exploited so much, it's a declining part of the budget and yet that's where they focus anywhere attention. we have to reduce deficit. but i don't see how those caps are sustainable. my only disagree with alice, very bad idea to do that but i do it anyway, don't think caps can be sustained. that doesn't mean everything is going to fall apart. it means they're going to play games. that's what i think they will do. like you have overseas contingencies. you can have emergencies. we do all kinds of things. i bet you this year they will have 25, 30 billion worth of bill expanding under the budget act they can do that. and i think they will. there's no way they can hold these caps continue will be even more difficult next year and more difficult the year after that. >> you could have said that three years ago and probably did. here we are with much lower spending. >> but we still took advantage of some of those provisions. i think we will do it even more now.

>> you just wrote a book that says a lot of what the government does may not do any good and we spend -- >> i omitted the word may. >> isn't there some point of having a budget constraint here which says to the congress, ok look, live within these things and let's spend more on the stuff that works and doesn't. that's kind of the idea. >> right. >> a, sent that a good idea? and b, why doesn't that ever happen? >> why doesn't it ever happen? >> why don't they set priorities and spend more on what they should and less on what they shouldn't? >> i think it's just too hard. the government is gargantuan. there's a book of government programs, if you dropped it on your toe, would you have to immediately go to the hospital. thousands of pages. the government is just huge. how can you -- we can't even control the department of defense. we were in a meeting a couple months ago that had an important

senior official and department of defense said they don't even know what the budget is. is that correct? >> no, that's not right. >> i'm talking about major general in the marine corps who said this. >> bob will speak to them afterwards. >> i think it's very, very difficult. we can do a lot more of it. i told you before and we said in this very room a couple of weeks ago that we know less than a 1% of federal spending we really have any idea of what its impact is. and you pooh-poohed that number but i think it gives the idea of the scale of this thing. we have so many programs, health programs, education programs -- >> caps are not a useful way of forcing priorities? >> i think they could be. >> but they're not. >> but they're not. here's why -- quickly -- >> we're talking about culture here. in the culture of congress, it's to cheat. figure out ways to round all

kinds of -- all kinds of provisions that they impose upon themselves and they don't work because congress figures out ways around it. >> alice? >> i think that's rather unfair. but the point is that even if you wanted to cut government spending because you thought it was too high and in the aggregate, i don't on this set of domestic programs that we're talking about, even if you thought that, putting caps on is just squeezing down everything. now, i'm not opposed to the caps but the way congress handles the caps is to say, well, we've only got this amount of money. we don't have time and we don't have the energy or we don't have the mandate to make decisions to what we should fund and what we shouldn't. so what we will do is just

allocate these spending amounts among the subcommittees of the appropriations committee in what seems like a fair way, rather roughly what they were doing last year, and let them figure it out and they have the same problem. they have a lot of constituencies leaning on them. they have a whole bunch of programs as ron has said and everybody is screaming, don't cut us. so what do they do? what would you do? you cut everybody a little bit. and that's what we have been doing now for a very long time. now, could we do better? i think so. but it would take a really dramatic change in the way both the administration and the congress operate. you would have to have a president who said let's change these priorities dramatically and let's have a serious debate

about how to do it and/or you would have to have a congress that said, we really want to take a chunk of the budget, go over it and see whether we could do these things more effectively, whether we could do -- emphasize some priorities better. i don't think we can do the whole budget. and you sort of could do it every other year but they could set up a mechanism for reviewing a major piece of the budget say every three years and five years to see if the money could be spent better and priorities were what congress really wanted them to be. >> bob? can i just ask you a quick question? so is what alice describes on the domestic side, is the military really any different? isn't there a certain amount of the air force, the navy, the marines, everybody has to get their share of the cuts? >> broadly, the budget shares haven't changed a lot. that's a fair statement. within those shares they've

changed a lot. let me try to respond. first off i think it's way too harsh that suggest that overall only 1% of government spending has any effect. i will offer just a couple examples. one obvious one, we haven't been attacked since 9/11, folks. some other countries have, quite recently, unfortunately. that's a tribute i think to both our intelligence and to our military capability. we got in and more or less almost out of two wars you may not like the results of them accordance with the will of the administration, the president and the congress. so we do a number of things and i think it's unfortunate that we suggest otherwise. in terms of accountabilrty, we absolutely know where we're spending the money, down to a great deal of detail. you may not like the results that you see. that's a fair point. and there are priorities set. i mean, i will give you a current example. we have backed much on ground forces over the last few years than we have any others.

