director will be on capitol hill for a hearing by the senate select committee on intelligence. they hold their annual hearing on global threats to the united states including the director of the cia, david petraeus and the director for the defense intelligence agency. we will have live coverage beginning have live coverage beginning tuesday at 10:00 a.m. eastern here on c-span hea. in a few moments, leon panetta releases the proposed budget with the next year. in an hour and a half, president obama on energy policy and jobs. after that, a senate hearing on the u.s. and global economic outlook. >> i had arrived in paris, walking to the hotel lobby. i met a man for the first time.

he said, so you of the rolling stone that. i did not care about the article, i just want to be on the cover. michael hastings wrote about the commander in afghanistan. >> i said, i think it is because -- between you and lady guta ga. >> he said, just put me and lady gaga in a heart-shaped tub. >> michael hastings continues the story and talks about his new book. >> leon panetta and the chairman of the joint chiefs of staff, general martin dempsey, have released the proposed budget for the next year. the planned cuts nearly half a trillion dollars over the next

10 years and calls for two more rounds of base closures. this is a little less than an hour and a half. >> good afternoon, everybody. as all of you know, this department has undertaken a very fundamental review of its defense strategy, and of our spending priorities. the reasons for their review are clear. first of all, we are at a strategic turning point. after a decade of war, and after a substantial growth in the defense budget. second, the congress of the united states, through the passage of the budget control act has required that the

defense budget be reduced by $487 billion over 10 years. to accomplish this effort, we decided that it was important to make this an opportunity to develop a new defense strategy for the united states, and for the u.s. military force that we wanted for the future. that strategy has guided us in making a series of tough budget choices, and establishing a new set of defense budget priorities. the ongoing process reached an important milestone earlier this month with the release of the new strategic guidance and the priorities for a new 21st century defense. it will be reflected in the

decisions that have been made and will be presented in the president's budget. when i announced the new guidance, i highlighted five key elements of the strategy and five key elements of the vision that we have for the military force of the future. let me summarize each of those. first, the military will be smaller and leaner, but it will be agile, flexible, rapidly deployable, and technologically advanced. it will be a cutting edge force. second, we will rebalance our global posture and presents -- presence to emphasize where we think the potential problems will be in the world, and that means emphasizing asia pacific and the middle east.

third, we will maintain our presence elsewhere in the world, and we will do that by building innovative partnerships, and strengthening key alliances, and developing new partnerships elsewhere in the world -- europe, africa, latin america, and elsewhere. fourth, we will insure that we can quickly confront and defeat aggression from any adversary, any time, any place. fifth, we will protect and prioritize some very important and key investments in technology and new capabilities, as well as our capacity to grow, adept, mobilize, to surge as needed.

given the fiscal constraints that have been imposed on the department, our approach was to develop this force for the future with some pretty important guidelines. we wanted to maintain the strongest military in the world. we committed ourselves not to hollow out the force, as has been done in the past in these types of drawdowns, to take a balanced approach by putting everything on the table, and to not break faith with the troops and their families. i want to think the entire leadership of this department, military and civilian alike, for their participation and support in this effort. this has truly been a team effort, and i am deeply appreciative of their cooperation.

we are united in the belief that this strategy and the resulting budget decisions follow the right approach to meet the country's most pressing security challenges, and to preserve the strongest military in the world, and at the same time meet fiscal responsibilities. today, i would like to offer a preview of the decisions we made to help build the budget request for fiscal year 2013, and the future years defense plan. this plan reduces spending, consistent with the budget control act, over 10 years, by $487 billion, but in the five- year budget presented by the present -- president we reduce the defense budget by $289 billion over the next five years the department will specifically request -- five years.

the department will specifically request in its base budget $529 billion. by the way, that compares to $531 billion in fiscal years 2012. our hope and plan is to rise to $567 billion by fiscal 2017. i would point out that the projected growth before we had to do this was to reach about $622 billion by 2017. fiscal year 2013, we will ask for an additional $88.4 billion for overseas contingency operations, oco funds, that compares to $115 billion we received in fiscal year 2012,

all of that, to maintain support obviously for our troops in combat. we believe this is a complete package that follows the five key elements that i described. you have the specifics in the package you have been provided, and i know the deputy and the vice chair will fill you in on any additional specifics you are interested in. i wanted to summarize some of the key decisions. with regards to the area of developing a smaller, leaner, but agile, flexible, and technologically against force, we knew that coming out of wars and dealing with budget reductions of this magnitude, the military would be smaller, but the key, as tough as it was to make the decisions with regards to drawing these down, the key is to fashion an agile and flexible military force

that we need in the future. what that means for the services is that we will have an adaptable and battle-tested army that is our nation's force for decisive action, capable of defeating any adversary on land. let me say that again. capable of defeating any adversary on land -- we will have a significant land force presence in places like korea and the middle east. at the same time, we will emphasize special operations forces. we will also emphasize a rotational presence, so that we can establish the kinds of partnerships that i discussed, and provide training and a device in other parts of the world. -- the device in other parts of the world. we will have a navy that maintains a foreign presence, and is able to penetrate and the penetrate.

and maybe has agility built into the force. the air force is the same. it will be an air force that dominates air and space, providing rapid mobility, global strike, and unman capabilities through their operators as well. a marine corps that is in the white expeditionary force with reinvigorated and tydeus capabilities -- amphibious capabilities. all of this will not work into a highly capable joined the network into a highly capable force -- network into a highly capable force for the future. we made a choice not to -- to

retain the most successful and technologically advanced platforms that we will need for the future. that involves unmanned systems, satellites, submarines, helicopters, aircraft carriers, and fifth generation aircraft. we are looking at multi-mission weaponry and technology that can support that kind of a joke for. striking the right balance between force structure and readiness is critical to our efforts, to avoid a hollow force, and we will continue to focus on this area to make sure we make the right choices. in this budget, we plan to gradually resize the active army reaching the 490,000, down from the present force level of 562,000, and the active marine

corps will go to 182,000, and that is down from two hundred two thousand. that transition will take place over the five years. we will not reach those numbers until 2017. this plan maintains a very significant army and marine force, with both forces at larger levels than they were at prior to 9/11. they will be fundamentally reshaped by a decade of war. they will be far more lethal, battle-hardened, and ready. the change in the size of our ground forces allowed us to examine the air force airlift fleet. our review determined we could reduce, and streamline our air fleet with minimal risk. we are retiring some a aging

c5a's, but will maintain the capability. we currently have 60 air force tactical air squadrons, and the review determined we could eliminate 6 of the 60, as well as one training squadron. none of that will limit our ability to dominate the skies. the navy is protecting our most flexible ships. it will retire lower priority cruisers that have not been updated with ballistic missile defense capability, or that require significant maintenance, as well as combat logistics' and fleet support ships. as we build this leaner and more agile force, we frankly

need to look at a department that is leaner and more agile as well. for that reason, this budget seeks to reduce excess overhead, eliminate waste in this department, and improve business practices across the department. we have identified about $60 billion in savings over five years, on top of the substantial efficiency efforts already underway. this will involve areas such as aggressive and competitive contracting processes, better use of information technology, streamlining the staff, reductions in contract services, and better inventory management. as a result of all of this, we will also need to look at facilities and the structure -- balancing overseas forward presence requirements with basing requirements back home.

in this budget requirement, we simply cannot sustain the infrastructure that is beyond our means or ability to maintain, therefore the president will request the congress to authorize the use of the base realignment and closure process, with the goal of identifying additional savings and implementing them as soon as possible. the second carrier -- rebalancing our global posture and presents to emphasize the asia pacific and middle east areas. the budget attacks and in some cases increases our investments -- protect and in some cases increases our investments in these areas. that includes a capability to strike over long distances. we will be funding the next

generation bomber and sustaining -- sustaining the current bomber fleet. we will move ahead with our next generation aerial refueling tanker. bringing in a stabilizing presence in combat power as needed, with an emphasis on these critical regions, the marines will sustain their level of presence in the pacific. the budget supports an enhanced partnering opportunity with australia and others, such as the philippines. in all of these cases, we will do this in a way that respects the sovereignty of the nations that we will be working with. it also provides the resources to forward station combat ships in singapore and a control pact in bahrain.

this will require maintaining the aircraft carrier fleet at 11 ships with 10 air wings, and maintaining our big back amphibious fleet. modernizing our submarine fleet will also be critical to maritime access in these vital regions. in this effort the navy will invest in a design that will allow new virginia class submarines to be modified. across the force, we will invest in upgraded sensors for aircraft, ships, and missiles, and the most electronic warfare capabilities. it requires the army to return to full spectrum training, developing a versatile mix of

formations and equipment to succeed on land, including in environments where access will be contested. the army will maintain its significant force structure in the pacific, including the korean peninsula, and will maintain an operationally responsible peacetime presence in the middle east as well. the third area -- building innovative partnerships and strengthening our alliances throughout the world in visions and army the develops innovative approaches -- envisions an army that develops innovative approaches that ensure our continued engagement with allies and partners across the globe. for example, in europe, while we are taking down two brigades, we will maintain two brigades, and outlined a brigade team

with come and, and rotate our deployments on the continent, so that our forces have more opportunities to train and operate with european counterparts. more broadly, the united states will continue to invest in shared capabilities and responsibilities with nato, responding to the alliance's most critical needs such as ballistic missile capabilities. elsewhere in the world, the gradual drawdown of the post- 9/11 wars will provide more opportunities for special operations forces to assist and advise our partners in other regions. and, we prioritize the most important programs for building partnership capacity. fourth, we will ensure that we can quickly confront and defeat

aggression from any adversary, anytime, anywhere, reaffirming that the united states must have the capability to fight more than one comps -- conflict at the same time. still, the changing nature of the conflict demands greater flexibility to shift and deploy forces to be able to fight and defeat any enemy, anywhere. the strategic guidance recognizes that we are dealing with the changing realities of the world that we live in in the 21st century. we are not just facing conventional threats. we're facing technological threats. we have to be prepared to be able to leap ahead technologically in order to be able to confront those kinds of adversaries. this requires that we have the

capability to defeat the enemy across a broad horizon of different conflict. the budget leverage is, as a result of that, and new concepts in space, cyberspace, special operations, long bridge budget long-range precision strike capabilities, -- long- range precision strike capabilities to ensure we can defeat and confronted accuracies. that allows for all three legs of the nuclear triad. our bu determined we could achieve better cost control -- review determined we could achieve better cost control by the lane the ballistics simmering for two years without

harming our nuclear deterrent. we're equally committed to a strong and safe return to achieve national security objectives. lastly with regards to new investments in technology, we have to maintain a decisive technological edge. we have to retain the kind of leverage the lessons of recent conflicts have given us, and we need to stay ahead of the most lethal and disruptive threats we will face in the future. that meant protecting or increasing investments in cyber capabilities, the ability to project power in denied areas, special operations forces, the kind that conducted the bin

laden raid and the rescue of the hostage. in order to protect vital investments for the future, we protected science and technology programs as well. at the same time the strategic guidance recognizes the need to prioritize and distinguish urgent needs from those that can be delayed, particularly in light of schedules and cost problems. we made reasonable adjustments to a number of programs. let me briefly mention the change with regards to the joint strike fighter. it is a program the remains essential for the future of our superiority. we have to develop the next- generation fighter, and we well. in this -- will. in this budget, we have slowed the procurement to be able to

complete more testing and allow for developmental changes before we buy in significant quantities. we want to make sure before we go into full production that we are ready. the four digit the four structure ships intel some -- four structure risks entailed some rest, but to manage that risk, -- risks, but to manage that risk, we will maintain the guys that have experience, even as their overall strength decreases to ensure that we have the structure and experienced leaders necessary to regrow the force quickly if we have to. another component will be

maintaining a quick and ready operational components, leveraging 10 years of experience in war. consequently, we are maintaining a strong army reserve and national guard. there will be no reductions in the marine corps reserve. the air force will make balanced reductions in the international guard, consistent with reductions in both be active component and air force reserve. the budget recognizes that a critical part of our ability to mobilize is a healthy industrial base. maintain the vitality of the industrial base and avoiding imposing unnecessary costs and risks on our critical suppliers will guide many of the decisions we have made. now, let me turn to the quality of all or all-volunteer force. -- of our all-volunteer force.

this budget recognizes that our people, far more than any weapons system, far more than any technology, are the great strength of the united states military. for that reason we focused first on every other area of the defense enterprise for savings in order to minimize any impact on the quality of the troops and their families. as a result, we were able to sustain or in hanse critical support programs, while reforming and reorganizing others to be more effective and responsive to the needs of the troops and their families. yet, in order to build the force needed to defend the country under existing budget constraints, the escalating growth in personnel costs must be confronted. this is an area of the budget

that has grown by nearly 90% since 2001. the budget will contain a road map to try to address the cost of military pay, health care, and retirement in ways we believe our fair, transparent, and consistent with the fundamental belief in our people. we recognize that we can never repay our service members or their families for all their sacrifices. on compensation for service members, we have created sufficient room in the budget to allow for full pay raises in 2013 and 2014 that keep pace with increases in private sector pay. in addition, let me make clear, nobody's paid will be cut. nobody's pay will be cut. with regards to pay raises, however, in order to achieve

cost savings, we will provide more limited pay raises beginning in 2015, giving troops and their families fair notice and lead time. on health care, another area of tremendous cost growth in the department, we avoided changes that will negatively impact off-duty troops or their families, protecting health care services for these troops, our wounded warriors. we decided to help control the growth of health-care costs, which is almost $50 billion in this department, we are recommending increases in health care fees, copays, and deductibles for retirees that will be phased in over five years, but let me be clear that even after these increases, the cost borne by military retirees

will rename the low levels of most comparable private-sector plans, as they should be. we also feel the most fair way is establishing a commission with authority to conduct a comprehensive review of military retirement. the president and the department have made clear that the retirement benefits of those who currently serve will be protected by grandfathering their benefits. there will be, for those who served today, no changes in retirement benefits. finally, let me just conclude. putting together this kind of budget that maintains the quality of an all-volunteer force, and implements significant, mandated savings has been a significant undertaking. this has been tough work.

at the same time, we have viewed it as an opportunity to shape the force we need for the future. i believe we developed a complete package, a line set to achieve strategic gains. the bottom line is there is little room for significant modification if we want to insure the force we believe we need to protect the country and the missions we have to deal with. ultimately, we will need the support and a partnership of congress to implement the vision that we have for our future military.

we look forward to working with the congress in this effort. after all, it was a bipartisan congress that mandated that we reduce the defense budget by $487 billion over 10 years, so we look forward to their partnership in this effort. make no mistake, the savings that we are proposing will impact on all 50 states, and many congressional districts across america. this will be a test, a test of whether we do seem the death of -- reducing the deficit is about talks, or about action. i understand how tough these kinds of issues can be. i understand also the this is the beginning, and not the end of this process. my hope is that when members understand the sacrifice involved in reducing the

defense budget by almost one- half of $1 trillion, that it will convince congress of the important responsibility that they have to make sure we avoid sequestration. that would be a doubling of the cuts, another $500 billion in additional cuts that would be required to take place through a meat axe approach, but we are convinced would hollow out the force. the leadership of this department, military and civilian, we are united behind the strategy we have presented, and we look forward to working closely with the leaders of the hill to do what american people expect of their leaders -- to be fiscally irresponsible at a

time of record deficits -- fiscally responsible at a time of record deficits, to use this time to develop the force we need for the future -- a force that can effectively defend this country, support our men and women in uniform and their families, and that is and always will be the strongest military power in the world. >> thank you, mr. secretary. just a few weeks ago we released a new defense strategy that keeps america safe and represents a clear strategic choices in the context of a persistently dangerous and increasingly competitive security environment that are proposed in the pulp -- budget for the next fiscal year. the joint chiefs and i worked closely with the president and

secretary leon panetta, and we made sure the unique strengths of each service were recognized. at the same time, we put national security above parochial interests, exactly what the american people should expect from us. we prepared a budget that strikes a necessary balance between succeeding in today's conflicts and preparing for those of tomorrow, accounting for real risks and real constraints, representing strong investments in our national security, but make no mistake, the trade-offs were tough. the choices were complex. the difficult decisions produce to wondered $59 billion in savings over the next -- 259 billion dollars in the next five years in savings.

it maintains our military's decisive edge, and helps maintain america's global leadership, keeping faith with the true source of military strength, our people. much will be said and written about the individual decisions, and some might be tempted to who view them through the prism of a zero sum game, pursing through each change to look for a winner and a loser. that is the least productive way to assess this budget. the merits of our choices should be viewed in the context of men involved in security department and a longer term plan. this is the first step. it is a down payment as we transition from an emphasis on today's wars to preparing for tomorrow's. let me make some brief points about what this budget means for the joint force of 2020. capability is more important

than size. this budget does not lead to a military in decline. rather, it builds a force that natchez capability to needs, to a joint force that is global and net worth, merciful and innovative, a bully-lead, and always ready -- ably led, and always ready. it is a military that can win any conflict, anywhere. second is the issue of compensation reform. i want to make clear that cuts in spending will not fall on the shoulders of our troops. there are no proposed freezes in pay, no change in the health-care, but we cannot ignore hard realities. pay-in benefits are one-third of the defense budget. pay will need to grow more

slowly. the budget proposes modest increases in health care fees, copays, and deductibles for retirees. we need to look at retirement, but we will take the time to determine how to enact reforms over the next year. last is risk. the primary risks lie not in what we can do, but how much we can do, and how fast we can do it. the risks are in time and capacity. we fully considered them, and i am convinced we can manage them by insuring we keep the force balanced, investing in new capabilities and preserving a strong reserve component. we will face greater risk if we do not change the way we have been doing things. three weeks ago i noted we have a real strategy that reflects real choices. the president's forthcoming

budget proposal embodies these realities, and i am confident it needs of our nation's needs for our future. thank you. >> we have a few time -- time for a few questions. >> over the next 10 years, d.c. where the -- do you see where the actual spending will go down from year-to-year, and for the american public, how do you explain what appears to be contradictory, as you talk about this $500 billion in cuts in defense budget that will be increasing over time? quickly, can you address the 490,000, as far as the size of the army, and what are the actual risks in the size? >> the simplest way to say this is bad and it -- is that under the budget that was submitted in the past we had a projected

growth level, and that would have provided for almost $500 billion in growth, and we had obviously dedicated back to a number of plans and projects that we would have. that has to be cut, and that is a real cut in terms of what our projected growth would be. so, the reason you are seeing the tough decisions presented to you in the implementation and strategy is because we had to achieve savings that would meet their requirement that congress gave us, and that is -- the requirement that congress gave us, and that is tough, real, and something that will cause some pain, but at the same time we recognize defense has to play a role in dealing with the national deficit. >> in terms of the size of the army, i am confident 490 active

is the right number for 2017. it might not be the right number for 2020. i have always said the earnings to be adaptable enough to provide the greatest number of options given the security environment that we face. so, we grew the army to confront a particular conflict, to conduct stability operations counter insurgency operations. those demands are going down. it is perfectly reasonable that the force structure would go down as well. >> secretary, you talked about the additional requests for more spending, $88.4 billion. given that one year ago, we had sizable amounts of troops in iraq, and numbers are coming down in afghanistan, why is it still so high? give us a sense of what that is for, the $88.4 billion.

