gives you my best advice on those areas, but when you come down to those questions you're really going to have to get know folks in the agencies and folks on the hill, in particular the appropriations committee, possibly also the authorizing committees to learn to have a relationship to be able to go to them and ask questions when the budget comes out. there is a concept which is pertinent to both discretionary spending and mandatory spending, next page in the handout which is the baseline. if you were to imagine a wonderful mythical world in which the federal government were able to do exactly the same thing year after year, the cost of continuing to do the same thing year after year would be what you paid for that activity last year, plus an increase to

reflect the rate of inflation for the next year. proposed freezes of federal pay aside, typically when you go from one year to the next year federal employees get a pay raise as just about everybody wants to. that may not be true this year but the cost of supplies certainly is going to change. usually up. sometimes down depending upon what it is you're buying. and there is a baseline that is constructed by cbo and by omb. they're supposed to be the same. they often are somewhat different, which is intended to reflect the change in the cost of doing the same thing year after year. so if you think about it given that the president won't propose to do the same thing next year that he's doing this year, the change in the president's program in terms of money can be

expressed as the increase in cost of doing the same thing, the baseline plus or minus program changes. many people talk about the baseline and come to the conclusion that the baseline can drive policy. i've heard people complain that because the baseline includes typically an increase for inflation, both in pay and in the cost of supplies, that is biases federal spending decisions upwards. the federal government, this argue goes, has no right to expect the pay increase for inflation -- of course most people in the private sector expect it but the argument is the federal government has no right to expect an inflation increase. it should make do next year with the same amount as this year if not less, and, therefore, the fact that we have a baseline that represents inflation biases

these federal spending decisions. i've never felt comfortable buying that argument. it always sounds to me like the baseline made me do it. what the congress ought to do, what its job is to review the budget every year, look at the extent to which programs should be changed or even if the programs aren't changed money can be saved and appropriations can be chosen, therefore, on a reasoned basis with appropriate changes from year to year that economize on the use of the taxpayers' dollars. that is what we hire the congress to do. the baseline is merely an indicative tool to give a sense of where those numbers might go. it is certainly intended to tell anybody where they ought to go. so when people make reference to the baseline and, in fact, when you look at that cbo document

that i mentioned at the outset which is going to be released later this year, it is in a sense a baseline document. it tells you what the cost of continuing to do what we're doing now can be anticipated to be next year and the year after that and the year after that. so that's a baseline, but it's not intended to tell anybody what we ought to do. the baseline holds true for discretionary spending. there is a concept of a baseline that is relevant for discretionary spending. there is also a concept of a baseline for mandatory programs. however, the mandatory program baseline is not quite as simple as the discretionary baseline. the reason is that if you're looking at what social security is going to cost next year relative to what it costs this year there is a lot more going on than just the rate of inflation. there is also the number of prospective social security

recipients that choose to retire. there is the number of current social security beneficiaries who might pass away. there is an adjustment in benefits, a cost-of-living adjustment which may or may not be triggered for current social security benefits. there is a current history of what new retirees is. people who retire with higher wages can bigger benefits than those with lower. there is a concept that applies to mandatory programs, but it is much more complex than that for discretionary programs. then in addition to that there is the addition of proposed changes and i've givenen you in your handout a very lengthy table. this is the table from the sum

men tri tab one is proposed policy changes for mandatory programs and the other is proposed policy changes for revenues. the reason why those two have been combined, i believe, is that in many instances there are overlaps between the two. particularly with respect to so-called refundable tax credits. the earned income tax credit, the child tax credit, amounts of those credits under the income tax law are paid to individuals without -- in excess of tax liability in excess of zeroing out the tax liability if those people meet certain conditions. those refundable amounts of tax credits are considerable outlays in the budget, not negative

revenues. and so as a result, when you propose a change in the child tax credit or the earned income tax credit and we've extended some changes in those credits in the current tax law as it was modified last month, then you have numbers that apply to both revenue changes and outlay changes with respect to a single policy and because of that, those two tables have been combined. so if you look at that table in the handout you'll find out it goes on and on and on and on. it's quite possible it will do so again this year, but if the question comes up, what is the president proposing to do with respect to medicare, with respect to social security, medicaid? with respect to the income tax, is he going to propose to extend the tax cuts that were further that were extended back in december, or is he going to propose a change? you're going to need to look at