that was a painful decision, i can assure you, within the department of defense, but it was one consciously made based on a strategy that we felt in the aftermath of iraq and afghanistan we could afford smaller ground forces and still cutting but not as much the naval and air force. so i think alice is right, we can do better, but it is not as if we are just taking this money and sort of randomly spending it wherever we want and it's not the case that there's no effect. >> it's easy if you mischaracterize someone. that's not what i'm saying. let me give you some examples. if we resort to specifics, i hate to do that, but if we did budget that i think even alice would agree are ridiculous like farm subsidies. >> just to be fai) to peter orszag, peter orszag wasn't saying only 1% of the federal government bought anything. what he said was talking about

domestic programs, we don't -- it's only 1% we know actually works, right? >> that's correct. >> but you have to think about that. a little bit. for example, one thing we do is air traffic control. i don't think we are investing enough in modernizing that system, but very few airplanes fall out of the sky. and another thing we do is interstate highways. we probably aren't maintaining those as well as we should, but you can drive from here to new york. we know what we're getting for that. so it's not -- i think it's sort of silly to say we don't know what we're getting for government programs. >> there's a diffq)ence between knowing what you're getting and you usq" the example of air traffic controllers we have several air traffic controllers that are using cathode ray tu1n probably the only ones remaining in the whole world in airports -- >> that's why i said it needs to be modernized. >> you need to spend more money on things like that and less on things like agriculture subsidies.

>> michael, you want to defend agricultural subsidies? bob gave us three scenarios for what could happen to defense i'm sort of interested in what odds you assign on those what's going to happen this year? >> yep$, i think bob's right. i guess just to s(ell out one or two of the options before congress, ron and i have done a little writing on this, too. it seems to me this overseas contingency operations fund that bob talkedy about and where there is some play in what you use it for, but 4i? complete liberty to use and abuse that term. you could have congress actually modify the law to allow a little even broader definition so for example, with putin doing what he's doing in ukraine, should we be able to say that any activity in europe by the u.s. military even routine training, is essentially something we can fund through the account because until we have a new president in two years i doubt we are going to have a fundamental repeal of the budget control act so there's a very good chance we have to live with the caps and

therefore, our overseas your main safety valve. it's already helping. you can find a way to let it help more. you can define anything that's going on in terms of operations in europe, essentially, as a deterrence related cost. and you could even do some of that with the asia pacific given there has been a fair amount of turbulence. bob i'm sure can think of all the complications in doing this more easily than i, and is probably thinking about how i have been in a think tank too long and not in the real world and i realize -- but there are ways to stretch the definition. for example, it goes from the united states to the persian gulf today or the arabian sea, and it flies a few or even just 10% of its whole six month deployment near afghanistan, as i understand it, the entire deployment could be counted and funded out of the oko. i think that's reasonable because to get to the arabian sea, you had to actually do that long deployment and so it's not a complete abuse. it's not -- it's not deceitful but it is a broad and somewhat

lenient definition of what a war cost is. you could find ways to expand that. that may be the most realistic thing. i think everyone's learned that sequestration per se is painful and so ineffective that what bob said is hopefully true, that the idea of congress appropriating above the caps and thereby necessitying this formal process of sequester which is as youx board set of cuts, and then service chiefs in the world have to implement this, it's crazy. it's just nuts. i would hope that for all of our disagreements, we recognize there are legitimate disagreements. over defense there is no legitimate role for a sequester as the mechanism to go to a lower funding. >> bob, can you just talk a little bit about what's it like to be in the pentagon and have to deal with these across the board spending cuts?