>> we are still maintaining a significant force in afghanistan to conduct the war there, and the cost associated with that effort is very significant, as we try to deal with the supplying of our troops. this is not as easy as iraq in terms of our ability to provide the supplies and needs that our troops need. that, plus, obviously, as we draw down the surge, maintaining a fairly large number of troops that will be present in afghanistan -- supporting them, giving them the best supplies and weaponry they need to meet this mission will continue to require support and funding under the oco. >> there are two people that

could demand an on oco -- the commander for operations, and the service chiefs. we always said it would take years following the end of the conflict to restructure the force. >> mr. secretary, are you seriously asking the president to ask congress for another round of base closures? your civilians are still trying to deal with the 2005 base closure. for general dempsey, you want to under-fund the strike capability. what has changed in the last few years to prevent an adversary or the rest of the world from confusing one of these conventional missiles as a

nuke? >> the technology, and therefore the trajectory that would be required to deliver it -- the speed at which they move, therefore you could lower the trajectory and avoid the confusion you are talking about in terms of the been mistaken there are issues beyond that, but fundamentally that is it. -- there are issues -- mistaken. there are issues beyond that, but fundamentally that is it. >> as we drawdown of force we have to look of the infrastructure supporting the remaining force, and the reality is we are going to have to be able to reduce that infrastructure. the best approach to reducing that infrastructure politically on capitol hill has been to work it through the brac process, and develop an approach to which we would submit recommendations, the commission would look if those

recommendations, and make a complete presentation to the congress and it would be voted up or down with one vote. the process provides that. i have been through the process i know its weaknesses and its -- process. i know its weaknesses. we will continue to work to make sure it is done effectively. i have to tell you there is no more effective process than to make it happen. >> the savings -- [unintelligible] >> we did not want to tie savings, because we need the congress to authorize it. if we put numbers in their and commerce did not do it, it would undermine the whole process -- congress did not do it, it would undermine the whole process. >> speaking of numbers, $60

billion for projected savings for efficiency. that is always a fuzzy area. better use of information technology -- how detailed is the savings actually? >> it is actually pretty detailed, and we will let our briefers go into specifics. i have asked the same question and dealt with deficiencies in the past. we obviously have to have meet on the bone. as you know, secretary gates began that process. we have gone back and said "ok, what have we done to meet the goals was signed by secretary dates?" -- secretary gates?" there has been progress made. >> are you talking about civilian layoffs or pay cuts? >> all of that will be

included, but more importantly going after duplication, overhead, waste, tightening up on systems -- this is a very big bureaucracy and it could use a lot of efficiency. >> is that civilian layoffs? >> no. we're talking about civilian pay savings as well. that is in the president's budget. >> general dempsey, i wanted to ask about special operations. the budget calls for protecting that investment. considering how much special operations forces work has increased over past years, to you believe the funding is increasing enough to support their added role in this department, and mr. secretary, you say you hope congress will see this and pass it, but as a former congressman, can you give us a reality check?

whether the chances of this getting through congress relatively unmolested? >> on special operations, you might have heard me say before that when you say what is new, i would say the capability and role of special operating forces, and cyber, and i am confident that each of those new, emerging, and more important capabilities are adequately funded in this budget, but in balance. the special operating forces can only be "special" if there is a force that allows them to conduct operations and shipped in volume entered we have to do this in balance, and i am confident -- operations. we have to do that imbalance, and i'm confident we have done that. >> this is going to be tough.

it is a tough challenge we cannot underestimate how difficult this is going to be. one of the problems is it is easy to talk about deficit reduction, but tough to do something that in effect reduces the deficit. what we are presenting here in -- that, in fact, reduce the deficit. what we are talking about does something to reduce. it will impact numbers, districts, constituents -- i understand that. when i was in the congress, i went through this process and i understand what it means, but it is also an opportunity for members to show the leadership the country expects of them when it comes to dealing with this challenge. we have presented a great blueprint for the times -- the kinds of challenges we will need in the future in a way that does not weaken national defense and maintains a strong military

force for the future. we briefed members of the committees that are responsible for the defense budget last night, and i am very confident that these leaders understand the challenges we face, and that they want to work with us to try and see if we can achieve what we have presented to the congress. >> mr. secretary, general dempsey, can you help me better understand, you talk about hard -- hard forces, but point out the forces will be higher than before 9/11. given that, where is the risk, and where are the hard choices? >> is that to you? [laughter] >> the risks, with the fact that we will have a smaller -- , with the fact that we will have

a smaller force. it is larger than we had prior to 9/11, but obviously it will be smaller, and there are risks associated with that in terms of our capability to respond. we have dealt with that risk for the combination of the forces we have in place, and the ability to mobilize quickly will give us the capability to deal with any threat. nevertheless, there is a risk. there is a risk, frankly, in the technological area. we depend a great deal of it being at the technological edge of the future. as i said, we have to lean forward if we are going to deal with the challenges we're going to face. we need to be innovative and off to leap forward. can we do that, develop the technology we need to confront the future? i'm confident we can, but there are risks associated with that.

so, the risks that we are going to be facing, obviously, with some of the areas that we have had to reduce the budget, -- come with some of the areas that we have tried to reduce the budget, but we have done it so that we can respond to the threats we face in the 21st century. i think this is the force for the future. are there risks associated with it? you bet. can we deal with them and make them acceptable? you bet. >> just to elaborate in 30 seconds, the greater risk would be that we decide we would just wish away any capability or form of conflict -- we are just never going to do that. what you are expressing here is the recognition that we are retaining our full spectrum capability, and that, we did not take any risks with that. >> we have time for one more

question. >> mr. secretary, in terms of security challenges, and security threats, what is worrying you most in particular for the next 12 months? [laughter] >> that is a setup. [laughter] >> look, the one thing we had to do, obviously, in developing the strategy, and the one thing that frankly distinguishes this from past drawdowns, as i have said before, is that in past drawdowns usually we have come to the end of a particular threat that we confronted, and we could move on. the reality is as we draw down from iraq and afghanistan, we still face a number of very important threats in the world. obviously, we are continuing to fight a war in afghanistan.

we continue to face the threat of terrorism, as successful as we have been in confronting that. we continue to see that challenge, whether it is in yemen, somalia, or elsewhere. we will have to continue to confront the threat of terrorism. we see the threats coming from iran, and a nuclear-capable iran represents a threat to us and to the world. weapons of mass destruction, proliferation of weapons of mass destruction are a concern. north korea is a concern because they ,too, are developing a nuclear capability. add to that the turmoil in the middle east that we have to confront, then the cyber threat and the potential for cyber warfare -- you can see the best

a ray of threats we have to confront with the force -- vast array of threats we have to confront with the force we have designed. it is all of those. >> i am sorry. that is the last question. the deputies are about to come to the podium. thank you very much. >> we would like to welcome of to the table the deputy secretary. [applause] -- [laughter] deputy secretary and the vice chairman kenneth we will not be taking a five-minute break. -- chairman. we will not be taking a five- minute break. >> ok. welcome again. i am not going to repeat everything that was said before. we are here to answer your questions.

i hope you all have a copy of the white paper that describes the key decisions we have made in connection to the 2013 budget and the strategic guidance which we released a few weeks ago. i will just comment on one of the questions that was already asked. i should say, by the way, that this is a pretty complete description of the many tens of individual decisions we made. there are many items in here. we are happy to answer questions about any items that are in the white paper. we will not be releasing the full budget until the president releases the full budget, and we will not be going into detail on these items until we of had a chance to confer with congress, which will begin next week. fundamentally, the detailed in here describes the enormity of the adjustments that we were

required to make. the secretary described pretty well -- the base budget is not decreasing over the years ahead, but now that it -- but neither is it continuing to rise in real terms, as it has over the past few years, and as we planned before the budget control act was enacted. the difference between the amount that we planned to have last year and that we now plan to have, that is where the before hundred $87 billion comes from. $259 billion over five years, and adjustment of about 8%-9% overall, which is very substantial by any measure. if you add to that the reduction in overseas contingency operations spending and consider the entire defense

budget, you can see that we needed to make the most consequential adjustments the defense department has had to make budgetary in more than a decade. so it is very large. these decisions were steered by the strategic guidance of the secretary and the chairman. came directly from president obama and from them, and the sequence of strategies in the budget is obviously critical to us. no part of the budget was not examined and no part was sacrosanct. we looked at everything. and there are a lot of tough decisions in there. some parts of the budget work increased because of their importance to the country and the future, that meant that other areas took more cuts. the result, and the secretary made this point and i just want to reemphasize it, a carefully

balanced package. this cannot be looked at or modified piece by piece, since a change in one area inevitably requires offsetting changes elsewhere. unbalancing the overall package. so is a package. the paper describes it in three parts. the first, a continued effort to make more disciplined use of the taxpayers' money. that was alluded to in one of the questions. -- second, we made investments in accordance with the strategic guidance, and third, we made modest but important adjustments in personnel costs. because of the value placed on the people in the all volunteer force who are what make it the world's greatest force, there are lesser cuts, but the senior leadership, including the joint chiefs of staff, believe strongly that this category needed to be included in overall package. these are the three parts of the package and we are pleased to answer your questions.

>> on the nuclear arsenal, president obama had given his pledge to the aspirational goal of going to 0. in the documents were given to review before the there is no cut at all except for slowing the couple of years. does this imply there be no reductions in the arsenal after negotiations with the russians, and there's no effort to cut the nuke forces even if it makes sense to our country in the current environment? >> there are no cuts made in the nuclear force in this budget. the white house, and we are obviously working under their direction, are considering the size and shape of the nuclear arsenal in the future, so when those decisions come, we will

factor them into our budget. i will make a couple of comments about what is in this budget that does bear upon the nuclear triad. one you mentioned, which is a slip by two years in the development of the ohio class replacement submarine. this is not a strategic decision, this is a managerial decision made partly for budgetary reasons, but mostly because that puts the ohio class replacement on a more predictable and stable schedule. the second thing i will note is we did protect the bomber force in its entirety in this budget. that is not just the nuclear bomber force, it is a conventional bomber force that is part of our higher capability and as we consider our force as it applies to the asia-pacific region and to the middle east, bombers will play an important role in there. we are beginning anew, stealthy, long-range strike platform, and we did protect that. we are continuing with that. we started that last year.

there are some things that bear on it, but no decisions that are strategic in nature reflected in the budget. >> secretary panetta listed the probation on the -- there is is a slowing in production to allow more development to take place. the marine corps has expressed an urgency to get this many of these as soon as possible to get the carriers in the fleet. while be produced vehicles will be going down, the number of these produced will be going up. secondly, can you address whether or not any of the developments or requirements for jss were going to address it there any changes made over the threat of cyber warfare and its potential vulnerability to that? >> there are several questions imbedded in there. i'll take a few. with respect to the joint strike fighter, the secretary said it right.

we want the airplane and all three variants of the airplane. we got some good news this year with respect to the stovall. it was taken off what secretary gates called probation a year ago. that was the result of some good engineering work done last year. that means all three variants can go forth. at the same time, the issue with the joint strike fighter of cost and performance of the program in its difficult position -- for the program we are transitioning and trying to reach full rate production, that is still a concern to us. all those associated with management of the program, our industry partners, are working our way through that. we will write up that curve to full rate production as and when

it is economically prudent to do it. as far as the stovall variant is concerned specifically, with the probation behind us, all three variants are now out more or less on an equal footing in terms of their engineering readiness to go forward. it becomes a decision for all of us and also for the marine corps the rate at which they procure. >> all three variants, they are terrific airplanes and we are committed to it. represents the future of tactical aviation in this country. we just need the ability to manufacture so we can catch up and start flying. we are anxious to get into the fleet. >> is any of the development

being adjusted with regard to cyber vulnerabilities that might be in the aircraft? >> not that i am aware of. >> we are very attentive as a general matter to cyber vulnerabilities in weapons systems, hours and others. it is a highly computerized airplane. >> and now you don't want to pick apart individual items but i want to ask about the carrier decision, specifically why we need it. why in the of the big ticket items? there is no cancellation here like we have come to expect. >> let me ask the admiral to speak to aircraft carriers in general. i think be open this area, there are 50 or 60 things listed in their that we were not able to

do because of the reductions in our plan budget from the budget control act. you go in here, you will find plenty of things that we had planned to do that we are not going to be able to do. you are right, they are not the things that are most important to our strategy and to our future. that is precisely -- it is the things that are most important to our strategy and our future that we protected. >> as far as the carrier goes, i think it is well-documented and carefully examined it inside the apartment and consulted with the white house. everybody is in agreement that the capability, the flexibility, the independent capability of the carrier, the applicability and it's particularly useful role in the

middle east and the pacific, which is wearing have emphasized most of the regional strategic focus here, just makes it a particularly adept platform for the top of things we want to do strategically in the future. it did not make sense to take out. enforcement so we will stick with 11 carriers. >> the strategy prioritizes of forward posture and talks about in the western pacific, the secretary talks about getting rid of logistical ships and getting rid of the ticonderoga class cruisers as well, without replacement. how does that square with the posture of being fully deployed, especially in the western pacific? >> first of all, were the things we have to remember as a strategy is that in many cases

is a lot more about where you are going to cut, rather than where you are going to add. there are much pure reductions in the things we are focused on in the pacific, to include naval forces. this is really a budget that has to look out to 2020 for some of the particular decisions, particularly navy type things because they are big muscle movements. but you will find a gradual shift from east to west in terms of aircraft carriers, submarines, and logistics and the like. i will leave it to the navy to articulate that over the coming week or so. >> looking at what we are doing with australia, the possibility of combat ships in singapore, what we are doing in guam. there is quite a bit that represents the movement into the asian pacific and around to southeast asia and the indian ocean. so you have to look at the whole picture.

>> the secretary emphasized that you want to keep mid grade officers, people who have gotten a lot of experience in iraq and afghanistan. given that a lot of this budget and the strategy diminishes in some ways the institutional role of the army in national strategy and cuts the army [unintelligible] what you say to someone in that situation in the adjustment to a peacetime army for why they should stay? >> i want to say something about that first. i will repeat your premise of the question about the institutional army. the army is in the midst of a transition, a strategic transition. it has, as all of our services have, but the army in particular, of necessity been very riveted on

counterinsurgency operations in iraq and afghanistan, and is now returning to full spectrum training and full spectrum capability. so it will be still the army that can dominate any other army anywhere. it is trying to build forward into that post iraq and eventually post afghanistan army. so it will have a very important role in the strategy and the asian pacific area and overall in the middle east. the premise is not right. >> all four services are absolutely critical to the strategy, and to try to single one out as being less critical than others does not really get the point of the strategy. i have some of privately in my own mind, it's the military itself or a stock right now, i

would be buying it. i would be applying that to the army and equally as well to the navy and the air force and marine corps. just because we are drawing it down to reduce some of the capacity we have built up in a counterinsurgency environment, it tends to ignore the fact that the have a tremendous potential role in asia and the korean peninsula, if north korea should ever become foolish enough to be aggressive there. all the way through the spectrum of missions that the army can execute, to include what result in somalia just this week. across the full spectrum of operations to include an important role the army will assume in regional engagement. i am big on the army right now. they have an important role in the strategy. >> so you don't think there is a problem with some people who might be made great officers to ask themselves why they should stay? >> we have terrific leadership in the army. they have a terrific mission, and i don't think we will have any trouble keeping those people

at all. >> the defense industry consultant put out of breivik implying the program has been canceled, terminated, and yet i look to your material, you are basically truncating the third generation model. what army helicopters will be used? >> this is a little tedious, because there are several different versions of the block 30. it is a good example, and we highlighted it in the white paper. it is an example of the way that we need to pay attention to cost performance with a budget like the one we have. blog 30 was supposed to replace the u2 for taking pictures from the air. that was the idea. there are other forms of global block.

the block 40, which is a navy version, an allied ground surveillance which is a version for the allies. those are not affected by this, but the block 30 priced itself out of the niche of taking pictures in the air. we will continue to use the u2. we had hoped to replace it with a global hall, but the global hall became expensive. that is the fate of things that become too expensive in a resource constrained environment. >> this one of the four, the block 30, is cancelled. >> i would just say that admiral bill loch raven is a friend of mine, but he is also a tough guy and i don't want to get a cross purposes with him are revealing the capabilities of his unit. that is a really impressive operation that was a joint

operation. we had on the aircraft navy seals, and it was very well executed. >> on sequestration, i am curious. has the department done any war gaming, if you will, on what it would do with the strategy of congress does not change the current -- it would seem to me as good stewards of the taxpayers' dollars, it would make sense to at least think about it, given that the political environment in this country is doubtful. >> i will just make a couple of comments on that. this budget is based upon the fiscal guidance that we got from the office of management and budget. the work of the super committee failed sometime in mid november. we were well on the way to putting this budget together at that time. we said repeatedly, the

secretary said it, the chairman said it, that both in the manner that sequestration would occur and the magnitude of the cuts, that would be disastrous for us. the strategy we gave you two or three weeks ago, we would have to start over again with sequestration. the secretary said it all right at the end of his sentence, which is that congress needs to do its work here. sequestration is no way to do business. >> if i could add, we have just been through a very healthy process in this part of developing this budget. something i've never seen before in my 33.5 years in doing this sort of work. we did strategy and then we allowed strategy to guide the budget decisions. very refreshing. if we get into a sequestration position, that turns that entire process on its ear and basically takes the chain saw to

the budget that is developed and we will have to write a new strategy. that is not the way we want to do business. >> some of the programs are being delayed or reduced. when you do that for unit cost, it goes up. are you creating further problems down the line where you won't be able to afford these changes? >> we are very attentive to that. in some cases, that will occur, but managers of those programs are trying to mitigate exactly that effect, when your vote slipping and reducing the size. >> the reduction in deployable regional missiles, where you expect that to have the most effect, and how much capacity to the regional allies have to absorber more responsibility on their shoulders? >> first of all, we remain very committed to the european based adaptive type of approach and we intend to keep that on track.