this particular table and i've tried to discuss in the handout a couple of things that can go on. if you're the president proposing the budget and you want to make your deficit look smaller, you may very well propose a bunch of policies with respect to particular mandatory programs that save money. you might propose targeted tax increases on people that many people don't like. there's a last year there was a proposed special tax increase for financial institutions, for example. it may be possible that those policies do not have a snowball's chance in haides in being enacted. if you put them in as proposals remembering as i suggested earlier, the budget assumes the enactment of the president's program you can take those and make your deficit look smaller. the same thing, of course, can happen in a congressional budget

resolution and has happened in recent years so you can see those things going one way or another. but you'll find in the handout some descriptions of ways in which mandatory and revenue policies can be used to make the budget look a little bit different as it comes out the door. i'm running a little slowly so i'll try to speed up a little bit. on the mandatory side of the budget, you will find that mandatory spending consists of a relatively small number of relatively large programs. so if you look at the mandatory budget and you look at the amounts of the programs, the mandatory programs in the budget, you will find the biggies are social security and medicare and medicaid and once you get to those, you've accounted for roughly 70% of the total. and then you've got a few dozen more programs that are much smaller that divide up the remaining 30%.

this is very much in contrast to the discretionary side of the budget where you've got an enormous list of programs, many of which are extremely small. and for those of you who are familiar with the budget books and many of you might simply work with the online versions, but for those of us who spent years hauling those things around, the biggest, fattest book in the budget is a book that is called the appendix. that budget is solely about discretionary programs, and it runs typically about 1,200 page, and it goes on and on and on with descriptions of individual program, individual line items in the budget. it is, in effect, the president's guidance to the appropriations committees. that's what that book is for. you'll want to keep in mind if you have that book and you're

carrying them all around and you notice that the appendix is virtually as large as the other books put together, you'll want to keep in mind that that book is only about the discretionary part of the budget, which is only about at this point i think it's roughly 1/3 of total spending. the other 2/3 are in much larger programs on the mandatory side of the budget and are described much more briefly in the course of the budget. there is also a concept of a baseline for tax receipts. in effect, a baseline is what happens if you put the tax system on autopilot. you allow current law to continue, and the question then is, how much revenue are you going to collect? that is a nice, neat understandable concept. the only problem with it is that particularly in the last few years in the last decade really it can be terribly misleading.

and the reason why it can be misleading is that going back to 2001 we have had enormous changes in tax policy enacted on a temporary basis. the tax cuts that were enacted in 2001 were set to expire at the end of calendar year 2010. even though the people who enacted those tax cuts had no intention of allowing that expiration to happen. the point was that's the way we can get those tax cuts through the budget process and get them enacted into law so we'll do it that way. of course, we came to the end of 2010 and we found ourselves in a terrible situation trying to figure out what we were going to do about those decisions. those tax cuts and tax cuts that were enacted in 2003 and a few enacted in 2009, back in december extended for another two years. so if you were to look at a revenue baseline, it will show that at the end of calendar year

2012, those tax cuts are going to expire and revenues will jump up to an extent that they will significantly reduce the amount of the budget problem. in reality, just as was the case in 2001 with respect to tax provisions that will expire -- were set to expire at the end of 2010, nobody wants all of those temporary tax provisions to expire, almost everybody has a sense of extending at least some of them, if not all of them. so extending at least some of them if not all. so a revenue baseline on that basis can be extremely misleading. if you look at the revenue base line and you put it into the budget picture, the deficit is going to take a sharp drop beginning in fiscal year 2012 and then particularly the next year fiscal year 2013. the problem is that with those taxes, tax cuts expiring, you

will have a significant economic dislocation and it will cause serious political problems to anybody who allows it to happen. you want to keep in mind that the revenue baseline is perhaps of all the parts of the budget the one where the baseline concept is the most negative and misleading in terms of results. i've got a couple more pages in the handout. let me say just one thing very quickly. part of the reason why we are where we are, part of the reason i think why the release of the budget has been postponed, is that the president has got to figure out what to do with the recommendations of his commission. the complication with the budget commission recommendations is that you've got bipartisan policy decisions to reduce the

deficit, all of which are extremely painful, all of which will cause extreme political difficulty to anybody who gets behind them in a very visible way. the president's problem is if he comes forward with those recommendations in his budget, his base is going to come at him and say that he has given a lot of ground in what should be a very contentious budget negotiation if there is going to be any negotiation at all and some people in his base will not want one. people on the other side will take the position that the president has just given us his negotiating position. now we want to find out where his give is and have him come even further towards us, more spending reductions, less revenue increases. so the president is in a political box and is going to have to try to figure out how to put deficit reduction on the

table because, frankly, the rest of the world expects it, and if we don't make some serious decisions in this direction as i suggested at the very beginning, there could be significant financial consequences in our not too distant future. the president's got to do that in a way that keeps his political position sound and that is not going to be an easy thing to do. so that, to me, is one of the most touchy issues going forward. i've got a final page in the handout, which deals with the question of budget earmarks. i think that what i'm going to try to do right now is just to stop and i'll point that out to you. you know it's there. i'm happy to answer questions about that. but we're getting down very close to the end of the session and we have the moment of silence coming up and we're going to want to stop approximately on time for that. so let me open it up for questions and i'll be happy to

try to help you out as much as i can. okay. >> i have a couple structural questions and i hope since the next panel is changed that you might be willing to go a little bit into their territory as well. the first one has to do with the proposals by the house republicans to cut back, whether a hundred billion or something else. do you see that coming in the context of the budget resolution and things like the budget function since the appropriation process seems to be completely broken? i wanted to get your perspective on whether roll backs would be by budget function. secondly, the talk about

two-year budget. if you take that seriously, if that would have any structural changes on the process that you've talked about. >> okay. i'm going to try to move relatively quickly. in fact, the proposed hundred billion dollar cut in the budget is going to be on us much sooner than you might anticipate, because we are funded -- the federal government is funded on a continuing resolution. and that, i forget even the date when it expires but it is not far in the future. so the first thing that this congress is going to have to do is finish the process of funding for the current fiscal year on the discretionary side. how will they do that? to be honest, i have no real idea. the simplest way is a cut in nonsecurity discretionary spending. the simplest thing would be to

take all the nonsecurity spending lines and cut them by the same percentage across the board. you can't do that. the reason why you can't do that is that in keeping with the discussion earlier, there are a lot of activities on the discretionary side of the budget that are long term in nature. many entail contracts. for those of you who believe in the constitution, the constitution establishes the sanctity of a contract. so if you made a commitment last year to build a building, and the federal government has signed contracts, you're on the hook for that building. so you can't cut that part of that particular line in the budget. so you go through, and this is the process, the kind of process that you go through every time you put together a continuing resolution for the federal budget. the first thing you've got to do is deal with term of art is

anomalies. you have to go through all the parts of the budget where, in fact, you're already locked in. take them off the table, because you've got to meet your contractual obligations on those and then you have to work through everything else. and if you have a spending target and the spendi ining tar is a reduction of, say, 10%, once you take everything that's fixed off the table you might very well be looking at a reduction of, say, 15%. usually the next step is you look at some things in the budget and you say, holy cow. i am not going to cut that by 15%. and every individual can choose his own. by the time you get a room full of people and everybody takes the lines that they don't want to have cut by 15%, there's not much left. but first you -- then you exempt programs that you don't want to cut and the next thing you know, you're cutting by 30%, 40%, 50%.

it is a very contentious process and it's the kind of process we go through routinely, as i say, when we do a continuing resolution now we're going to be in the process of trying to finish up the appropriations for this year and i suspect it is going to be extremely contentious and extremely painful. >> you mentioned the recommendations by the president's deficit reduction commission. what if any of those do you think actually have a chance of being adopted? >> well, the commission's recommendations include, for example, a package to fix social security. i've got a discussion in the handout which i didn't get to of why i would say that we need very early action on repairing

social security's finances. my understanding from the discussions within the commission was that there was a fair amount of agreement on the motivation to do it. there were certain possible changes to social security that caused a great deal of heartburn on both sides. one where it seemed as though there might be a certain measure of agreement was increasing the cap -- the taxable maximum amount of compensation that we would be subject to the social security payroll tax. that's only one part of a potential solution. you've got to go a lot further than that. but people were able in that commission to relate to one another to some extent as to how you might be able to find ways to save money.