for the other regions, we are not going to decrease anything we have done so far. we may just grow, as many other things in this budget will find themselves in a situation that they will have to grow a little bit slower. we will work closely with our partners to ask them to invest in some of this capability as we invest in it as well. in several regions of the world you will see that phenomenon occurred. we are still committed to working closely with our partners to defend against missile attacks from rogue nations. >> [unintelligible] >> it would put the air force below the limit the congress has set. as the department discussed moving at lower is that it would be? >> we discussed that and all the other changes we are proposing. after all, it is the president's budget proposal to congress. the airlift, this is capacity, access need.

in this budget in burma, we cannot justify retaining capacity that is excess to need. >> could you please elaborate to emphasize the asia-pacific? what is the biggest challenge for the united states in this region? secondly, negotiating to involve more u.s. military presence in the philippines. what would be the indication for u.s.-china relations in the context of the south china seas? >> the final answer to question is this is a very dynamic region that is going to be a central region to the world going forward. the united states has played a pivotal role in the asia- pacific region for decades. it is that peace and prosperity

in part brought by the american pivotal military role there that has allowed the prosperity of all countries there, to include china. you mentioned china, and that pivotal role is something we intend to maintain and sustain. that is fundamentally the reason for being mayor. there are a number of issues in areas. it is a very vast region, and we intend to keep our pivotal role there. you mentioned the philippines. we have a good relationship with the philippines, including a good security relationship, and we intend and wish to build on that in the future. >> we have time for two more questions. >> this gentleman right here. >> will the combat operation include some of the risk that

come with a smaller force? >> we are constantly cognizant of that and we do not plan on letting any of the risk and strategy on our forces that are currently in combat. we are very committed to taking care of those troopers and making sure that have the resources they need to get the job done. the short answer to the question is that no, we are not putting risk on current combat operations. >> how is the delayed schedule more predictable? how're you doing on cost controls, and how concerned are you that the program will basically eat the entire shipbuilding accounts in the future? >> the second and third are related. with respect to the schedule, the schedule as it was was an aggressive one, maybe even verging on optimistic. all i am saying is this is a safer schedule. we are sure reconnect the

schedule, so it is a little more secure from a managerial point of view, it is better place to be. terms of cost control, on the ohio class replacement, the initial cost estimates came in quite high, unacceptably high. so high that they did have, precisely they did present exactly the concern that you mentioned, namely that in 2020- 2030, they would consume a disproportionate share of the navy's shipbuilding budget. for that reason, the navy worked very aggressively on the requirements, and i should mention that the admiral is doing that as a more general rule in the requirements process here. they are working hard on saying do we really need this or that, and to get the design, to amend the design, look at the drivers of cost in the design, and

manage the cost down. and that was done from a figure well in excess of 6 billion per boat to the neighborhood of 5 billion per boat. that is something we will need to do with all our programs going forward. we have to ask ourselves, in this kind of budgetary environment, how much is good enough? is the 8% solution sufficient? that is what was done with the ohio class replacement, and that is why it will be affordable. >> with that, i thank you. >> for our friends in the press, if you have any additional questions regarding context of particular question, please connect with our press operations. we do have folks who have been involved in these decisions standing by to be able to respond to more of your questions. thank you very much.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> julian barnes was co-author of a front page piece titled "fewer troops, more drones. what is behind the strategy, the use of drugs? >> the obama administration, there is no question about it. they are tired of conflict 61 the u.s. fought and iraq and is still fighting in afghanistan. they view the likelihood of the u.s. getting involved in such a conflict as low. as they remake his the pentagon

budget and strategy, they are emphasizing different kinds of forces for the counter-terrorism miss of -- mission will see a build up in drums and a special operation forces. >> $88 billion for the war in afghanistan. where are the biggest cuts going to happen? >> the biggest is the cuts that will come over the next few years to the army. personnel costs are growing very fast. this cut in the army to 490,000 is going to be a big player of

that. we have a variety of other attempts to save some money here. we have cuts to older transport aircraft. we have cuts to older naval cruisers. the timing of the f-35 purchase has been slow down. even some high-tech, newfangled systems are on the cutting block. your listeners just heard the pentagon announced that the current generation of global talks, the blog 30's 0, would be canceled. this was meant to be a replacement for those old u2 spy planes, but the cost spiral out of control. they will try to go to the next generation be on the block 40, but they are giving up on the current one. that is a warning to defense contractors, keep your costs down, or your program will be cancelled. >> what kind of battle do they

have on the capitol hill when they officially present the budget in mid-february? >> it looks to be fierce. panetta made some references to that. you heard in the opening statement, as soon as this came out we had statements from senator john mccain in the senate and from the house. they both raised questions about cuts to the marines and the army. senator mccain made the point, we just went through a war in iraq where we found that our military was too small and had to spend a lot of money building it up. now we are going to cut it back? is that really the smart way to go? mckeon saying a special operation forces are great and the drones are great, but while giving america the edge, they are not enough to deter or defeat all enemies the u.s.

could face. mr. panetta and the rest of the folks at the pentagon would probably respond that while there are cuts here, while there are significant cuts to the army, we are keeping a robust, conventional force. the navy will be very strong. the air force's gaining some new capabilities. the army, although smaller, will be more deployable and more capable. >> julian barnes of the wall street journal. you can follow his reporting on twitter. thank you for the update. >> and a few moments, president obama on energy policy and jobs.

u.s. and global economic outlook. after that we will repair the defense budget for the next fiscal year. our road to the warehouse coverage continues tomorrow with the several events of enter florida. newt gingrich speaks to the hispanic leadership network conference at 11:00 eastern. it will also hear from mitt romney. you can see that live at 12:20 p.m. eastern. rick santorum will also be in miami speaking to the latin builders association at 1:30. >> i do believe that the west for all of its historical shortcomings, the west still

today represents the most acceptable and workable universally political culture. >> in 1991, the united states was the only global superpower. how to restore its status in the world. "strategic vision" saturday night at 10:00 p.m.. and did fdr he used the word to further power the executive branch? new privacy is no privacy. how your rights are being eroded by a social network. but tv every weekend on c-span -- "book tv" every weekend on c- span 2. >> president obama spoke at a ups hub and las vegas.

this is about half an hour. [cheers and applause] >> hello, nevada, it is great to be back in las vegas. i love you back. although i always say when we stay here for the night, i have to watch my staff to make sure they get on the plane when we leave. sometimes, you know, they conveniently miss the flight. but everybody please have a seat. it is great to see you. joe, thanks for the introduction. scott, thank you and the folks at u.p.s. for hosting us today. i want to thank all of the elected officials and the tribal leaders who took the time to join us. before i get into the core of my remarks, i want to mention

something i said to scott and joe, and that is u.p.s., i think, deserves just extraordinary credit for being the best in its space, one of the best businesses we have in the united states, but the reason is because it has such outstanding workers and the relationship between its work force and management, cooperating constantly figuring out how to make things better. it's just an outstanding organization. and so you guys all need to be congratulated for everything that you do. [cheers and applause] >> now i'm here to talk a little more about what i talked about at the state of the union on tuesday night. [laughter] >> and what i want to focus on is how we're going to restore

the basic promise of america. something that folks at u.p. is understands, which is if you work hard, if you do the right thing, you should be able to do well enough to raise a family and own a home and send your kids to college and put a little away for retirement. that's the american dream. that's what most people are looking for. they don't expect a handout. they don't expect anything to come easy. they do expect if they're willing to work hard to try to get ahead. if they're doing the right thing, then they can have a sense of security and dignity and health, make sure that their family is moving forward. that's what americans are

looking for. that's what americans deserve. and today, three years after the worst economic storm in three generations, our economy is growing again. our businesses have created more than three million jobs. [applause] >> last year, businesses created the most jobs since 2005. american manufacturers are hiring again and creating jobs for the first time since the 1990's. and we've got more work to do. but what we can't do is go back to the very same policies that got us into a mess in the first place. we can't go backwards, we have to move forwards. i said on tuesday and i will repeat today, we will not -- we cannot go back to an economy weakened by outsourcing and bad debt and phony financial

profits. so on tuesday at the state of the union, i laid out my vision for how we move forward. i laid out a blueprint for an economy that's built to last, that has a firm foundation, where we're making stuff and selling stuff and moving it around and u.p.s. drivers are dropping things off everywhere. [applause] >> that's the economy we want. an economy built on american manufacturing, with more good jobs and more products made here in the united states of america. [cheers and applause] >> an economy built on american energy, fueled by home grown and alternative sources that makes us more secure and less dependent on foreign oil. an economy built on the skills of american workers, getting

people the education and the training they need to prepare for the jobs of today, but also to compete for the jobs of tomorrow. and most importantly, i talked about an economy that's built on a renewal of american values, hard work, responsibility and the same set of rules for everybody, from wall street to main street. [cheers and applause] >> that has to be our future. that's how we restore that basic american promise. now, part of my blueprint and what i want to focus on a little bit today is for an economy built to last with american energy. that's why we're here. for decades, americans have been talking about how do we decrease our dependence on foreign oil. well, my administration is actually begun to do something

about it. over the last three years, we negotiated the toughest new efficiency standards for cars and trucks in history. we've opened millions of new acres for oil and gas exploration. right now, american oil production is the highest than it's been in eight years, eight years. last year, we relied less on foreign oil than in any of the last 16 years. oft hasn't gotten a lot attention, but that's important. we're moving in the right direction when it comes to oil and gas production. and today, i'm announcing that my administration will soon open up around 38 million acres in the gulf of mexico for additional exploration and development, which could result in a lot more production of domestic energy. but as i said on tuesday and as the folks here at u.p.s.

understand, even with all this oil production, we only have about 2% of the oil's reserves. so we have to have an all out, all in, all of the above strategy that develops every source of american energy, a strategy that is cleaner and cheaper and full of new jobs. now, a great place to start is with natural gas. some of you may not have been following this, but because of new technology, because we can now access natural gas that we couldn't access before in an economic way, we've got a supply of natural gas under our feet that can last america nearly 100 years, nearly 100 years. now, when i say under our feet, i don't know that there's actually gas right here.

[laughter] >> i mean in all the united states. and developing it could power our cars and our homes and our factories in a cleaner and cheaper way. the experts believe it could support more than 600,000 jobs by the end of the decade. we, it turns out, are the saudi arabia of natural gas. we've got a lot of it. [applause] >> we've got a lot of it. now, removing that natural gas, obviously has to be done carefully. and i know there are families who are worried about the impact that this could have on our environment and the health of our communities and i'm sharing that concern. i'm requiring that all companies drilling for gas on public land disclose the chemicals they use. we want to make sure this is done properly and safely and america developing this resource without putting the health and safety of our citizens at risk.

but we have to keep at it and take advantage of this incredible natural resource and think about what could happen if we do. think about an america where more cars and trucks are running on domestic natural gas than on foreign oil. think about an america where our companies are leading the world in developing natural gas technology and creating a generation of new energy jobs. where our natural gas resources are helping make our manufacturers more competitive for decades. we can do this. and by the way, natural gas burns cleaner than oil does, so it's also potentially good for our environment as we make this shift. so last april, we issued a challenge to shipping companies like u.p.s. we said, if you upgrade your fleets to run on less oil or no oil at all, we are going to help you succeed.

we want to help you with that experiment. we started out with five companies that accepted the challenge, and of course, u.p.s. was one of the first. that's how they roll. [laughter] [cheers and applause] >> so less than a year later, we have 14 companies on board and together they represent one million vehicles on the road. that's a lot of trucks. we should do more, though. and that's why we're here today. these let's get more of natural gas vehicles on the road. let's get more of them on the road. [applause] >> the federal fleet of cars is leading by example. turns out the federal government has a lot of cars. [laughter]

>> we buy a lot of cars. so we've got to help not only the federal government, but also local governments upgrade their feet. if more of these -- their fleet. no reason why buses can't go in the same direction. second, let's offer new tax incentives to help companies buy more clean trucks like these. [applause] >> third, let's make sure all these new trucks running on natural gas have places to refuel. that's one of the biggest impediments, the technology, we know how to make these trucks, but if they don't have a place to pull in and fill up, they've got problems. so we're going to keep working with the private sector to develop up to five natural gas corridors along our highways,

these are highways that have natural gas fueling stations between cities like the folks at u.p.s. and south coast air are opening today between los angeles and salt lake city. that's a great start. these trucks can go from long beach all the way to salt lake city, and they are going to be able to refuel along the way. and finally, to keep america on the cutting edge of clean energy technology, i want my energy secretary, steven chu to launch a new competition that even our scientists, engineers and entrepreneurs to discover new break-throughs for natural gas vehicles. we are going to keep moving on american energy and keep boosting american manufacturing. we are going to keep training

our workers for these new jobs. an economy that is built to last means renewal of the values of who we are hard work, fair play and shared responsibility. right now, that means, first of all, stopping a tax hike on 160 million working americans at the end of next month. [cheers and applause] >> people cannot afford right now losing $40 out of each paycheck. your voices convinced congress to extend this tax cut before and make sure they do it again. no drama, no delay, let's just get this done for the american people and for our economy as a whole. [cheers and applause] >> but we've got a longer run issue -- scott and i were talking about this, and that is how do we get america's fiscal

house in order. and we are going to have to make some choices. the reason that we've got these debts and deficits is because we aren't making hard choices. right now, we're supposed to spend nearly $1 trillion more on what was intended to be a temporary tax cut for the wealthiest 2% of americans. supposed to be temporary. back in 2001. [laughter] >> that's a long time ago. a quarter of all millionaires pay lower tax rates than millions of middle-class households. warren buffett pays a lower rate than his secretary and i know that because she was at the state of the union. she told me. [laughter] >> now, that's not fair.

that doesn't make sense. importantason it's for us to recognize that is, if we're going to reduce our deficit, then we have to have a balanced approach that has spending cuts and we have agreed to $2 trillion worth of spending cuts and get rid of programs that don't work, got to make government more efficient. i asked congress for authority to consolidate agencies to make them run better. we are going to have to be much more effective when it comes to government spending. we all acknowledge that, and we are making progress on that front. but that alone doesn't do it. so if we want to deal with the deficit, we've got to look at the other side of the ledger. do we want to keep these tax cuts for the wealthiest americans or do we want to keep investing in everything else, like education, like clean energy, like a strong military, like caring for our veterans who are coming home from iraq and

afghanistan? we can do both. we can do both. [applause] >> let's follow the buffett rule, if you make more than $1 million a year, you should pay a tax rate of at least 30%. [applause] >> which, by the way is lower than you would have been paying under ronald reagan. nobody's talking about anything crazy here. on the other hand, if you make less than $250,000 a year, which 98% of all americans do, then your taxes shouldn't go up. [applause] >> i think that's a fair approach and a lot of folks have been running around saying that's class warfare. asking a billionaire to pay as much as the secretary in taxes,

that's just common sense. and i promise you, if we make this change, warren buffett will be doing fine, i will be doing fine, scott will be doing fine. we don't need more tax breaks. you're the ones who have seen your wages and your incomes stall, while groceries to college to health care have been going up. you are the ones who deserve a break. and -- [cheers and applause] >> and i want to make one last point, we do not begrudge success in america. we aspire to it. we want everybody to succeed and be rich. we want everybody to be working hard, creating new products and services, creating jobs that that's the american way. we don't shy away from financial success. we don't apologize for it. but what we do say is, when this nation has done so much for

us, shouldn't we be thinking about the country as a whole? when americans talk about folks like me paying their fair share of taxes, it's not because they envy the rich. just yesterday bill gates said he agrees with me that americans who can't afford it should pay their fair share. i tell you, bill gates doesn't envy the rich. [laughter] >> he doesn't envy wealthy people. this doesn't have anything to do envy but with math. americans understand it. if i get a tax break i don't need and a tax break the country can't afford, one of two things is going to happen. ourer it's going to add to deficit, right, or somebody else is going to have to make up the difference. someone is going to have to pay more for their medicare or a

student is going to have to pay for for their student loan or a family trying to get by will have to do with less, and that's not right. that's not who we are. each of us is only here because somebody, somewhere felt a responsibility to each other and to our country and helped to create all this incredible opportunity that we call the united states of america. now it's our turn to be responsible and it's our turn to leave an america that is built to last for the next generation. that's our job. and we can do it. we can do it! [cheers and applause] >> we can do it! and i know we can do it because i have seen in states like nevada and with people like you that i meet all across this country, you understand the history of this country, generations of americans working together, looking out for each

other, living by the idea that we rise or fall together. those are the values we have to return to. i mentioned praise for our military at the state of the union. and the incredible work that they do. and the reason our military is so good, the reason why they are so admired is because, you know, it's not like everybody in the military agrees on everything. you have democrats in the military, you've got republicans in the military. you have folks who are conservative, liberal, different races, different religions, different backgrounds, but they figure out how to focus on the mission. they figure out how to do their job. and that sense of common purpose is what we're going to need to build an economy that lasts. and if we work together in common purpose, we can build that economy and we can meet the

challenges of our times and we'll remind the entire world once again just why it is that the united states is the greatest country on earth. thank you everybody. god bless you and god bless the united states of america. thank you. [cheers and applause] captions copyright national cable satellite corp. 2012]