there can be a reasonable amount of agreement for restraint on discretionary spending to the extent that you talked about it in concept and you don't start talking about specific things you want to cut. but it is likely that any proposal to deal with the budget problem if it comes to fruition, it is going to involve restraint, probably across the board. i shouldn't say across the board. it will probably involve restraint that will affect every agency, including the pentagon, and ideally it will be done on a relatively targeted basis at places where you can find savings that you can achieve. you might find, this is, i think, the wild card. there was a great deal of interest on the president's commission in a tax reform,

which is to say and this kind of goes back to 1986 for those of you who are old enough that this means anything, we had a tax reform act that was enacted at that time and what it did was eliminate a lot of preferences in the tax law and to use that revenue to reduce tax rates. it is possible that even for some members of congress who are extremely averse to tax increases, that they may be willing to go along with a tax law reform, which raises some revenue but also reduces tax rates because it's the tax rates that affect the incentives that people have to work and save and invest. it is possible that if you take all the various parts of the budget and you put them together, with a tax reform, that provides some appeal to people, possibly across the

board but certainly on the republican side, so that that gets you some revenue and reductions in the -- on the spending side, reduce outlays, and you put the two together and you get enough spending -- enough deficit reduction that you start getting the debt under control, that possibly could be attractive politically. it is -- one of the things that makes this difficult is that it always works best if you do the whole thing at one time, because that way everybody is making a sacrifice. if you try to target one part of the budget and you say, okay. we're going to start here and this is going to be our first piece of legislation, that is not going to be attractive to those who are losing, who are taking cuts in that legislation and everybody else won't be terribly motivated to pursue it anyway because it's not going to solve much of the problem. that's why we're probably going to look at if it is successful deficit reduction efforts are

probably going to work through the entire budget including the revenue side. >> thank you very much. >> okay. >> thank you. that was a terrific stab at helping us start to understand this complicated issue. let me remind those of you at home in your offices watching c-span that the document we've been referring to is available on our website. that's national press.org. you'll find a red bar across the top of the home page and if you click on that bar, it'll take you to the program page. scroll to the bottom and you'll find this document. for those in the room also if you want to go back and print out a copy if you didn't get one, it is available. for those of you not able to stay for the rest of the morning's program, i'll ask you to keep your seats for a minute. our president barack obama has asked we as a nation observe a

moment of silence in memory of the victims of this weekend's horrific violence in arizona. in addition to the grievous injuries to representative gabriel giffords and others, six people were slain outright. i'm going to read their names as reported in this morning's "the washington post". christina green, 9 years old. dorothy morris 76. federal judge john enrolled 63. fillies sneck 79. dorwin stoddard 76 and the last victim, 30. please join me for a few moments of reflection or prayer.

[ moment of silence ] >> thank you very much. and now we'll move on. if you are here, come down to the front. we're going to move from the nuts and bolts discussion of our federal budget into a discussion of the broader economy. and to help us do that we're extremely pleased to have our next speaker, a reporter for "the wall street journal." he covers the federal reserve and the u.s. economy. previously he was with the "dallas morning news" a washington correspondent and before that covered the energy industry, technology, and business for the texas state house. he's also an award winning

reporter. he has won awards from the society of american business editors and writers, from the associated press managing editors, from the association of consumer advocates and we are particularly proud to note that he is a winner of the national press foundation's thomas stokes award for best energy writing. he is a long-time friend of the national press foundation and we're very pleased to have him. if you are a fan of the national public radio show "market place" as i am his voice will be familiar because he is a regular there and also appears on other television and radio shows. so very pleased to welcome him today and thank you for being here and being flexible with our schedule. this is terrific. we have i believe a few open seats at the table, so if anyone who is sitting on the sidelines if you have an open chair next to you please raise your hand. i see one.

if one person wants to move over to the table feel free to do that. would you like to stand or you wanted to use the computer? okay. i think it's right here. anna, are you in the room? can you help, i think we're going to load a, maybe a list of websites. we are pleased to be here at the woodrow wilson center for scholars today. they have these beautiful facilities including the computer and projector which are going to help with our next presentation. so our thanks, also, to the wilson center for their hospitality. and as our speaker sets up his presentation i will take a minute to welcome our paul miller fellows here this morning. this is part of a nine-month fellowship they have been awarded. these arl washingte all washing

reporters who have not been in town all that long. they come to us one day a month to take part in the national press foundation's paul miller fellowships in which we try to help them become more familiar with the agencies and institutions that make washington work. this is part of their fellowship this morning. in addition to a pretty diverse range of other journalists and interested parties from around washington who braved the cold weather to come out and join us this morning. we're very pleased about that. looks like we're getting booted up here. one more note. our previous speaker has made a

point of saying that if you need to contact him with questions, you want to do an interview and didn't get something this morning please feel free to do so. his contact information is also on our website. national press.org. and many thanks to him. >> should any of you have occasion to want to interview lee hamilton our director in bloomington, the contact information for the center is also in the press foundation materials and also on our website which was up there previously, center on congress.org.