>> then a few moments, a senate hearing on the u.s. and global economic outlook. leon panetta's defense budget. later we were real air president obama's speech on energy policy and jobs. on washington journal tomorrow morning, we will discuss real-

estate foreclosures with david stevens. thomas edsall will join us to talk about his new book, "the age of austerity." washington journal is live on c- span every day at 7:00 a.m. eastern. c-span is a road to the white house coverage takes to live through the weekend leading up to tuesday's primary. >> by the end of my second term -- [applause] -- we will have the first permanent base on the moon. it will be american. by the end of 2020, we will have the first continuous paulson system in space capable of getting to mars in a short

period of time. i am sick of being told we have to be timid did and limited to technologies that are 50 years old. >> when the founders said the trader had endowed us with unalienable rights among them life and liberty and the pursuit of happiness, they laid out a path for america that was not temporary but enduring. a path of a says we can pursue happiness as wewe do not need ao tell us what kind of car to get. we do not need a government to tell us what kind of health care we are going to have. >> see what the candidates say we are posting on social media. >> now discussion of the u.s. and global economic outlook. a panel of economists polled senate budget committee they expect modest economic growth this year, adding that the

recovery is fragile. as suggested that the european debt crisis could lead the u.s. into recession with little notice. the hearing is two hours. >> i want to welcome everyone to the senate budget committee. i want to start with a bit of the business of the committee, because i know people are asking what is our intention with respect to going to a marked up. i want to make clear to everyone that i intend to go to a marked up in the committee, and i want to do it sooner rather than later. it talked about march 9 as a time that might have a real estimate. since that time that have

talked about that and not let that slip, so we just have to wait and see. i will be talking to all the members of the committee and i want to start that consultation immediately. we will start consultations next week with respect to members of the committee, and will certainly be talking to senator sessions about the timing, and hopefully we will know in the near term what the cbo schedule is with respect to the real estimate. i want to start with that. >> i appreciate that. i know that the chairman deeply cares about these issues, and i think that process will be good for america. >> i do, too. we have some disagreements on some part of what has happened here to fore, and i will talk

about little about some of that as well. we also have places where we agree. i think it is good for us as a body and good for the country to have the fullest possible debate. last year in some ways we got overtaken by a separate process, because very early on, and negotiation began at a higher level than ours. that had an effect on what we did. i do want to say that when i hear discussions that we don't have a budget, i don't agree with that. i just think that is wrong. because when we did the budget

control act in august, that provided a budget for this year and next. the budget control act was not the normal way of doing budget, i am the first one to say that. but in many ways, it is a stronger document than a typical budget resolution. typical budget resolution never goes to the president for signature. it is purely a congressional document. the budget control act is actually a law, passed overwhelmingly in the senate, 74-26. not only does it have the force of law, it also set discretionary spending caps for 10 years instead of the one year that you normally have in a budget resolution. and it provided enforcement mechanisms, including a two- year deeming resolution, which improves the enforcement of budget points of order. something i insisted on in the budget control act. finally, it created a

reconciliation like super committee to address entitlements and tax reforms. and it back that process up with a $1.20 trillion sequester. so it is surly different than a typical budget resolution. but we do have the critical elements of the budget in place. i will be the first to say, i would like to see a difference -- see it different than what was adopted in the budget control act. i am sure each of us would have done it differently if we had the power to do. today's hearing, i want to focus on now, the outlook for the u.s. global economy. we have three excellent witnesses, the former vice chairman of the federal reserve, now professor of economics and public affairs at princeton university.

we have the chairman of macroeconomics advisers, one of the most respected macro economic firms in the country, and the director of economic policy at the american action forum. welcome to all of you. thank you for being here. we appreciate very much bigger spending time with us. i would like to briefly review the economic situation confronting the country. it is important to remember the economic crisis that we have come through from 2008 and 2009, we experienced the worst recession since the great depression. the economy contracted almost 9% in the fourth quarter of 2008. that is really stunning. 9% contraction in the fourth quarter of 2008. we lost 800,000 private-sector jobs in january 2009 alone. the housing market prices was

rippling through the economy, with home building and home sales plummeting and record foreclosures. we faced a financial market crisis that threatened to set of global economic collapse. credit markets were largely frozen. we have come a long way since then. the federal response to the crisis, including actions taken by the federal reserve, the bush in ministration, the obama initiation, and congress successfully pulled us back from the brink. it is clear that our economic situation would be much worse now if we had not had that federal response. one of our witnesses today, along with economist mark zandy, completed a study in 2010 that measured the impact of federal actions on shoring up the economy. their conclusion was as follows. we find its effect on real gdp jobs and inflation are huge, and probably averted what could have been called depression 2.0.

when all is said and done, the financial and fiscal policies will have cost taxpayers a substantial sum, but not nearly as much as most had feared and not nearly as much as if policymakers had not acted at all. if a comprehensive policy response to save the economy from another depression, as we estimate, they were well worth the cost. this chart shows dr. blinder's estimate of the number of jobs we would have had without the federal response. shows we would have had 8 million fewer jobs in the second quarter of 2010 if we had not had the federal response. i understand dr. blinder will present estimates for the number of jobs saved in 2011 as well, which i look forward to hearing. although the recovery has recently shown signs of strengthening, it has been a

long and difficult road back. recovery tend to be shallower and take much lower. here is what two leading economists found in their research. "real per-capita gdp growth rates are significantly lower during the decades following a severe financial crisis. in the 10-year window following severe financial crisis, and agglomerates are significantly higher than in the decade that preceded the crisis. the decade of relative prosperity prior to the fall was importantly field by expansion in credit and rising leverage that spans about 10 years. it is followed by a lengthy period of retrenchment that most often only begins after the crisis and last almost as

long as the credit surge." in other words, we should expect to see more than normal growth and relatively higher unemployment right now, because we are recovering from a severe financial crisis. if we look a private-sector job growth, we see it has improved dramatically from one we were in recession. as i noted in january 2009, the economy lost more than 800,000 private-sector jobs to private sector job growth returned in march 2010 and we now have 22 consecutive months of growth. some additional positive signs that we see in the economy, as i mentioned before, we have had 22 consecutive months of private sector job growth. last week, unemployment claims fell to their lowest level since april 2008. we have seen nine consecutive quarters of real gdp growth. gdp growth is not expected to have risen to 3.1% in the fourth quarter of 2011.

housing starts are up 25% since december 2010. consumer confidence was up sharply in the last two months of 2011. u.s. auto manufacturers are returning to profitability, and state revenues are showing signs of improvement. but those with news elements are no reason for complacency. there are serious risks that remain to economic recovery. for example, unemployment and underemployment remain far too high. housing continues to pose a threat. too many homes are still in foreclosure or underwater. political deadlock in washington could block key measures. federal, state, and local budget cuts could add too much near-term fiscal drag. the european debt and fiscal crisis is creating uncertainty and threatening u.s. exports.

as was reported on the front page of the washington post yesterday. i hope all our colleagues read the story about what has happened with the slowdown in europe and how that is affecting u.s. companies as well. beyond that, we have what i have termed our own debt threat. we have a debt that is too high, growing too fast, and his comparative that we present a plan to deal with it. i was part of the fiscal commission, part of a group of six. in both the above effort, we came up with plans to reduce debt by $4 trillion over what would otherwise occur. i personally favor a more ambitious effort than that. my fondest wish would be that we could come together around a plan that would reduce the debt from what otherwise will occur

by about $5.50 trillion. why do i put that number? because we could balance the budget in 10 years if we put in place a plan of that magnitude. the timing of when it begins is critical, because the economy is still weak. i would not personally start tough medicine until we see the economy doing better, but i would put in place a plan right now to achieve the kind of debt reductions that i have described. i believe that would be a tonic for confidence in the economy. i believe it would assure markets that were serious about the fiscal affairs of our country appeared with that, i am going to stop.

i apologize for the lincoln that opening statement, but there was a lot to talk about -- for the length of that opening statement. senator sessions, welcome back. >> i agree with you that a plan now is needed. i do believe that it would, in fact, provide a tonic, as you say, confidence in our business world and the world around that we have our house in order. one of the things that is destabilizing our return to growth, or weakening that, is lack of confidence that we have our house in order and we have a plan that would bring our house back into order, and balancing the budget in 10 years would be really good goal. i believe we could do it, but it would not be easy, as you know. we are entering the budget season for fiscal year 2013, producing a budget for public accountability and scrutiny.

it represents one of the bonneville duties of a good government. -- fundamental duties of a good government. particularly in a time of economic stress. the last time the chamber offered and present to the floor of budget in 2009. i believe that is 1002 days ago. i appreciate your call comments, your expressed a desire to work on a budget resolution, and i look forward to working with you in a realistic way, but it is not going to be easy to lay out a plan that works. for too long, washington has been spending what we do not have, borrowing what we are not able to pay back. it has become a habit, a trend. our debt is now greater than our entire gross domestic product. slowing down road today and casting a shadow of doubt on our economic future. i believe it is impacting growth today.

we would have higher growth today if we didn't have as much debt as we have. americans were promised that a surge in spending would lead to a corresponding job creation. maybe there has been some help there, certainly the amount of money that has been spent certainly in the short run should have provided some help. but i would just point out, our job situation is not good. the number of people working today, 131.9 million, is less than in 200. that was 132.5 million. we had more people working in the year 2000 than we have today. the number of people on unemployment compensation is one thing for valuable insight, but it is not the only thing. we are not creating sufficient jobs. i saw one of the french ministers this morning on bbc

saying they believe have to get their debt under control, but most important, make the french economy productive and growing. the middle class is being squeezed from all directions. real wages are declining. it is not a winning combination we are you are not adding real numbers of jobs and not having real income. declining food and energy prices are rising. health expenditures that we were told would go down by the end of this year are going to be up for a f $2,400 according to cbo. nearly five trillion dollars in new debt over just three years. the government is continuing to grow while the middle class is

continuing to shrink. what makes matters worse if that the growth we have seen has been too much driven by an sustained borrowing by government. this is not a solid foundation, in my view. the cbo one as, for instance, that the president's first stimulus package -- and they accounted for this carefully -- ultimately would be a net drag on the economy. yes, they said you would have a short-term benefit, but that stimulus is now gone. the money is spent. the benefit, short term, is now gone, but we are carrying the burden of that debt still. so we are adopting policies that are leaving us weaker, not stronger in the long run. in the state of the union tuesday, president obama had a chance to tell the american people the truth about the danger we face. he missed perhaps his last

opportunity to rouse the american people to make some tough decisions that will feel tough, but will not require us to salvage this government spending. i was discouraged about how little the president spoke of our mounting fiscal obligations. the super committee finally agreed -- as you know, only $2 trillion of production deficits, instead of the $4 trillion we have been told repeatedly is the absolute minimum. you have said you would like to see more. we will spend $45 trillion in the next 10 years, and we will add $12.40 trillion to the gross debt, so i do not think a $4 trillion reduction in the

expected growth of debt is too much to ask. i really do not. the president outlined no plan to go beyond that $2.4 million. the money we were borrowing to fund the war -- we were hoping to reduce that amount of borrowing and stop increasing the debt by bringing the war costs down, and now, he proposes expanding at least half of that on new programs. so that is a concern. we hear the argument that spending cuts should be deferred, but this, i think, goes against common sense, and really more, the political reality. the american people are ready to hear the truth and willing to take some action. we have economists who say cutting spending now would be the perfect time, you should next june cut taxes by a certain amount, but this is a political world.

we are not able to make decisions like that. we have to move when we have the consensus to move, and i am really trouble that we might lose the consensus we have to make some really good changes that i thought the last election led us to. mr. chairman, i would offer more of my remarks for the record, but i would just say we should focus on solid policies, creating jobs without adding to debt wherever possible. more growth, more jobs without more debt. that means more domestic energy exploration, american energy. a streamlined tax code focus on growth. more free market competition in health care, not more government domination. immigration policy that spurred national interest and legitimately protect our american workers.

it means making the government leader itself and more productive. that would make america stronger and healthier. the president says he wants america built to last, but we cannot do that on borrowed money. debt is not an asset. spending is not the virtue. borrowing cannot be our future. thank you. >> i thank the senator. i just want to say there are places where we disagree, and we are going to have a really good debate in this committee and hopefully, we will have a really good debate on the floor of the senate. but while there are places where we disagree, there are places where we are in strong agreement. especially in place where i see we are in strong agreement is the need for a substantial plan to deal with the debt over this next 10 years.

you know, if we could find a way to come together in this committee -- i have been here 25 years. i am not operating under any illusions. this is an election year. but i do believe if we could find a way to come together around this committee, that itself would be a boost to confidence in the country. so let's try. you have my commitment. i am eager, and this is the last year i will be here. i am not burdened with a reelection campaign. i will spend every possible moment focused on trying to achieve a result. i ask all members -- you know, i know it is hard. we have all taken positions,

things we feel strongly about, but if all of us -- if none of us are willing to give any ground, we are not going to succeed. it is going to take all of us to give some ground on things we hold dear to find a way to come together. i have sat on both sides, and i plead with colleagues -- let's give it our absolute best shot. i pledged to do that. them a while you have taken action, you have said we are going forward. you have made a decision to go forward with the budget process, and that is real action. i think that as a good first step. thank you. >> thank you. we will go to our witnesses and go right on the table. what have we said? seven minutes.

if we try to hold to that, full testimony be made part of the record, and then we will open the panel up to questions. thank you very much for being here. i appreciate it. >> chairman konrad, ranking member sessions, members of the committee, i would like to thank you for the opportunity to share my views on the budget today -- chairman conrad. i think even in this fractious environment, everyone agrees that the recovery has been far too weak. the numbers we have now show a compound growth rate since the recession ended up only 2.4%. that is a rate we could be satisfied with it we started at 5% unemployment. some observers view this week macro economic performance as unsurprising and maybe even inevitable, given the devastating financial crisis that brought about the

recession. you mentioned the analysis, which is just the celebrated, showing that it takes a very long time for economies to recover from banking and financial crises, but what was pointed out in a very nice paper recently by three researchers at the fed is that the extraordinary -- extraordinarily poor performance over a decade is not so much from the slow recoveries after the bottom, it is that the bottom is so deep. it just takes a very long time to climb out. that should be a lesson for all of us. it means we are not condemned to a sluggish recovery in terms of growth rate, much less one that never gets us back to full

employment, as you hear some people claiming. there are many factors relative to the speed of vendor recovery, including both macro economic policy and luck. i want to start with the first and finish with the second. it would be nice to have a little luck. the u.s. policy response to the devastating recession was vigorous, as you said, mr. chairman, but it is petering out, as you also said. the fed deserves a lot of kudos for what it has done, but i want to focus on congressional action. i realize that for many members, voting for tarp in 2008 was about as much fun as a root canal work, but i have little doubt that history will record that that vote, the vote for the recovery act in february 2009, followed then by the very successful banks stress tests that spring, which required the tarp money behind them to be effective, really turned the tide, and making a horrific situation merely terrible. it is a hard point to make, right? we wound up at a terrible point. it could have been much, much

worse. in the paper that you mentioned, mr. chairman, we use a large scale model of the u.s. economy. to estimate the overall impact of all of these policy responses taken together on the economy. i think, as far as i know, it is the only such estimate to the state. there are many such estimate to the effects of the recovery act, for example, but there were many things done in the financial arena. we estimated that all those policy responses together added 10 million jobs in 2011 and 2012. it is roughly the same number for 2011 and 2012. if you translate that to the unemployment rate, it is roughly 6.5%. the about it -- instead of 8.5%, we would be at 15%.

maybe that is wrong, but if it is even close to the ballpark, that is an unthinkably bad outcome that we avoided. spending from turkey, of course, is long gone, and spending from the recovery act peaked in 2009 and has been declining ever since. in 2011, that amounted to roughly 1% of gdp. in fiscal 2012, a two will be perhaps half that amount. correspondingly, if you look at the federal spending component of gdp, it has been falling since third quarter of 2010. this comes to the point about the near-term fiscal drag that you mentioned in your opening statement. i published an op-ed in the "wall street journal" a week ago describing what i called four myths about the budget deficit. i will not go over all four now. one was that we had an urgent

deficit problem that had to be tackled right away so that we do not become the next greece. that has as a corollary the notion that if there's any fiscal stimulus efforts, pay for it immediately if not sooner last we spoke the market. the markets are practically falling over themselves to lend money to the federal government, the united states federal government, not to some other federal government, at negative real interest rates. i suggest the as an example, a package that would spend another $500 billion in the near term and pay for it 10 times over with $5 trillion worth of deficit reduction. i would support that kind of policy if you changed the 5286, the four to three -- almost any number. a second, which i know comes straight from your legal mandate to deal with 10-year budget windows, is the obsession on the next 10 years.

if you look at the cbo long-term projections, what happens over the next five years is actually quite benign and what happens over the next 10 does not matter very much. it is after that that things explode entirely out of control, almost completely do health care spending. so that is the issue. finally in the last minutes i see on the clock, the luck issue. my outlook for gdp growth in calendar year 2012 is about 2.5%, the st. tepid pace we have been experiencing since the recession, and the biggest threat on the economy's contagion from europe -- financial contagion from europe. the latest news on that in the last few days or week or so is pretty good, but it turns good and turns bad and we cannot count on that. it could change any day. we get a worst-case scenario, a european financial blow that will be somewhat like lehman brothers -- not exactly like lehman brothers.

-- almost all of that growth could evaporate. the other major risk, which i cannot begin to calculate, comes from the middle east and oil. so far, that looks ok, but who knows what might happen there? some might say the near-term outlook for the economy is mediocrity if we are lucky and stagnation if we are not, and i would have helped that the united states of america had higher aspirations than that, and i would also hope that this policy would help, not hinder, this recovery. thank you very much for listening. i'll be happy to answer any questions. >> thank you very much. then the chairman, distinguished members of the committee, i am the senior managing director of macro economic of buzzers, a forecasting firm in st. louis that i founded in 1982. thank you for inviting me to discuss the risk around the

u.s. and global economic outlook for the u.s. and what policy might do to improve it. our outlook for 2012 was dark. growinghe nation's gdp only about 2.25%. this is not fast enough to help the unemployment rate. unemployment could drift up modestly from here over the next 12 months. given that much slack in labor and product markets, inflation will remain subdued. consumer prices likely will rise only about 1.5% over the course of the year, but with unemployment that are above the benchmark and inflation below the 2%, monetary policy will remain accommodative and interest rates historic low. consumer spending will grow at about the same pace of gdp.

private domestic investment will grow somewhat faster. a narrowing trade deficit will be a modest boost to growth, but fiscal policy will restrain the recovery. it has three components. first, the stimulus associated with the american recovery and reinvestment act of 2009 is abating. second, the caps on discretionary spending passed as part of budgetary control at of 2011 will start to bite. third, state and local governments will continue to trim spending and boost taxes in order to comply with their balanced budget mandates. where are we in the deleveraging process that all of us are concerned with? at least at the aggregate level, there are indications that in the united states, we are nearing the first stage of the deleveraging process. corporations -- at least large corporations -- are flush with funds and balance sheets. house prices have fallen back

into historical alignment with incomes in rent, and thanks to consumer retrenchment and very low interest rates, the ratio of household debt service has retreated to very low levels. a sizable percentage of homeowners remain under water on their mortgages, and there can be little doubt this is both a drag on consumer spending, the housing rebound, as well as an impediment to labor mobility that contributes to high structural unemployment. the deleveraging process is only secondary, now coming more forcefully into play as the economy continues to expand. credit strings have tightened were qualifying credit scores linger well above recent norms. federal regulations intended to define and curtailed systemic risk are now under development. all the secondary dimensions of

the deleveraging process might safeguard the economy and improve the quality of expansion, but they also do restrain the pace of their recovery. in my 30 years in this business, i have never known as much uncertainty to surround our forecast as as the case today. i want to discuss briefly with you the risk and uncertainty that a critical to have the environment may evolve over the next several years, areas about which i think many economists actually agree, although there could be some reasonable disagreement on some of these bonds. first, let me address fiscal policy. we prepare our forecast using an economic model that allows us to make their explicit assumptions about fiscal policy. this was a lot easier in the old

days. changes in the governing mandatory benefit, changes in tax cut and changes in discretionary spending were relatively infrequent and usually considered permanent in nature. now, the fiscal landscape is cluttered with temporary policies, extensions, modifications which could have measurable impact on our forecast. i do not know how all these things are going to play out. i would be suspicious of any forecast to the claims he or she does. to give you a sense of the challenge, our forecast assumes the payroll tax holiday benefits will be extended through december but will be paid for gradually through the next decade, the health care reform will not be repealed, that most of the bush tax cuts will be extended, that it will sequester will be avoided, and the grand bargain on a gradual deficit reduction will be achieved. a lot of assumptions. however, imagine the enormous fiscal drag in 2013 -- roughly 5% of gdp -- should either by political design or political miscalculation the tax holiday, unemployment benefits, the doc vix, the bush tax cuts all

expire even as the health care taxes take hold and discretionary spending is sequestered. furthermore, all that could happen in a sputtering economy when the fed, having already expired most of the errors in its monetary quiver, could not respond aggressively or might be politically restrained from spawning at all. in our modeling, that is a recipe for recession. i want to talk about the euro crisis. the view of the slow-motion train wreck that is a view of the debt crisis as a single downside risk to continue economic recovery in the end of the states. slower growth in the eurozone mean slower growth in the u.s. export region, which makes goods and services produced in the u.s. less competitive, but more important would be the financial contagion that could spread around the globe without regard to borders if an uncontrolled lehman brothers event occurs within the financial system this year. prices of risky assets around the world declined together even as the dollar strengthened.

it could tip the u.s. into the back end of a double-dip recession, and this does not even consider the possibility of a dissolution, either in part or in full of the euro itself. house prices, my last point -- the issue here is that home buyers and home builders delay buying and building if the expectations for further declines in house prices. the consensus forecast is for house prices to begin rising modestly, which would be good news here rising rather than falling house prices will lower real inflation, just a cost of mortgage finance, thereby supporting housing demand. may also boost household net worth, prevent foreclosures, thereby supporting consumer spending. unfortunately, it is difficult to be confident in the consensus forecast for house prices here for one thing, not long ago, the consensus was for house prices to turn up last year. for another, no one knows for sure how long is the shadows by of houses that could be brought to market the moment sellers since prices bottoming out,

therefore delaying even longer the eventual turnaround in housing prices here as the economy approaches the three- year mark of this recovery, the coming years are likely to see growth and utilization rates that will not especially surprising given the circumstances, will nonetheless feel and be very disappointing. furthermore, the risk of the forecast and the uncertainty surrounding them have seldom if ever been as dire or prevalent as they are now. in short, these will be very trying times. you can call me a cockeyed optimist because at least from my point, i can imagine worse outcomes than the ones i do consider most likely, but i surely hope not to see them. thank you for your kind attention today and the opportunity to offer my advice. >> thank you, dr. prakken. >> thank you for the invitation.

as someone who worked on the hill for nearly a decade, as an economist, when my jobs was to -- and for members of the economic forecast, i just want to give the warning that it is really difficult to do economic forecast. i always tried to caution my bosses not to put too much faith in them, and not to denigrate dr. prakken, who has by all accounts the best forecast out there, this is just an impossible thing to do. the look of forecasts the way they work, generally people forecast next quarter something close to what this quarter is, and the one after is a combination of long-term growth than what it was last quarter and three quarters up, it is more or less what they think long-term growth is. this is not really a science and it is subject to all kinds of contingencies that might happen. i think right now, if you look at what is going on out there, there are a lot of risks to the economy. i think dr. blinder identified

this -- who knows what will happen in the middle east or with oil prices? as everyone who has spoken here has indicated, what happens in europe is the real wild card. there have been a few articles in the last few weeks. the "washington post" article refuted that -- the eddied where somehow there is a the linkage there, that somehow we are immune from what might happen in europe. i did not think that is the case of all. i think in increasingly globalized society, we are very much at risk. and the idea that this might somehow benefit us because it capital flight leaves europe and is looking for another place, it might come here -- that might be true in the short run, but i take a little bit of exception to dr. blinder -- i do not think if we are going to run trillion-dollar deficits for the indefinite future -- i think at some point, that is going to start spooking markets appeared especially, as he indicated, if we have an entitlement that is growing and growing and growing

and there has not been any real movement to do anything about it. i am not a big fan of fiscal policy. i think it is an interesting and fun game to play -- "what if we had not made certain changes in 2009? what would have been the impact?" i do not think the government is ever going to be -- is going to be nimble enough to enact fiscal policy in a way that benefits the economy. an example i like to the people has to do with it a favorite restaurant i have in washington, d.c., a deli located for 30 years at 15th and i street. in early 2010, the building was remodeled, in the ground-floor tenants were booted out.

2012, the work still has not begun. over 100 people who work at these ground-floor businesses ended up losing their jobs. a year later, it eventually found a new place to work, but government does think very slowly. it is the nature of the beast. we simply cannot count on if there is some kind of new recession out there, cause perhaps by the euro crisis -- we cannot count on the government to nimbly respond to this with fiscal policy. as both my counterparts have noted, the federal reserve does not have too many quiver's left to deal with the current crisis we have. it is almost impossible to see how they can -- they certainly cannot lower interest rates further. it is difficult to see what else they can do. what i would like to encourage the senators to think about -- instead of thinking about the very short run policies we can do to stimulate the economy for the second or third or fourth

quarter, just to think longer term and think what we can do to engender long run economic growth. the two i think are most obvious are things that have been cited before -- i think it is time to have entitlement reform occur. i think the simpson-bowles committee made an admirable first attempt, and i think that would have been a wonderful place to begin. the gang of six also talked about this. again, great place to start the discussion. i wish members of both sides would have picked that up and run with it. as the chairman said, it is a really difficult time to something like this, during an election year, but it seems to me that waiting one more year is something that we really cannot afford at this time. for a number of reasons -- not only our health care costs rising, but another good thing that is happening that also happens to have a bad outcome is

that longevity is increasing dramatically, especially from age 65 on. it is kind of interesting. if you look at the centers of disease control data from 2000 through 2007, longevity increase for people at age 65 by nearly a year over those seven years. if longevity is going up for people who fit the retirement age by nearly two months a year, that will overwhelm our system. that is something that social security and other actuaries have not been able to account for yet. this is kind of one - surprise from something that otherwise is a very good trend -- one negtive surprise from something the other was is a very good trend. it really is beyond time to have a tax code that looks like somebody designed it on purpose. as a former treasury secretary said so nimbly. we do not do a very good job at

encouraging investment. we do not do a very good job at encouraging all kinds of things. just the complications that are endemic of the tax code are something that need to be fixed. to me, it seems like it is obvious that there is a bipartisan solution that could keep rates relatively low -- get rid of a lot of exemptions, things like the mortgage interest deductions, something i have written about credit, and end up with more revenue and more reasonable rates, and something that actually encourages economic growth rather than discourages economic growth. seems like it, reform and tax reform are two gigantic things. i know it is difficult for congress sometimes to do more than one thing at a time, but it seems like it is a propitious time for the u.s. senate to bite off as much as it possibly can. thank you. >> thank you, dr. brannon, for your references to the fiscal commission and the group of six and your references to the need of tax reform. i used to be a tax commissioner, used to the chair

of the multi-state tax commission. for anyone intimately familiar with the tax code, as i know you are, we are way past time to fundamentally reform it. it is an abomination. if you were going to sit down and design a tax code that would have the worst disincentives to the very things we all want to see happen -- savings, investment, economic growth -- you would be hard pressed to do a worse job. i am going to defer my question in time. then we will go to senator sessions and proceed with other members. i will reserve my time. >> mr. chairman, thank you very much, and let me thank all three of our witnesses. i found the testimony to be very persuasive, that we had not taken action -- decisive action -- that today, we would be faced with unemployment rates

that are much higher and options that are much fewer. i also take away from this, mr. chairman, from the testimony that has been given, that we do not extend the unemployment insurance programs, if we do not deal with the payroll tax issue, if we do not deal with amt, if we do not deal with the physician problems in medicare, that we are going to put a real anchor on our recovery and cost employment. our unemployment rates will go up. we have a short-term/long-term issue here. i just want to associate myself with the comments of the chairman and the ranking member, that we need a deficit reduction plan over the next 10 years that, as a minimum, reduces the deficit by $4 trillion.

i agree with that. but in the short term, we have got to take steps to counter some of the challenges to our economy. our state and local governments will be reducing their input into the economy. that is for sure. they have no choice. they really are relying on the federal government to provide some assistance to our economy. we have got to figure out a way to do that consistent with the long term commitment to reduce our debt. that is what we really need to do. i will ask the question, if i might, as it relates to the housing market. you all touched upon this somewhat briefly. we all know that it was the housing bubble that burst that sparked the current recession -- it was not the cause of the current recession, but it was certainly a spark. the two of you have commented on it directly, but we may not

yet be at the bottom. we hope we are. we hope we will see housing prices increase. what can we do at the federal government for policy that would be helpful to encourage a more healthy housing market? we know that there is a lot of inventory that is potentially out there. people have been sitting on the sidelines. we also know that mortgage rates are historically low. what can we do to try to encourage irresponsible return in the housing market that will help not only housing sales but also new home starts? >> that start on that? >> certainly. >> i will not start with pie in the sky with congress appropriating huge sums of money to help these people that are under water in the mortgages, which in an ideal world, i would.

in 2008, advocated that, but it is not going to happen. there is something much simpler, which i would hope that republicans and democrats can agree on -- when the law in 2008 establishing the fhfa was passed, it provided for conservatorship of fannie and freddie it's the worst happen. the worst did happen, and fannie and freddie are now in conservatorship. conservatorship perpetrates the fiction that there are shareholders out there whose interests need to be protected, that we are considering value. the head of the fhfa -- who, by the way, has never been confirmed, so he is acting, which is another issue -- is under a legal mandate from congress to conserve value. the truth is, as we all know, that fannie and freddie our nationalized companies, basically, and the only shareholders that matter are the u.s. taxpayer, and that law should be rewritten. i do not think it would take more than a one-paragraph bill

to put it into the wall, that their job in taking care of the red which will eventually be the demise of fannie and freddie -- there one objective should be to serve the citizens of the united states. i think that would help. >> a number of things, but we should, i think, start by saying there is no silver bullet that can fix the housing mess. it will, under all circumstances, be a long and drawn-out affair. but i think we can agree that to date, the program is intended to facilitate mortgage modification and refinancing has had disappointing take up rates. i think this disappointing rates are partly because of reservations on the lenders side to participate in these. so schemes that somehow broaden the number of mortgages that

qualified for these plans perhaps coupled with some approach to sharing future house price appreciation with the lenders could encourage them to become more actively involved -- i know you have written about this -- and they are also extremely worried about having the so-called representations' of mortgages put back to them in the event that they jump back into the refinancing game. a better attempt to modify mortgages without actual debt forgiveness, which i think -- >> just let me interrupt for a moment. it is a major issue in my state of maryland. i've had many housing forms, and i have one again this saturday not far from here. there is an inconsistency among banking institutions. some are very happy to try to work things out because they understand it. others are very remote, and he cannot seem to get their

attention. is there any way we can get the attention of the mortgage holders in a more direct way? >> it could be that banks have a different financial state, and that could explain their different responses. better information would be helpful. i think also, there is the notion out there that the gfd's are sitting on large amounts of properties that have already been foreclosed, and they could put those to market. perhaps the provision that they would become rental properties for a certain number of years. - standing is there are investors and developers chomping at the bit to get access to those properties -- might understanding. they understand that demand for housing is -- pent-up accumulating demand will be tilted towards renters rather than owners, given today's financial realities about home ownership. but this is really, really important. there is a housing been waiting out there. demographics suggest we will

have to build 1.5 million housing units per year on average over the next 10 years. we're only building 500,000. there is going to be a 300% increase in residential construction up there somewhere, but we have to have a financial system in place that can accommodate that going forward. the most important thing to do immediately is to do what we can to stem house price declines. the most important thing i think we can do there is to do what we can to prevent particularly the so-called strategic foreclosures. we know as soon as the house goes in a foreclosure, the property value goes down by 30%. any of these programs that could modify mortgages, sell the assets, get them into productive use, share the appreciation somehow or other, to put a floor on the expectation of house prices would really be helpful. then, you have to find a model to replace the originate, securitized, and foot model with something that can accommodate this demographic push for housing demand that will be coming over the next 10

years. >> let me thank the witnesses. this is an issue we will have a follow-up on when we have more time. thank you. >> thank you. senator sessions. >> i would yield my time to senator johnson. >> thanks, senator sessions. i would like to agree with you that i think it is crucial that we have a plan. i certainly want to extend my hand. i would like to do everything possible to work out a budget resolution. i think that is absolutely crucial to restore some confidence and reduce some levels of uncertainty. as somebody who has been in business for 31 years, made investment decisions, hire people, created jobs, i do not think there is any doubt that really, what is holding back our economy is the high level of uncertainty and a total lack of confidence in what is going to happen with our economy. so much of that is driven by what will happen with our government. to me, it really is the root

cause of our problem, the size, the scope, and all the regulations, all the intrusion of government into our lives, into economic decisions that businesses have to make, and the cost to government. i could not disagree more with dr. blunder -- blunder in terms that debt and deficit does not make a difference -- blinder in terms that debt and deficit does not make a difference. i think it makes a huge difference. does the huge amount of debt and deficit that has accumulated over the last 10 years and was accumulating over the next 10 years -- it scares people. . prakken, you talk about the level of uncertainty in economic forecasting making your job harder. think of a business person, the level of uncertainty when he has put his own money or her own money on the line to make those investment decisions -- that is the problem.

dr. brannon, i agree with you. i do not think government can positively affect the with its actions. what government can do is get out of the way. the questions i want to ask you -- first of all, thanks for your testimony. the additional deficit risk that nobody is really talking about -- i worked in terms of the estimates on the true cost of the health care law. one of you talked about the uncertainty around the health care law. cbo estimated only 1 million people will lose their employer-sponsored care, but mckinsey study found 30% to 50% of employers right now are planning on dropping coverage. 180 million americans get their health insurance through employer-sponsored care. half of them lose their health care, the cost of obamacare will not be $95 billion.

it will be over $400 billion. if everyone loses it, it will be if everyone loses it, it will be close to $1 trillion. i like your comments in terms of that level of risk and your economic forecast. dr. prakken. >> thanks for such an easy question. >> not a problem. >> i have no way of quantifying for the united states economy the health care at pier the name of our firm is macro economic advisers, and much of what is going on in health care reform is a microeconomic phenomenon. in particular, segments of the market for enter population. i would be careful with the example you just gave. if a firm drops its health care coverage for employees, what

happens to the money that it saves when it makes that decision? ok? does it simply turn around, as it could, and give it to their workers as a higher wage? in which case, workers could use that higher wage to go out and buy health insurance on one of these exchanges. doing these analyses is extremely complicated. i think what you have to come back to is this -- we have a huge, unfunded federal liability over the next several years as the actuaries account these things. i think we all agree that the principal source of that is health care -- medicare and medicaid. furthermore, given the way cbo estimates these costs, they make very optimistic assumptions about what is called the excess growth of health care. these unfunded liabilities are probably even larger than cbo estimates. yet, our response to this unfunded liability is not to

tackle head on that issue. it is instead to wac discretionary spending over the next 10 years -- >> excuse me, our response is to increase the unfunded liability theory that is the point i'm making. i would like to have your comments on that. the level of uncertainty caused by these deficit risks that we are not talking about in washington because we are simply not even addressing the ones that are on the table in economic forecasts -- i will go one more into the hopper. you talk about 2.5% growth, dr. blinder. if we only achieved 2.5% growth, at $5 trillion. the cbo estimates for every 1% decrease in economic growth, at $3 trillion. these are the risks -- this is the level of uncertainty causing job creators not to act, not to invest. dr. brannon.