>> i will go ahead and get started. while we're pulling up the presentation, some of you can share. i actually have some printouts here at the table. i thought it would be useful to start off since we're talking about the context of the budget to discuss something very much in the news and will be for the next few months. the budget in the context of the debt and the debt ceiling and the effect of the debt ceiling on the u.s. economy and that entire debate and we are really just now starting to see the debate pick up obviously about what this means for the economy overall if we were to have a default on the debt. obviously it's only a threat right now from people looking for spending cuts but it is a serious threat and one we've never actually faced.

so the -- i'll pull this up. this just for the basics to start off with a rundown of what the u.s. debt looks like. as you know we're heading just above $14 trillion of debt ceiling at $14.3 trillion. and you can see here that we've actually run through from the --

you can run the debt back to 1789 if you wanted to. there's always been some debt in the u.s. except for 1835 when andrew jackson was able to eliminate it entirely. there's always been some fairly low level of debt and as the economy went into the '70s we started seeing a creep up into the '80s. you can see on this chart what happens when policies aren't quite in sync as they should be with taxes. and here you can actually see from the last 110 years we are running through basically even on revenue versus spending and there are dips here and there. but you notice right here in the 1970 period that you go into deficits and this is what

happens when you lower taxes significantly without having the spending cuts to deal with it and this is what happens when you actually make the proper tax and spending changes that you need in the late '90s and the economy goes into surplus and then again when you are running two wars and lowering taxes and paying for social programs and then of course you have this big drop with the financial crisis when tax revenue plummeted and spending went up with the stimulus program and we're starting to see the -- obviously we hit bottom but with the latest deal in december to extend the bush era tax cuts the deficit is still over a trillion dollars for the coming year and that's how you get into a figure like this where it just -- it clearly is unsustainable. now, there is a difference between -- you've probably heard a difference between the debt

held by the public and debt held by intragovernmental accounts, debt held by the public about $9 trillion. that's people, regular people, investors, includes foreign investors. about $4 trillion out of that $14 trillion is held by foreign governments and foreign investors. so that is a significant figure when you consider that about half of that $4 trillion is held by china and japan. japan obviously had surpluses and bought up debt until its downturn from the u.s. and china is still buying it and is a leading buyer of u.s. debt. a few points to run through on this debt ceiling debate that we're going through now. the u.s. dollar as you know is the world's reserve currency. there is a reason that the u.s. is able to borrow to the extent

it can right now because people see it as a safe haven during crises and flock to the u.s. dollar because it's the safest place to hold money just because of the reputation of the u.s. government and the might of the u.s. government and there's an expectation that the u.s. is always going to pay it back. if you were to look at the entire volume of $100 bills in circulation, some are between 2/3 and 3/4 of the physical bills are held outside of the u.s. that's kind of an indication of what people think of the dollar everywhere around the world and that's why the u.s. is able to borrow at such a large extent. the risk though is that you keep borrowing and don't pay it back and there is nothing wrong with short-term borrowing as long as there is a long-term plan to pay it back afterward and that is reel it big issue right now. interest rates are really low, for the u.s. government to

borrow at ten years the yield a few months ago was 2.4% which is obviously a historical low but there is a reason it's advantageous for the government to go and borrow at that rate, build the economy back up. this was all the money borrowed during the stimulus program was done at very cheap, low rates. that's done to fill a hole in the economy whether in the 2001 recession, when the tax deal came out and the stimulus package that sent checks to everyone. same thing in 2003 and then in another plan sending money directly to people and the big one of almost $900 billion in 2009. the problem is if there is no long-term plan to pay it back you run into the unsustainable deficits obviously and there's been a study that looks historically over centuries at governments that keep borrowing money and don't have a plan to