>> the biggest problem we have with health care has not been dealt with by the affordable care act. the rising entitlement costs. i think that is what really threatens government solvency. there's no denying that lots of small businesses in oshkosh and elsewhere are worried about the entrance to figure out what these costs will do. i do not think any of them really believe their health- care costs are going to go down all that much, but the fact that you look at the balance sheet of the united states, we might have had $1 trillion deficit last year, but the amount of unfunded liabilities went up by $3 trillion last year alone. i think that is what frightens financial markets, and i think that is really where the federal government has to think first in terms of their priorities. you are right, there are a lot of things in the affordable

care act that i think are not really solving anything. >> thank you, mr. chairman. >> thank you, senator. >> just a tail wind on your last comment, there is a lot of legislation around here that over the decade, does not solve a lot of things, either. you could probably randomly select legislation. in my state, it would be no child left behind, which is hundreds of pages of junk, in my opinion, but that is another issue, another committee. if i can, before i ask some of the questions, i say this every time i come to this committee when this folks talking. they talk about the stimulus. did not really have long-term impact, and that is where i want to take a little exception, just to mention a couple of things. what i learned over the years -- if you let stuff keep out there in the media world or the cyberworld, it becomes fact when it is not necessarily fact. i am talking through you to the broader folks that are

listening. in alaska, we received one of the two health services projects to construct a hospital. the money has been spent, but the end result is we have several hundred people working there for many, many, many years to come, providing health care to provide better health care to people, who then have more productive lives, which then in turn work longer, they taxes, produce product. it has an effect. the problem is, cbo -- which i have my own problems with cbo -- cbo never will analyze that. small road construction project, the most jammed up intersection project in anchorage, alaska, now because of the stimulus money -- it is the most improved intersection for traffic flow in the city. why is that important?

last time someone sat in a car, burning of fuel, burning up time they should be at work or taking their kid to the doctor or whatever it might be -- they become more productive. but that is a long-term impact that we have put out there. a telecommunications company built broadband to western alaska, which had no broadband and no capacity to enter this new world we live in. more individuals will be productive and bring products to market. more kids will have education. so every time i hear from people that the stimulus that did not do anything, it is flat- out wrong. problem is you cannot score

those things or analyze those things because they do not want to hear about that. that is my rent for a second year, but there's a couple -- i thought this was an article -- if i pronounce your last name wrong, i apologize -- you had a good quotation. prakken? i thought it was interesting. the 54,000 jobs. small-business surge in the unemployment numbers and what is happening there, and it comes from the small-business world. to me, that is a very important indicator because small business people who hire people -- does not matter what time of the year -- they are not hiring to fire. they are hiring to keep. compared to a larger company, at christmas time, they hire them to fire them or lay them off. small business people do not do that. i thought your comments here

were very interesting. if you could give me an additional field on that of what you think and how the small business community is starting to play a role in this recovery. >> the number you are talking to -- it shows that small business hiring, which many economists think of as the engine of economic growth, has accelerated over the last several months. certainly a good development. that data does not tell us much more about small businesses. a survey routinely asks small businesses how they are doing on a variety of different fronts, including their biggest challenge. the answers to those questions actually are surprising, given

the rhetoric that one reads in the paper about, one problems confront small businesses. the main problem they say they have to deal with is, right now, lack of demand. they do not say access to capital. they do not say burdensome regulation. they say their order books are thin. this gets to the point about -- can government somehow stimulate the economy short run in return for long run deficit reduction that could be really helpful? and i agree with that one, that that is something we should start to think about. i'd also like the point about the ongoing return to some forms of federal spending. the federal government can borrow at - interest rates right now. -- negative interest rates right now. are you telling me there are

not some worthwhile social projects that have rates of return that are not higher than that? you have to pick them carefully, and obviously, there's the opportunity for squandering the fund, but to think there are not social investments that have rates return higher than the government faces when it enters capital markets is to cut off a variety of policy options that have long run benefits. >> i have one broader question. >> cbo has tried to stay away from dynamics course keeping because it can be easily abused -- dynamic scorekeeping because it can be easily abused. either with specificity or generality, the request was made on the economic returns, not to mention the social returns on infrastructure.

>> i just have a broader issue, that i think they have got to change the way they do their business. from a small business world, some of the ways they do the stuff -- it just does not make sense, but i will leave it there. let me ask a quick question on the housing. i am not one of these to insert principal knockdowns. the real approach to me this seems logical year is a proposal of it at some folks have talked about, and i think is a good idea, and that is if you know for the last two and a half years, someone has under water property, but they have made their payments on time, they have done it, even though their rates are higher than the current markets -- does it not make sense just to create a financial instrument that says you, even though your property is under water -- we do not care if it is under water because obviously, you're staying in that home for several factors -- jobs, kids in school, neighborhood -- that is what people buy for. why not just lower the rate -- it is an enormous stimulant

into the economy -- the idea is lets just do it. we will lower the risk that they will go into foreclosure because we give them more cash flow, and then we will stimulate the economy, and we do not care what the bankers say because all we're doing is creating another easement that if you want to refinance, we go over here and get it done. they pay off the bank, and that is the end of the story. tell me your thoughts on that. it is so simple. everybody has these grand plans that make no sense. >> it is so simple, and everyone has all these grand plans that make no sense, and this is all you need to do. >> i would like to jump in on that very quickly. there is no one magic fix. >> fannie and freddie of basically the only players left

in town, and that comes back to the remark i made earlier. they are hamstrung by the law. i think they are not quite as hamstrung as they are acting, but you wrote the law. you can change the law. i do not believe any member of congress back in 2008 wanted to make life more difficult for the american tax payer. that is the effect now of the law written in 2008, and this is the body that has the ability to change it. fannie and freddie cannot change the law. senator sessions, back to you. >> we appreciate the members of the committee that at talent and expertise. -- they both add great talent and expertise. ron. >> thank you. appreciate your letting me take time ahead of time. just on stimulus, i cannot help myself. talking about infrastructure, if you look at the classic

definition of infrastructure, probably, it was 4.5% of infrastructure in the stimulus package. to dr. prakken's comments about how expensive it is for government to borrow so it should not be borrowing to spend more, it is true that we borrow more than we should be, and that the federal level, we are borrowing about 40 cents for every dollar we spend. there is an impact that goes beyond the obvious, which is what the interest rate is. at some point, we cannot just keep spending more than we take in and not expect to have an economic impact. just have to throw that out. also, to throw out the fact that economists, including books kook, dr. blinder, were your successors at the council of economic advisers and predicted that the stimulus will work in ways that it has not.

they predicted unemployment would be under 7% now, and we are looking at 8.5%, and it would be 8.7% over the last couple of months if we have not had so many people leave the work force. we hope the economy is improving. i see some positive signs and some troubling signs, but you cannot say that the expectations that were set by those in support of this were met. i wish there had been more infrastructure in the legislation, and i certainly wish we had seen better impact from it. i am curious, if i could go back to the health-care debate, because i think all three of you understand the important role of health care in dealing with our fiscal crisis, as well as our economic crisis.

in other words, this incredibly slow growth we have seen in this recovery compared to other recoveries, and a true jobless recovery. in 2002, we called it the jobless recovery. we are down about 6.1 million jobs. in 1981-1982, we were up 6 million jobs at this point in the recovery. i think health care is playing a role, not just in the long term problems that we face, but also in some of the uncertainty you talked about. i liked what you said about the fiscal landscape being cluttered with uncertainty. and i adore 30 years, you had never seen such uncertainty as you have seen now. i think a lot of it is these huge, unfunded liabilities in health care. you were starting to go there in response to senator johnson's question. i wondered if you could talk about that theory the first

part of your response was that we are focusing too much on the discretionary spending side, as i read it, and i thought you would follow that with the need for us to focus on the long term. >> the real issue in health care is -- there are two parts. one is that the population is aging. as you get older, you require more medical attention. seconds that the prices of medical services are rising faster than overall prices. the issue philosophically that we must address as a society is -- do we think our elderly are somehow entitled to the best available health care, irregardless of the cost? if the answer is yes, the resulting gain is just one of shifting the cost. who is going to pay for that? the government? the private sector? will the government shift the cost to the private sector? the other issue is that maybe we're just going to tell these aging books that they really are not necessarily entitled to the best medical care that money can buy under all circumstances.

until we really wrestle with the very fundamental philosophical debate, it is just hard to see how we will make progress on health care. is it going to be the government? and until we really wrestle with that fundamental philosophical debate, it is hard to see how we will make progress on health care. the circumstances in health care do not change that much from one year to the next. it cannot be why growth is slower this year than last year. it just does not change that much. demographic projections just do not change fast enough for that to explain this. it does not make sense for that to be the case. that is not what our forecast is 2.3%. it simply is not. >> let me give you a micro example that might counter what you just said. >> ok. >> in ohio last week, health care costs, all of the time. it is a cost of doing business. one manager said, we are getting a little ticked up in

the business. i am not going to hire somebody. and the reason is, health care. instead, we are out bringing in some more part-time people. the notion that our current health care uncertainty -- and obviously, the cost has not gone of greatly, as you pointed out. but when you talk about gdp, it has added some uncertainty. and in terms of what the health care legislation has done to make it worse, i agree with you on the long-term impact, but i think we forget that it is impacting today's economy, too. >> i am a manager of a small business, 20 people. before i left, i got my plane and i asked my cfo how health care is affecting us right now. he said, we pay very generous benefits, so we will be slapped with this cadillac tax. otherwise, it does not make a

difference. maybe bigger firms have different circumstances. >> if you are self insured and if you have a health savings account, which a lot of them do, there's a lot of uncertainty. >> the example used it is not uncommon. there's a lot of what we call labor hoarding out there. firms are very reluctant at the beginning to lay off workers when a recession comes because they will not save that much. but once they do lay them off, they really do not want to bring them on. there are fixed costs and that is one of the things that high health care does. >> we have got to deal with these costs.

the chairmen of banks -- ranking member have been leaders on this, saying that you will not get things done until you deal with this. i would hope that is one of the conclusions that we can all agree with, and maybe disagree on some of the other issues. the way you put it, doctor, is probably accurate in terms of some of the difficult choices that we have to deal with for the elderly. and what you did not talk about is that we have to restructure the way we deliver health care. it is not just making a tough choice between price and quality. it is saying, how do you get away from a fee-for-service model and have better quality? and have lower cost? >> you have to restructure the curtain. >> and we have to have output match the volume. >> i have to say that i have to agree with senator portman's last.

if there is one thing that is clear, we have got to change the way we pay for health care. we have incredible incentives for waste in our current system. and virtually everyone is in agreement on that score. hopefully, that could lead to a taking action. senator? >> thank you very much, mr. chair. i want to ask about availability of credit to small businesses. we had the small business lending fund, which in oregon, many banks supplied, and not a one was granted access to an expanded base and leveraged additional loans to main street. that was the whole goal.

it is still not clear why so many were denied lending. but this is one strategy. and we had a second strategy, a small business lending fund sustained at 90% guaranteed. some banks have started to increase their lines of credit to help restore funding, but i would like to know from your perspectives if that has been a significant change. that we have had business is coming to my town halls and talking about their lines being cut in half or eliminated. if they cannot borrow on their credit card and they have no equity on their house to bar on and they cannot get loans from the bank, they are basically still in the water. and they cannot even manage inventory ups and downs that go with the course of a year. credit to small businesses, any insight? >> one thing that i have observed is the segment of the small business committee that is particularly prone to these

credit issues are the ones that are exposed somehow to release date. -- real estate. they either own commercial real-estate or have assets that are exposed. there is a legitimate argument, that there is a segment of the small business committee today cannot refinance. an example of an auto dealership in st. louis. they could not refinance their credit line three years ago and the reason that was stated was the market value of the properties had fallen so significantly, and they were used as collateral against the loan, and yes, you could have credit, but you either had to put in more equity yourself, or you had to hold a $1 million credit line, essentially raising the cost of the loan.

i think we need to be careful about the kinds of companies that have exposure to the real- estate boom and bust that has impeded their capital and other types of businesses. the banks that i have talked to in the midwest are actively looking for quality opportunities to lend. the definition of quality opportunity is tighter than it was four or five years ago. but again, if you look at the survey responses for large numbers of small businesses, they do not need credit availability even close to the top of an their list of significant problems. >> i am aware of the fact that the sblf not worked in that not

nearly as much money has been put out from it. i don't know if what joe just finished on is part of it. but here is something that we do know, from one program to another, going back to entitlements. there needs to be outreach. the one thing about entitlements is that people do not always know that is available it is not enough to just put it on the table and say, a certain class of businesses are eligible. i always have suspicion when take up rates on what is eligible are low that is the reason. >> let me be clear that this is not banks reaching out and

applying to the program. they had a huge incentive to apply only to lend those funds out the door because there was a 1% vs. 7% differential for the bank. based on whether lending increased proportionaly at the bank. the issue was the treasury turning down their application. if we have not had much of an explanation or an analysis from treasury on that. i want to switch gears. >> i am from a small town near peoria, illinois. we have a hometown bank. the president of the hometown bank was calling me almost on a weekly basis last year, asking me when treasury was going to initiate this. it just took treasury so long to get their act together to issue that to get the money out the door. it would have been a lot more help had they done this a year before they ended up doing it.

>> was that bank eventually accepted into the program? >> after four or five months of waiting, yes. >> that is a positive, because not a single bank was admitted that applied in oregon. the president pledged to champion this issue right before he took office. that did not happen. and indeed, there was a huge push back on this issue. you can do it for second homes. judges can do it on boats and planes and every other mortgage contract. a lot of concern has been expressed that this would have a significant impact on mortgages and interest rates in the future. but that has been countered by saying let's do it by looking

backward and looking at second houses now where the power exists, and we do not see that large discrepancy. why is it so hard for folks to entertain the concept that you have advocated for? >> i think the biggest problem is that people see that there are certain people who would unjustly benefit from such a thing. people who basically made a real estate that and they lost it and are still going to get bailed out. far more common is a person who took out a loan for $500,000 for a home that was maybe worth $550,000 and then the price fell to $300,000. that person is not going to pay $500,000 for that house. they will walk away if they do not get some kind of loan modification. we should knowledge that fact and create a situation for people who are willing to

undergo chapter 13 bankruptcy. which is not available to anybody. if you have assets, you are not allowed to go through chapter 13 bankruptcy. we need to set up a procedure to basically pay what the mortgage holder is going to get for that anyway, and that is, $300,000. >> when this power exists for other types of loans, second homes and so forth, then it is really utilize. -- rarely utilized. but it is an instrument. and in this case, we have all of these modifications were the service he is not very motivated, but this would create a lot of motivation. do you both support this as well? >> you need part carrot and part stick. -- to get widespread mortgage modification.

>> at this point, i'm almost willing to support anything. >> [laughter] thank you. senator sessions. >> thank you all for being here today to provide your insights. we have not passed a budget resolution here through the senate in almost three years. the chairman would argue that we did dean a budget last year in the budget control act the fact is, we put caps in place. the we have not passed a formal budget since 2009, and i hope this committee will find a way to do that this year. the reason that is problematic in my view is that we have all made mention of the fact -- or you have -- that what is driving federal spending is entitlement programs.

primarily, health care, medicare and medicaid are growing at multiple rates of inflation. we cannot sustain that over time. doing something on taxes is critical if we're going to take on what i think are the biggest challenges facing the country from a spending and debt standpoint. the other reason i think it is so important that we do a budget is that there is increasing concern among people out there and investors in the economy and about what congress is going to do. there is a study of over 1600 investors released on tuesday that identify the national debt as one of the top concerns on investors' minds as we head into this new year. the study also found that a significant number of investors believe that the uncertainty coming out of washington over debt and regulation is holding the economy back. 85% of small-business

executives in a recent survey think that the economy is on a wrong track. do you agree that a formal budget resolution is important, not only because we have got to address the issues of entitlement reform and tax reform to get the debt under control, but also because we need to bring certainty to investors and job creators out there? i think there is a definite correlation between deficit and spending and the economy and jobs. it strikes me that the uncertainty that comes out of washington with regard to how we are going to deal with these long-term problems is complicating the ability of the economy to get back on track and create jobs. >> i think i agree with you. it would certainly be a good first step and would maybe signal that the gridlock that

we have seen in the past year or so might be a thing of the past. we need to have real, fundamental reform. >> anything that you can do to make fiscal policy enhance the fiscal environment in which companies are trying to grow their businesses more stable and more predictable has got to be helpful. it is a young literature, but it is interesting that it is growing, attempts to measure growing uncertainty by looking at how many provisions are a tax code, how valuable they are, when they will expire -- this literature does suggest that such measures of fiscal

uncertainty can be correlated with slower economic growth. the logic of this is pretty straightforward. if you do not know the environment will be working in next year, two years from now, the next step is to delay major decisions until more clarity as possible. but it is not easy to have clarity right now. it is not just a budget resolution. it is eliminating the uncertainty for people like what is going to happen at the end of february when this temporary holiday expires. what is going to happen in 2013 when you could have fiscal go to 5% of gdp if everything goes badly? that is a huge element of uncertainty that overhangs anyone's willingness in the long run to make economic decisions. on paper, we know what we have to do. we have to reform the tax code and make it permanent. we have to address the hon

funded liability entitlements, and we have to adopt a process for assessing the value of government programs so we do not propagate things in future programs that are unproductive. >> what level of deficit reduction you think is necessary? the budget control act had $2.1 trillion provided. >> that is not sufficient. >> right. simpson-bowles said $4 trillion. where would you put it? >> i would put it between $4 trillion and $5 trillion in the next five to 10 years. we did a study that showed that if you just continue on the current path, you will see adjusted interest rates starting to move of and the amount of deficit reduction that would prevent that and stabilize the debt to gdp ratio by the end of the decade should be between $4 trillion and $5 trillion. anything beyond that would make a significant improvement in the un-fund of liabilities that would otherwise start to grow rapidly up to that time. i was heartened by the formation of the super committee.

i was disappointed that it failed. i hope it will reconvene this year and get back to the task of coming up with the $2.4 trillion. but actually, that is not enough. it will only be the opening gambit and it will have to be a considerably larger fiscal attraction. >> i am not a forecaster. and i will not try to pull a number out, but i will say this. i think we are underestimating the growth in entitlement spending. as the doctor pointed out, not only do we have the baby boom generation reaching retirement, the longevity of people, especially age 65 on, is growing by leaps and bounds. people think is not changing that much if you look at the aggregate numbers. at for people like you and me, men between the ages of 40 to 60, longevity has not changed at all in 30 years.

the same things that kill men, we have not gotten any better at fixing those. but we have gotten better at heart disease, treating cancer, the things that usually befall people aged 65 and on. >> the senator was not here when i said we will go to a market of this committee. but last year, we kind of got "bigfooted" here -- that is my terminology -- by negotiations that started earlier in the year. this year, we are not in that situation. in terms of the hearings that we are looking forward to, we're going to have the chairman of the federal reserve. we are going to have the head

of omb, the head of cdo, the secretary of defense. we are trying to get the secretary of the treasury. we're going to have the secretary of transportation. we will have a hearing on entitlement reform and a separate hearing on tax reform, because i think there is strong interest on those areas and i think they are central features of our long-term imbalances. and then we will have a hearing on income inequality. we have had another request for a hearing on energy policy. we will have to see if we can work that in, because this year, i think we're going to need to -- if we go to the kind of markup i anticipate, we will probably need more time for markup than we have seen in recent years. if we're going to take a real

run at doing what members of this committee have told me individually and collectively they would like to do, it is going to require a longer markup that we have had in previous years. that will have to be factored into our thinking as well. a final point is, the congressional budget office has not told us when we will get the estimates. initially told us they were shooting for march 9. we have been told it has slipped. we do not know what it has slipped to. that is a factor we just have to learn about before we can reach a conclusion. with that, senator whitehouse. >> thank you, chair. i think the chairman can probably predict what i'm going to jump into, because this discussion of health care is always so frustrating in this committee because the focus is always on the cost and the trends, which are real.

but as dr. prakken said, based on rising demographics, but one thing we overlook is the fact that we are running the most inefficient health care system in the world by orders of magnitude. we are at 18% of gdp that we burn on health care. the nearest industrialized country to us, i think, is the netherlands at 12%. other countries deliver health care that is about as good as ours on average. the savings every year to our health care system could be between $700 billion and $1 trillion, and we could improve the quality of care. i am glad the senator related that issue about restructuring

the way we deliver care. i understand that is a process of innovation and learning and of reform, and that for those reasons, cbo cannot score it. but it is tiresome to have witnesses come before the panel day after day and never mentioned this enormous issue because it is not scoreable. simpson-bowles agreed this was a big issue but did not mention it because it was not score a goal. -- it was not scoreable. at some point, we have to take off the cbo blinders and get to work on this. we cannot burn $700 billion to $1 trillion a year and do nothing about things like hospital infections that kill people every year, run up costs, and are completely

preventable. it is a constant frustration. there is so much to be done, and it is such a bipartisan thing we could be doing. and hospitals and health-care systems, from kaiser in california to gundersen lewis in -- gundersen lutheran in wisconsin to mayo in florida and minnesota all across this country are actually doing it and showing that it works. they are actually saving money by delivering better care, and yet, we have these budget discussions that operate in this artificial cbo universe and we never even take that on. that is concluded. >> [laughter] >> to determine what to say something? >> i always enjoy -- did the chair want to say something? >> i always enjoyed the

thunderous presentation. i think you're right. >> i also want to talk about the housing predicament. for a long time i was the chairman in the subcommittee that looked at this system. if a bank is under water and needs to renegotiate the value of its headquarters or the property it owns, the bank will not hesitate to talk about reducing that principle with its lender as part of the work out. but then the bank, the same bank, will turn around and tell a homeowner and say, no, we will not discuss the principle of what you owe me on your home. dr. brannon has talked a lot about this. i would like to submit a copy of his article open but the housing blues" for the record.