pay it back. once you get at the point of about 90% of your total gross debt to gdp, the u.s. economy gdp is about $14.5 trillion and we are basically over that point now, it's been shown countries that are borrowing at a level that high end up having slower economic growth and nobody knows the exact reason why this happens. it all depends on each individual country and their own circumstances there but there is a sense that if you are borrowing at a level that high your growth patterns go somewhere from being -- possibly growing at 3% to 4% per year down to 1.5% to 2%. that is one of the risks we face now. as you see higher debt investors will eventually decide you don't want to make your debt on this particular government. this is what greece went

through. greece was well over a hundred percent of debt to gdp and the borrowing costs for the greek government went through the roof and you get to the point where you can't actually sustain the current budget because you're spending so much just to service the debt that you've got that that's when you get to the point of a default and investors then will charge even more than they've been charging before. so the u.s. right now as i said, we're right around 3.5%, interest rates have gone up. as the economy has gone up. there is some fear that if you don't do anything about the deficit and the debt and leave this problem festering that investors will eventually start questioning the ability of the u.s. government to pay it back and you look at 4.5%, 5% borrowing costs, 6%. the reason this is just not for the government borrowing because it obviously affects how much the government is going to be able to do in other programs if

it's spending so much money servicing debt but also beyond that in the idea of how these interest rates flow through to the rest of the economy and the market place the ten-year treasury yield is known as the benchmark rate and that flows through if you're ever looking for a mortgage it's often tied very closely to the ten-year yield and with some premium that borrowing costs in every other way are tied to the ten-year yield whether for corporations or for consumers. investors can turn quickly and fiercely so they can decide and we never really know when investors are going to decide that the u.s. is not going to borrow, be able to borrow at the pace that it did before. and a crisis can come up suddenly. we've known for years that greece was borrowing more money than it should have been borrowing and we've known that its gdp, debt to gdp ratio was going over a hundred percent but only until investors as a group

obviously decide that this isn't sustainable. do you have that sudden and fierce crash in that market? and nobody ever really knows. we learned through this latest financial crisis even though we knew back in 2004, 2005, 2006, that the housing market was going into an unsustainably high level for prices it wasn't until 2007 that investors started to take note and then obviously suddenly in september of 2008 there was the very sharp reaction to what was happening there. raising the debt ceiling is certainly a contentious issue but kind of an oddity for governments around the world particularly the u.s. it doesn't really make sense why an elected body should be able to go and make decisions on taxing and spending separately

from the debt ceiling. there are no other countries in the world where you actually set a separate vote for raising the debt ceiling because just like we saw in december lawmakers came together and made the decision to increase spending and lower and keep taxes lower and didn't really do anything about the debt ceiling at the time but that decision alone is the effective decision that you're going to borrow more than you would have otherwise and postponing a decision like this on the debt ceiling for such an odd circumstance just exacerbates the problem because it allows it now to be used as a political weapon of sorts. for those of you who follow congress closely and were watching the federal reserve chairman on friday speaking before the budget committee he was obviously to talk about the state of the economy and the

state of the recovery but he also spent a fair bit of time talking about the debt and the deficit. there were a number of reports that have come out in the last few months but from private sector and from the debt, the deficit commission looking at this issue and i just wanted to run through a few of the points that chairman bernanke brought up because they really highlight i thought fairly succintly some of the problems we're seeing right now in the economy and in this debate over the budget deficit. you've all heard the difference between a structural and a cyclical deficit because there is no problem during a downturn of the business cycle in borrowing that's never really an issue. financial markets give plenty of leeway for the u.s. government to go and borrow in large sums during a downturn because the economy is weak. you're basically filling a hole

in the economy and there is nothing wrong with that. the entire purpose is to get the economy moving again. the structural issue is what we're dealing with now when medicare and medicate expenses are growing unsustainably social security is obviously has its problems and the defense budget is what, a quarter of the federal budget, almost a quarter of it. you're looking at this problem and you have to do something beyond the cyclical issue. the fact that tax revenue has gone down during this cycle and is going to come up is not the entirety of the problem. the cbo has its estimates and one of the things the chairman ran through were the implications if nothing were to be done about the debt and deficits. he says diminishing confidence on the part of investors it will