-- "a cure for the houseiing blues" for the record. >> it will be admitted. >> thank you. could you talk about the value of allowing a homeowner in bankruptcy to sit down with the lender and negotiate a new principal balance for what they owe in the light of, first of all, if they walk away from it, the bank is going to be written down on what in the foreclosure process anyway. they would get a better number in an organized bankruptcy than they would by going through the foreclosure process, with the destruction of the property itself and the collateral and so forth. >> as it stands, my father is a bankruptcy lawyer in peoria, illinois. i am well aware the you were in charge of bankruptcy.

my father would love to run many reforms by you. i agree with you in the sense -- this is what i told senator mulally. -- senator merkley. in a situation where someone those $500,000 on a home worth three under thousand dollars, the mortgage lender is not going to get $500,000. people all over are walking away from their mortgages. it does not seem like that is going to change, at least not in the near future. we should acknowledge that and create a system for people who are severely under water to file for bankruptcy. and it's not available to everybody. if you have assets, you are not allowed to file chapter 13 bankruptcy. you are told to go away. and you are told to negotiate something else. >> do you think that would

influence behavior elsewhere? i have lived, since the mortgage crisis, with innumerable stories from rhode islanders who are on the receiving end of the worst bureaucratic treatment i have ever heard of from the big banks about their mortgages. never did in the same person on the line twice, never getting a straight story -- up to 19 months in one case of getting the runaround. when is your home at stake, you can imagine the frustration over never getting a discussion from anybody. the banks are so on motivated. -- unmotivated. we got money into raila for the hardest hit plan, and rhode

island housing sat down with the biggest banks to design a program for how the hardest-hit plan funds would be distributed. the agreed upon a plan and when it came time to go forward, the big banks said, we may have agreed on a plan, but we are not going to participate. there is no alternative. >> if i could stop the senator on that point because we are out of time in this question in by the senator. >> could you submit for the record? >> we could do that. we have been told the vote is hard wired for noon. centre sessions and i have withheld all morning. we still have four senators to question and we only have 12 minutes. that is a problem. senator sessions. >> thank you. i remember about a year ago, a little over, i was at the home

of owl blanton in alabama and we -- al blanton in alabama and we had a town-hall type meeting at his house. we lost him recently, but everybody talked. a man well in his 80s said, i have lived through the depression, world war ii, through correa, through the big inflation and other things that have happened. and i do not believe our problem is the high cost of living. i believe it is the cost of living too high. i was at another town hall meeting and an african-american stood up and said, my daddy told me you could not borrow your way out of debt. we have talked, you have and others have about the uncertainty that is out there. just briefly, would you not

agree that when you look at europe and you look at the u.s., is our debt to gdp was one-third of what it is today, there would be less concerned and more confident about how are you come out of a recession or where our economy would be? the debt itself, because it is so large in the developed world and we are so high the leveraged that it is creating uncertainties that we have not seen before, could you say yes to that? >> i would rather we have less debt than more debt. yes. >> what we are talking about in europe right now, some are predicting catastrophic events. hopefully, that will not happen. but our debt compared to europe as a whole is not much better than theirs, if any.

we are on a path in which we went from $161 billion deficit to $450 billion to $1 trillion i think this year. some have predicted 4% growth for 2011. it came in at 2%. dr. prakken, what was your prediction for 2011? >> too high. [laughter] >> you do not want to tell us? >> made when? >> january of 2011. >> probably close to 3%.

>> you were a little more cautious. >> yes. >> doctor, when you say we ought to borrow another $500 billion and that this will create more growth than uncertainty and damage, it bothers me. because i am of the view that debt is a problem for us now. i am not saying we need dramatic cuts this year, but i'm saying we need to be very dubious about are we more than we are now borrowing. -- borrowing more than wwe are now borrowing. we were breathing a sigh of relief that we were reducing the were crossed. -- war costs. then the president announced last night that he wants to

spend half of the money we were borrowing to fight a war, that money now becomes money he can spend because he is saving it. it should be money that is no longer borrow each year. because all of it is our road. -- all of it is borrowed. this initial stimulus plan, as one mentioned, it was certainly less than total of 10% infrastructure. it went to general spending and created a sugar high. and as bill gross of pimco said, it is not a permanent thing. then you look at the -- are you wanting me to wrap up? you look at the shock at one in people to take a little of their own medicine, and then to have the president say nothing to us about the debt when he gave the state of the union address.

his own chairman of this joint chiefs said that as the greatest threat to our national security. doctor, i don't know what your politics are exactly, but would you start and say -- are we missing something? is this a point when this nation actually has to worry about this course of debt? and does this not have the potential, as the debt commission said we are facing the most indefensible financial crisis if we do not do something. >> i think you are correct. the current fiscal policy is not sustainable. it will result in a gradual decline of our living.

>> the emphasis needs to be on the trend, not a level. we have no trouble now financing the level of the deficit that we have now. in fact, we are paying zero interest rates at the short end. the trend is totally unsustainable, completely unthinkable and it is almost entirely, as came out in this hearing, due to rising health- care costs. that is the one thing that needs to be dealt with in terms of long-term deficit control. and unfortunately, nobody knows how. if we could do that, almost nothing else would matter. >> mr bowles of the commission said we could be facing a debt crisis in two years. that was a year ago when he made that statement. you are talking about medical costs in the next 20 to 30 years, which are horrendous as

you rightly point out. i am worried that it is already having an impact on this economy. i think the europeans have decided they have to retrench now, even though it might have some short-term pain. i am dubious about a big, new spending program. thank you. >> we have three of us left. the vote is hard wired at noon. could we go to 5 minute rounds. would that be acceptable? i apologize to my colleagues. in fact, i tell you what, let's do six for the two of you and i will either not do it around or have a truncated. >> you are very thoughtful. i think i can get under sickert -- under six.

i am just going to ask one question. dr. brannan, you worked on the hill for a long time. my concern has long been that the lame-duck session of the 2012 congress will look very much like the lame-duck session of the 2010 congress. big economic challenges, a fight over the bush tax cuts. and quite frankly, the 2012 session has a double whammy because you have this question of the sequestration kicking in. in other words, not really looking at targeting your spending in a careful way. i have looked at a lot of ways to break out of this cycle. for example, i opposed the bush tax cuts and i suggested after 2010, why don't we extend those bush tax cuts for one year so that congress will be forced on a bipartisan basis in 2011 to make some tough choices so that both sides would be under pressure to come together.

obviously, we were not successful. i would have liked to have seen it. senator coats and i have a bipartisan tax reform idea. there have been other ideas on how to approach it. my one question to you is, what do you think can be done over the next few months to try to drive this kind of bipartisan agreement are around tax reform and spending reform so you do not get this kind of lame duck meltdown where the choices are the only ones that do not really serve the country's interests? >> when i started at the hill -- and it seems to happen every six months. how do you tie the hands of the next congress? when i was on the staff of the senate finance committee, the last day we were in session we knew we would be here until 4:00 a.m. or 5:00 a.m. because

the last negotiations would not take place until everybody was too tired to do anything. we have talked about a comprehensive tax reform and people on both sides have acknowledged it and said it takes a year or two to get it done. if you look at what your predecessor, senator packwood, did ultimately, it took about a month to get everything through. and i have talked to him about that. he said, if you take much longer to do comprehensive tax reform, everybody starts to draw out exactly how much their ochs is gored. ox is gored. maybe the thing to do is to try to do it in a lame duck session. >> thank you. >> i happen to agree with you, dr. brannan. i think that might be a way to get it done. otherwise, we would be pecked to death on the finance

committee. if we have a long, drawn-out fight on this 2% payroll tax cut, what is going to be the effect on job creation and our economic recovery? >> it cannot be too long and drawn out because you only have a month left to make a decision. the decision is whether the holiday ends at the end of february, or is extended through the end of the year, correct? >> correct. >> in which event, a holiday would expire anyway. to be frank, it will not have

all that much effect on the economy. moving up 10 months the something that is going to happen at the beginning of next year anyway. but it is roughly $140 billion that would be taken out of the pockets of working men and women. it would certainly reduce their spending some if they did not have that. that would reduce the demand for goods, and in turn, prompted the reduction of production of some goods and, in turn, job losses. it is just simple. if you take spendable money away from people, they will spend less, and reduce less. >> could i just say that i think everybody viewed a 2- month extension as economically ridiculous. it was the best that could be done under the circumstances. i think there's a strong

shareholders that the other 8 to 10 months are coming. the question is whether you drag it out until midnight on the last day, which the congress might. the reputation of the congress starts looking ridiculous to people. >> i agree that there is that expectation. but there is uncertainty about how and over what time frame it will be paid for. if the insistence is that it will be paid for quickly, that mutes the extent that it is paid for over a holiday. it is down the road, you have a more favorable outcome. >> i do not think the stimulus as a whole lot. i think congress is better

served thinking about long run changes in taxes and spending and not worrying about short- term variations in the business cycle. i do not think they can do much about it. >> tell me what you think is going to happen in europe. and according to what you think, if you think is going belly up on the banking system, tell us how bad you think is going to affect us. dr. blinder? >> i alluded to that a little bit in the testimony. i think the best guess -- and that is the right word here -- that they will -- if they continue to kick the can down the road, they have been remarkably successful at that. this has been going on in an acute phase since the spring of 2010. they keep kicking the can down the road, doing just enough to get by. i think that is the best guess for 2012. the downside risks of what you

are talking about are enormous. if there is a financial equivalent to lehman brothers that starts in europe, i think that is a recipe for a worldwide recession starting in europe, but not staying in europe. and as i suggested in that testimony, the potential to knock down u.s. gdp growth, which might otherwise be 2.5% -- let me not even try a forecast. to knock down gdp growth by two percentage points from what it would have been otherwise in a worst-case scenario. >> i agree with everything allen said. i am hopeful that the ecb's decision to lend money to banks in the eurozone so they can either acquire some of this troubled the sovereign debt, or

not sell in the fire cell to recapitalize themselves seems to have worked fairly well so far. and increases the chances of the muddle-through scenario. europe is the single biggest threat. and you can imagine two or three different scenarios, all of which have roughly probable chances of occurring. either one probably has a 35% or 40% chance of occurring. it is just determining the impact on the u.s. >> we have 7.5 minutes left in this vote. i will forgo my questioning round. this is brilliant management by the chairman. i lose my chance to question the witnesses. i had an extensive statement at the beginning. i deeply appreciate the

contributions of the witnesses today. you have certainly helped the work of this committee. with that, we will stand adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] x and a few moments, defense secretary leon panetta releases the pentagon's budget for the next fiscal year. later, president obama announces the sale of new oil and gas drilling permits in the gulf of mexico during his speech on energy policy and jobs. then we will reassure the senate hearing on the u.s. and global economic outlook. >> "road to the white house coverage continues tomorrow with several events in florida. gop presidential candidate newt

gingrich speaks to the hispanic leadership network conference at 11:00 a.m. eastern. that conference in miami will also hear from mitt romney. you can see that live here on c- span at 12:20 p.m. eastern. rick santorum will also be in miami tomorrow, speaking to the latin builders association. that is live at 1:30. >> april 15, 2010, had arrived in paris, walk into the hotel lobby, met general mcchrystal for the first time, and he looked at me and said, so you are the rolling stone died. i don't care about the article, i just want to be on the cover -- you are the rolling stone and die. >> michael hastings wrote in the june issue of rolling stone. >> i said it is between you and lady gaga pickwick i was just making a joke. he replied, just put me and lady

gaga in a heart-shaped tub. i felt like, this is a different kind of general. this is going to be a different kind of story. >> several months later as a result of the article, general mcchrystal had been fired. michael hastings continues the story in talks about his new book, sunday night at 8 eastern on c-span's "q&a". >> defense secretary leon panetta and the chairman of the joint chiefs of staff have released the pentagon's proposed budget for the next fiscal year. the plan cuts nearly half a trillion dollars over the next 10 years and calls for two more rounds of base closures. this is a little less than an hour and a half. >> good afternoon, everybody. as all of you know, this department has undertaken a very fundamental review of its

defense strategy, and of our spending priorities. the reasons for their review are clear. first of all, we are at a strategic turning point. after a decade of war, and after a substantial growth in the defense budget. second, the congress of the united states, through the passage of the budget control act has required that the defense budget be reduced by $487 billion over 10 years. to accomplish this effort, we decided that it was important to make this an opportunity to develop a new defense strategy for the united states, and for the u.s. military force that we

wanted for the future. that strategy has guided us in making a series of tough budget choices, and establishing a new set of defense budget priorities. the ongoing process reached an important milestone earlier this month with the release of the new strategic guidance and the priorities for a new 21st century defense. it will be reflected in the decisions that have been made and will be presented in the president's budget. when i announced the new guidance, i highlighted five key elements of the strategy and five key elements of the vision that we have for the military force of the future. let me summarize each of those. first, the military will be smaller and leaner, but it will

be agile, flexible, rapidly deployable, and technologically advanced. it will be a cutting edge force. second, we will rebalance our global posture and presence to emphasize where we think the potential problems will be in the world, and that means emphasizing asia pacific and the middle east. third, we will maintain our presence elsewhere in the world, and we will do that by building innovative partnerships, and strengthening key alliances, and developing new partnerships elsewhere in the world -- europe, africa, latin america,

and elsewhere. fourth, we will insure that we can quickly confront and defeat aggression from any adversary, any time, any place. fifth, we will protect and prioritize some very important and key investments in technology and new capabilities, as well as our capacity to grow, adept, mobilize, to surge as needed. given the fiscal constraints that have been imposed on the department, our approach was to develop this force for the future with some pretty important guidelines. we wanted to maintain the strongest military in the world. we committed ourselves not to

hollow out the force, as has been done in the past in these types of drawdowns, to take a balanced approach by putting everything on the table, and to not break faith with the troops and their families. i want to think the entire leadership of this department, military and civilian alike, for their participation and support in this effort. this has truly been a team effort, and i am deeply appreciative of their cooperation. we are united in the belief that this strategy and the resulting budget decisions follow the right approach to meet the country's most pressing security challenges, and to preserve the strongest military in the world, and at the same time meet fiscal responsibilities. today, i would like to offer a

preview of the decisions we made to help build the budget request for fiscal year 2013, and the future years defense plan. this plan reduces spending, consistent with the budget control act, over 10 years, by $487 billion, but in the five- year budget presented by the president we reduce the defense budget by $289 billion over the next five years the department will specifically request -- five years. the department will specifically request in its base budget $529 billion. by the way, that compares to $531 billion in fiscal years 2012. our hope and plan is to rise to $567 billion by fiscal 2017.

i would point out that the projected growth before we had to do this was to reach about $622 billion by 2017. fiscal year 2013, we will ask for an additional $88.4 billion for overseas contingency operations, oco funds, that compares to $115 billion we received in fiscal year 2012, all of that, to maintain support obviously for our troops in combat. we believe this is a complete package that follows the five key elements that i described. you have the specifics in the package you have been provided, and i know the deputy and the vice chair will fill you in on any additional specifics you are interested in.

i wanted to summarize some of the key decisions. with regards to the area of developing a smaller, leaner, but agile, flexible, and technologically against force, we knew that coming out of wars and dealing with budget reductions of this magnitude, the military would be smaller, but the key, as tough as it was to make the decisions with regards to drawing these down, the key is to fashion an agile and flexible military force that we need in the future. what that means for the services is that we will have an adaptable and battle-tested army that is our nation's force for decisive action, capable of defeating any adversary on land. let me say that again. capable of defeating any adversary on land -- we will have a significant land force

presence in places like korea and the middle east. at the same time, we will emphasize special operations forces. we will also emphasize a rotational presence, so that we can establish the kinds of partnerships that i discussed, and provide training and the device in other parts of the world. we will have a navy that maintains a foreign presence, and is able to penetrate and the penetrate. and maybe has agility built into the force. the air force is the same. it will be an air force that dominates air and space, providing rapid mobility, global strike, and unman capabilities through their

operators as well. a marine corps that is in the white expeditionary force with reinvigorated and amphibious capabilities. all of this will network into a highly capable force for the future. we made a choice to retain the most successful and technologically advanced platforms that we will need for the future. that involves unmanned systems, satellites, submarines, helicopters, aircraft carriers, and fifth generation aircraft.

we are looking at multi-mission weaponry and technology that can support that kind of a joke for. striking the right balance between force structure and readiness is critical to our efforts, to avoid a hollow force, and we will continue to focus on this area to make sure we make the right choices. in this budget, we plan to gradually resize the active army reaching the 490,000, down from the present force level of 562,000, and the active marine corps will go to 182,000, and that is down from two hundred two thousand. that transition will take place over the five years. we will not reach those numbers until 2017. this plan maintains a very significant army and marine force, with both forces at larger levels than they were at prior to 9/11.

they will be fundamentally reshaped by a decade of war. they will be far more lethal, battle-hardened, and ready. the change in the size of our ground forces allowed us to examine the air force airlift fleet. our review determined we could reduce, and streamline our air fleet with minimal risk. we are retiring some a aging c5a's, but will maintain the capability. we currently have 60 air force tactical air squadrons, and the review determined we could eliminate 6 of the 60, as well as one training squadron. none of that will limit our ability to dominate the skies.

the navy is protecting our most flexible ships. it will retire lower priority cruisers that have not been updated with ballistic missile defense capability, or that require significant maintenance, as well as combat logistics' and fleet support ships. as we build this leaner and more agile force, we frankly need to look at a department that is leaner and more agile as well. for that reason, this budget seeks to reduce excess overhead, eliminate waste in this department, and improve business practices across the department. we have identified about $60 billion in savings over five years, on top of the substantial efficiency efforts already underway.

this will involve areas such as aggressive and competitive contracting processes, better use of information technology, streamlining the staff, reductions in contract services, and better inventory management. as a result of all of this, we will also need to look at facilities and the structure -- balancing overseas forward presence requirements with basing requirements back home. in this budget requirement, we simply cannot sustain the infrastructure that is beyond our means or ability to maintain, therefore the president will request the congress to authorize the use of the base realignment and closure process, with the goal of identifying additional savings and implementing them as soon as possible.

the second carrier -- rebalancing our global posture and presents to emphasize the asia pacific and middle east areas. the budget protects and in some cases increases our investments in these areas. that includes a capability to strike over long distances. we will be funding the next generation bomber and sustaining the current bomber fleet. we will move ahead with our next generation aerial refueling tanker. bringing in a stabilizing presence in combat power as needed, with an emphasis on these critical regions, the

marines will sustain their level of presence in the pacific. the budget supports an enhanced partnering opportunity with australia and others, such as the philippines. in all of these cases, we will do this in a way that respects the sovereignty of the nations that we will be working with. it also provides the resources to forward station combat ships in singapore and a control pact in bahrain. this will require maintaining the aircraft carrier fleet at 11 ships with 10 air wings, and maintaining our big back amphibious fleet. modernizing our submarine fleet will also be critical to maritime access in these vital regions. in this effort the navy will invest in a design that will

allow new virginia class submarines to be modified. across the force, we will invest in upgraded sensors for aircraft, ships, and missiles, and the most electronic warfare capabilities. it requires the army to return to full spectrum training, developing a versatile mix of formations and equipment to succeed on land, including in environments where access will be contested. the army will maintain its significant force structure in the pacific, including the

korean peninsula, and will maintain an operationally responsible peacetime presence in the middle east as well. the third area -- building innovative partnerships and strengthening our alliances throughout the world envisions an army that develops innovative approaches that ensure our continued engagement with allies and partners across the globe. for example, in europe, while we are taking down two brigades, we will maintain two brigades, and outlined a brigade team with come and, and rotate our deployments on the continent, so that our forces have more opportunities to train and operate with european counterparts. more broadly, the united states will continue to invest in shared capabilities and responsibilities with nato, responding to the alliance's

most critical needs such as ballistic missile capabilities. elsewhere in the world, the gradual drawdown of the post- 9/11 wars will provide more opportunities for special operations forces to assist and advise our partners in other regions. and, we prioritize the most important programs for building partnership capacity. fourth, we will ensure that we can quickly confront and defeat aggression from any adversary, anytime, anywhere, reaffirming that the united states must have the capability to fight more than one conflict at the same time. still, the changing nature of the conflict demands greater flexibility to shift and deploy forces to be able to fight and

defeat any enemy, anywhere. the strategic guidance recognizes that we are dealing with the changing realities of the world that we live in in the 21st century. we are not just facing conventional threats. we're facing technological threats. we have to be prepared to be able to leap ahead technologically in order to be able to confront those kinds of adversaries. this requires that we have the capability to defeat the enemy across a broad horizon of different conflict. the budget leverage is, as a result of that, and new concepts in space, cyberspace, special operations, long-range precision strike capabilities to ensure we can defeat and confronted accuracies.

that allows for all three legs of the nuclear triad. our review determined we could achieve better cost control by the lane the ballistics simmering for two years without harming our nuclear deterrent. we're equally committed to a strong and safe return to achieve national security objectives. lastly with regards to new investments in technology, we have to maintain a decisive technological edge.

we have to retain the kind of leverage the lessons of recent conflicts have given us, and we need to stay ahead of the most lethal and disruptive threats we will face in the future. that meant protecting or increasing investments in cyber capabilities, the ability to project power in denied areas, special operations forces, the kind that conducted the bin laden raid and the rescue of the hostage. in order to protect vital investments for the future, we protected science and technology programs as well. at the same time the strategic guidance recognizes the need to prioritize and distinguish urgent needs from those that can be delayed, particularly in light of schedules and cost

problems. we made reasonable adjustments to a number of programs. let me briefly mention the change with regards to the joint strike fighter. it is a program the remains essential for the future of our superiority. we have to develop the next- generation fighter, and we will. in this budget, we have slowed the procurement to be able to complete more testing and allow for developmental changes before we buy in significant quantities. we want to make sure before we go into full production that we are ready. the four structure risks entailed some risks, but to manage that risk, we will maintain the guys that have

experience, even as their overall strength decreases to ensure that we have the structure and experienced leaders necessary to regrow the force quickly if we have to. another component will be maintaining a quick and ready operational components, leveraging 10 years of experience in war. consequently, we are maintaining a strong army reserve and national guard. there will be no reductions in the marine corps reserve.

the air force will make balanced reductions in the international guard, consistent with reductions in both be active component and air force reserve. the budget recognizes that a critical part of our ability to mobilize is a healthy industrial base. maintain the vitality of the industrial base and avoiding imposing unnecessary costs and risks on our critical suppliers will guide many of the decisions we have made. now, let me turn to the quality our all-volunteer force. this budget recognizes that our people, far more than any weapons system, far more than any technology, are the great strength of the united states military. for that reason we focused first on every other area of the defense enterprise for savings in order to minimize any impact on the quality of the troops and their families. as a result, we were able to

sustain our in house critical support programs, while reforming and reorganizing others to be more effective and responsive to the needs of the troops and their families. yet, in order to build the force needed to defend the country under existing budget constraints, the escalating growth in personnel costs must be confronted. this is an area of the budget that has grown by nearly 90% since 2001. the budget will contain a road map to try to address the cost of military pay, health care, and retirement in ways we believe our fair, transparent, and consistent with the fundamental belief in our people. we recognize that we can never repay our service members or their families for all their

sacrifices. on compensation for service members, we have created sufficient room in the budget to allow for full pay raises in 2013 and 2014 that keep pace with increases in private sector pay. in addition, let me make clear, nobody's paid will be cut. nobody's pay will be cut. with regards to pay raises, however, in order to achieve cost savings, we will provide more limited pay raises beginning in 2015, giving troops and their families fair notice and lead time. on health care, another area of tremendous cost growth in the department, we avoided changes that will negatively impact off-duty troops or their

families, protecting health care services for these troops, our wounded warriors. we decided to help control the growth of health-care costs, which is almost $50 billion in this department, we are recommending increases in health care fees, copays, and deductibles for retirees that will be phased in over five years, but let me be clear that even after these increases, the cost borne by military retirees will rename the low levels of most comparable private-sector plans, as they should be. we also feel the most fair way is establishing a commission with authority to conduct a comprehensive review of military retirement. the president and the department have made clear that the retirement benefits of those who currently serve will be protected by grandfathering

their benefits. there will be, for those who served today, no changes in retirement benefits. finally, let me just conclude. putting together this kind of budget that maintains the quality of an all-volunteer force, and implements significant, mandated savings has been a significant undertaking. this has been tough work. at the same time, we have viewed it as an opportunity to shape the force we need for the future. i believe we developed a complete package, a line set to achieve strategic gains. the bottom line is there is little room for significant modification if we want to insure the force we believe we

need to protect the country and the missions we have to deal with. ultimately, we will need the support and a partnership of congress to implement the vision that we have for our future military. we look forward to working with the congress in this effort. after all, it was a bipartisan congress that mandated that we reduce the defense budget by $487 billion over 10 years, so we look forward to their partnership in this effort. make no mistake, the savings that we are proposing will

impact on all 50 states, and many congressional districts across america. this will be a test, a test of whether reducing the deficit is about talks, or about action. i understand how tough these kinds of issues can be. i understand also of this is the beginning, and not the end of this process. my hope is that when members understand the sacrifice involved in reducing the defense budget by almost one- half of $1 trillion, that it will convince congress of the important responsibility that they have to make sure we avoid sequestration. that would be a doubling of the cuts, another $500 billion in additional cuts that would be required to take place through

a meat axe approach, but we are convinced would hollow out the force. the leadership of this department, military and civilian, we are united behind the strategy we have presented, and we look forward to working closely with the leaders of the hill to do what american people expect of their leaders -- to be fiscally responsible at a time of record deficits, to use this time to develop the force we need for the future -- a force that can effectively defend this country, support our men and women in uniform and their families, and that is and always will be the strongest

military power in the world. >> thank you, mr. secretary. just a few weeks ago we released a new defense strategy that keeps america safe and represents a clear strategic choices in the context of a persistently dangerous and increasingly competitive security environment that are proposed in the budget for the next fiscal year. the joint chiefs and i worked closely with the president and secretary leon panetta, and we made sure the unique strengths of each service were recognized. at the same time, we put national security above parochial interests, exactly what the american people should

expect from us. we prepared a budget that strikes a necessary balance between succeeding in today's conflicts and preparing for those of tomorrow, accounting for real risks and real constraints, representing strong investments in our national security, but make no mistake, the trade-offs were tough. the choices were complex. the difficult decisions produce $259 billion dollars in the next five years in savings. it maintains our military's decisive edge, and helps maintain america's global leadership, keeping faith with the true source of military strength, our people. much will be said and written about the individual decisions, and some might be tempted to who view them through the prism of a zero sum game, pursing through each change to look for

a winner and a loser. that is the least productive way to assess this budget. the merits of our choices should be viewed in the context of men involved in security department and a longer term plan. this is the first step. it is a down payment as we transition from an emphasis on today's wars to preparing for tomorrow's. let me make some brief points about what this budget means for the joint force of 2020. capability is more important than size. this budget does not lead to a military in decline. rather, it builds a force that natchez capability to needs, to a joint force that is global and net worth, merciful and innovative, ably led, and always ready. it is a military that can win

any conflict, anywhere. second is the issue of compensation reform. i want to make clear that cuts in spending will not fall on the shoulders of our troops. there are no proposed freezes in pay, no change in the health- care, but we cannot ignore hard realities. pay-in benefits are one-third of the defense budget. pay will need to grow more slowly. the budget proposes modest increases in health care fees, copays, and deductibles for retirees. we need to look at retirement, but we will take the time to determine how to enact reforms over the next year. last is risk. the primary risks lie not in what we can do, but how much we

can do, and how fast we can do it. the risks are in time and capacity. we fully considered them, and i am convinced we can manage them by insuring we keep the force balanced, investing in new capabilities and preserving a strong reserve component. we will face greater risk if we do not change the way we have been doing things. three weeks ago i noted we have a real strategy that reflects real choices. the president's forthcoming budget proposal embodies these realities, and i am confident it needs of our nation's needs for our future. thank you. >> we have time for a few questions. >> over the next 10 years, do you see where the actual spending will go down from year-to-year, and for the american public, how do you explain what appears to be

contradictory, as you talk about this $500 billion in cuts in defense budget that will be increasing over time? quickly, can you address the 490,000, as far as the size of the army, and what are the actual risks in the size? >> the simplest way to say this is that under the budget that was submitted in the past we had a projected growth level, and that would have provided for almost $500 billion in growth, and we had obviously dedicated back to a number of plans and projects that we would have. that has to be cut, and that is a real cut in terms of what our projected growth would be. so, the reason you are seeing

the tough decisions presented to you in the implementation and strategy is because we had to achieve savings that would meet the requirement that congress gave us, and that is tough, real, and something that will cause some pain, but at the same time we recognize defense has to play a role in dealing with the national deficit. >> in terms of the size of the army, i am confident 490 active is the right number for 2017. it might not be the right number for 2020. i have always said the earnings to be adaptable enough to provide the greatest number of options given the security environment that we face. so, we grew the army to confront a particular conflict, to conduct stability operations

counter insurgency operations. those demands are going down. it is perfectly reasonable that the force structure would go down as well. >> secretary, you talked about the additional requests for more spending, $88.4 billion. given that one year ago, we had sizable amounts of troops in iraq, and numbers are coming down in afghanistan, why is it still so high? give us a sense of what that is for, the $88.4 billion. >> we are still maintaining a significant force in afghanistan to conduct the war there, and the cost associated with that effort is very significant, as we try to deal with the supplying of our troops. this is not as easy as iraq in terms of our ability to provide

the supplies and needs that our troops need. that, plus, obviously, as we draw down the surge, maintaining a fairly large number of troops that will be present in afghanistan -- supporting them, giving them the best supplies and weaponry they need to meet this mission will continue to require support and funding under the oco. >> there are two people that could demand an on oco -- the commander for operations, and the service chiefs. we always said it would take years following the end of the conflict to restructure the force. >> mr. secretary, are you seriously asking the president to ask congress for another

round of base closures? your civilians are still trying to deal with the 2005 base closure. for general dempsey, you want to under-fund the strike capability. what has changed in the last few years to prevent an adversary or the rest of the world from confusing one of these conventional missiles as a nuke? >> the technology, and therefore the trajectory that would be required to deliver it -- the speed at which they move, therefore you could lower the trajectory and avoid the confusion you are talking about in terms of being mistaken. there are issues beyond that, but fundamentally that is it. >> as we drawdown of force we

have to look of the infrastructure supporting the remaining force, and the reality is we are going to have to be able to reduce that infrastructure. the best approach to reducing that infrastructure politically on capitol hill has been to work it through the brac process, and develop an approach to which we would submit recommendations, the commission would look if those recommendations, and make a complete presentation to the congress and it would be voted up or down with one vote. the process provides that. i have been through the process i know its weaknesses and process. i know its weaknesses. we will continue to work to make sure it is done effectively. i have to tell you there is no

more effective process than to make it happen. >> the savings -- [unintelligible] >> we did not want to tie savings, because we need the congress to authorize it. if we put numbers in there and congress did not do it, it would undermine the whole process. >> speaking of numbers, $60 billion for projected savings for efficiency. that is always a fuzzy area. better use of information technology -- how detailed is the savings actually? >> it is actually pretty detailed, and we will let our briefers go into specifics. i have asked the same question and dealt with deficiencies in

the past. we obviously have to have meet on the bone. as you know, secretary gates began that process. we have gone back and said "ok, what have we done to meet the goals was signed by secretary gates?" there has been progress made. >> are you talking about civilian layoffs or pay cuts? >> all of that will be included, but more importantly going after duplication, overhead, waste, tightening up on systems -- this is a very big bureaucracy and it could use a lot of efficiency. >> is that civilian layoffs? >> no. we're talking about civilian pay savings as well. that is in the president's budget. >> general dempsey, i wanted to ask about special operations.

the budget calls for protecting that investment. considering how much special operations forces work has increased over past years, to you believe the funding is increasing enough to support their added role in this department, and mr. secretary, you say you hope congress will see this and pass it, but as a former congressman, can you give us a reality check? whether the chances of this getting through congress relatively unmolested? >> on special operations, you might have heard me say before

that when you say what is new, i would say the capability and role of special operating forces, and cyber, and i am confident that each of those new, emerging, and more important capabilities are adequately funded in this budget, but in balance. the special operations forces can only be "special" if there is a force that allows them to conduct operations. we have to do that in balance, and i'm confident we have done that. >> this is going to be tough. it is a tough challenge we cannot underestimate how difficult this is going to be. one of the problems is it is easy to talk about deficit reduction, but tough to do something that, in fact, reduce the deficit. what we are talking about does something to reduce. it will impact numbers, districts, constituents -- i

understand that. when i was in the congress, i went through this process and i understand what it means, but it is also an opportunity for members to show the leadership the country expects of them when it comes to dealing with this challenge. we have presented a great blueprint for the times -- the kinds of challenges we will need in the future in a way that does not weaken national defense and maintains a strong military force for the future. we briefed members of the committees that are responsible

for the defense budget last night, and i am very confident that these leaders understand the challenges we face, and that they want to work with us to try and see if we can achieve what we have presented to the congress. >> mr. secretary, general dempsey, can you help me better understand, you talk about hard forces, but point out the forces will be higher than before 9/11. given that, where is the risk, and where are the hard choices? >> is that to you? [laughter] >> the risks, with the fact that we will have a smaller force. it is larger than we had prior to 9/11, but obviously it will be smaller, and there are risks associated with that in terms of our capability to respond. we have dealt with that risk for the combination of the forces we have in place, and the ability to mobilize quickly will give us the capability to deal with any threat.

nevertheless, there is a risk. there is a risk, frankly, in the technological area. we depend a great deal of it being at the technological edge of the future. as i said, we have to lean forward if we are going to deal with the challenges we're going to face. we need to be innovative and off to leap forward. can we do that, develop the technology we need to confront the future? i'm confident we can, but there are risks associated with that. so, the risks that we are going to be facing, obviously, come with some of the areas that we have tried to reduce the budget, but we have done it so that we can respond to the threats we face in the 21st century. i think this is the force for the future.

are there risks associated with it? you bet. can we deal with them and make them acceptable? you bet. >> just to elaborate in 30 seconds, the greater risk would be that we decide we would just wish away any capability or form of conflict -- we are just never going to do that. what you are expressing here is the recognition that we are retaining our full spectrum capability, and that, we did not take any risks with that. >> we have time for one more question. >> mr. secretary, in terms >> mr. secretary, in terms of security challenges, and security threats, what is worrying you most in particular for the next 12 months? [laughter] >> that is a setup. [laughter] >> look, the one thing we had to do, obviousin