be brought under control will lead to sharply rising interest rates of government debt and potentially to broader turmoil. higher rates would drain funds away from private capital formation and increase our foreign indebtedness with adverse long run effects on u.s. output, income, and standards of living. so the beginning part of the statement is self-explanatory. the high rates of government borrowing draining funds away from private capital formation, that is a really important point here because when the government is borrowing money and interest rates on government debt go up people are still going to trust the government more, the u.s. government than corporation in terms of borrowing costs so as investors keep putting money into u.s. treasury bonds as the value of those bonds is dropping, the yields are rising, corporations are going to be crowded out from being able to borrow. and individuals will be crowded

out from being able to borrow because investors will focus on safer government debt than they will on corporate debt. that creates all sorts of problems for the economy if borrowing costs, not just the cost of capital but also the availability of capital for business that will severely slow down the economy. then obviously the foreign indebtedness with $4 trillion out of the $14 trillion held by foreign investments and governments. you have a number of issues with trade flows and the balance of power right now that you're seeing in this debate over the yuan and doing something about trade with china. the final point here i want to bring up from the fed chairman and what his warning to congress was, doing nothing will not be an option indefinitely. one thing he points out here,

the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run but could also yield substantial, near-term benefits in terms of lower, long-term interest rates and increased consumer and business confidence. that is actually something that was debated in the early 1990s when president clinton was trying to come up with a plan to bring down the deficit and some would call it a deal but an understanding he had with chairman greenspan is that once you are able to bring down the federal deficit and give investors confidence that the debt is not going to come out of control, then long-term borrowing costs for the government come down and as treasury yields come down and those borrowing costs come down, corporate borrowing costs come down as well. so the agreement between the white house and republicans in the '90s that brought the budget into balance was actually a very

important factor in the boom of the 1990s and that really sharp period and strong period of job creation that we saw then over the eight years of the clinton presidency you're looking at about 23 million jobs created in the eight years following that and the bush presidency about a million jobs created so there is a fairly stark difference there obviously between the two climates that we saw. i want to pause there and first go to some questions that people have so we can talk about the debt and then i'll go into some of the other metrics of the economy that may be useful. yeah? >> do you know how much of the increase in the federal debt over the last 20 years can be pinned on the tax cuts? >> well, you can actually see in

looking at the federal deficit what happens when you have tax and spending programs that aren't paid for. as you can see the u.s. went into surplus in the final years of the 1990s and once 2000 hit -- you had a combination of two things. first the economy weakening. it was a milder session but nonetheless a recession. unemployment went up to 7.8%. for eight months to have a recession is actually pretty mild and not that bad in terms of how recessions go. putting in the tax cuts at the same time as you begin fighting two wars, obviously creates a big hole in the budget and that's when you got from an annual surplus into annual deficits, $400 million and you can see that the debt goes from

about $6 trillion up to 9 or 10 trillion over that period. a large part of that was due to having tax policies that weren't somehow balanced out with spending policies. >> when chairman bernanke is talking about structural problems as opposed to the need for raising revenue, also the fiscal commission's proposals for tax reform, my understanding is they're talking mostly about spending cuts, not talking in the aggregate, actually significantly raising taxes in the u.s.? >> the fiscal commission is actually talking about both spending cuts and raising revenue somehow so you can raise revenue. the big problem with the tax code is there are so many deductions built in that you can't really measure it in the simplest way so if you were to remove say the mortgage interest tax deduction that's the most

common one that's discussed. then all of that would become -- so that affect obviously the tax base but that would lead to higher revenue. so you're not necessarily directly raising the tax rates. you're just removing a deduction. they are talking about raising tax revenue in that sense by removing a lot of the deductions and what chairman bernanke has been urging lawmakers to do is to -- it's not really the role of the federal reserve being independent to look at that issue and so he is saying somehow figure out either spending cuts or revenue increases to deal with this problem and it's not just about the cycle for the economy. when the economy is weak, the tax revenue goes down substantially because people are making less money. when the economy improves, it goes back up. but the structural problem is the fact that even when the economy improves, you're not dealing with the underlying deficit and it just keeps going out of control until you find some way to cut spending.

>> have you charged your battery recently? i wonder if anyone's modeled for 1950 or '60 tax systems because as warren buffet pointed out we basically have a regressive tax system now. if it were truly progressive how much of this void would be filled if we had a rational tax policy for instance. >> rational is in the eye of the beholder. you also had an incredible post