how much of a waste of time is it? technically interesting, i have to say, to a comptroller but the price was way too high. several things wente1 wrong in 2013 sequester and as alice said, all government leaders including myself, thought we wouldn't do it and so we didn't slow spending in the early part of fiscal year '13. we didn't want to sequester ourselves. well, they did it. suddenly we found ourselves with six months to go in the case of the department of defense, a $38 billion cut exacerbated for d.o.d. because that was the year we underestimated some wartime requirements and incidentally, the oko is outside of the caps. it does get cut by the sequester. i never understood the logic of that but the lawyers insisted so we saw! a cut in oko, we had underestimated the amount. it all came together and had particularly devastating fnects on the operating accounts.

we saw services do things we never thought they would] the air force stopped flying at 12 squadrons. the army stopped sending units through its national training center. the navy is saying we are not going to send a second strike group to the persian gulf even though the combat commander wanted it. there were significant effects. overall it was exceedingly discouraging and of course followed hard on by the shutdown. it was a lousy year. >> even though there's no formal oco escape hatch, there is always some way, emergencies or whatever, but let's say that the republicans hold the line, that they want to stick with the caps. what are the practical consequences? >> i think the things that i mentioned like we won'tb have -- our air force will continuq to be among the worst in the world. i think we are rated something like 13th in terms of efficiency. our infrastructure will continue to deteriorate.

there's a recent report that shows we are something like 17th in the world in the quality of our infrastructure. so those are very concrete impacts. a lot of people are very concerned about nih. nih, look at the budget of nih. it's shocking. it goes up -- it's astounding how much it went up. somebody told me the president has a certain level, then the house gets it and adds to that and the senate gets it and adds to that and they vote and come out with the congress report and it's still higher. now for the last five years, at least according to the baseline, it's actually been reduced. it looks like a mountain and now it's coming back down. not as much as the mountain you talked about before on defense but it's coming back down. there will be many, many practical consequences. i don't think republicans will i talked to two pq staffers who are involved in the budget process and they both said the same thing, that there will be ways they will be able to get, you know, a buck here and a buck there and they won't $ave to -- they will be able to say they

lived by the caps but they really didn't live by the level have the cap >> well, i'm less prone to think they will find ways around it but i think ron's got some of the right things. what do you do when you have immediate needs that have to come out of your budget, whether you're a family or an institution? you generally let the maintenance go. you don't put on the new roof if it's not actually leaking. we have been doing that for a long time in the federal government. and i'm not just talking about roads and bridges. i'm talking about national parks and as we said, air traffic control and a lot of prisons and a lot of things that we think

need to be there and should be maintained in a modern way but we haven't quite be able to do it. now, if you look at the projections for the next ten years it will get worse and worse. we will put off morek of the routine maintenance. we will just not do those things and at some point it will catch up with us. >> what about how this affects federal employees? i know there's a caricature of federal employees that they don't work very hard and are overpaid and they have too high pensions and stuff, but is that really true in the past given the caps and the shutdowns and furloughs? in the past given the

it's partly because they do work very hard. >> so any defense guys have a domestic question? i will turn the tables. >> well, i would like to add on to what alice said regarding federal employees. first i distinguish between the military and civilians. we give a great deal of credit as we should to the military public opinion polls show it's the highest rated organization in terms of trust in the united states. the civilians on the other side tend to be linked to government as a whole and the public has a lot of distrust for government. so i think they do get a bad rap. i think if you step back, i supervised many of them, watched many others during my tenure in the pentagon. they do a lot of things right. some of the overall things we haven't been attacked, are certainly partially of their doing.

but more specifically, 80% of the work force in the financial management community, department of defense is civilians. they manage through some of the toughest budget times in the sequester period and before and after, i might add, and it's still chaotic budgetarily. a large percentage of the logistics folks are civilians in the department of defense. they conducted an exit from afghanistan. again, you may not like the results of the war but they got us out of there in a landlocked country where we had extreme problems logistically. i could go on with other examples. i think federal employees do a lot right and as managers, as a former manager, one of my goals is to try to say that to them because they are -- we do see a degradation of morale and i think it is of concern in terms of recruiting new employees into the federal government. >> i think that the public perception among people who don't work for the government is

that there are a lot of people who work hard and the incompetent people never get fired. that is true? >> that is a problem. i certainly won't sit here and say there's no improvements that should be made in the civil service. two things need to happen. one, we need to be able to hire people more quickly. they worked that issue hard and made some progress, it's still not where it needs to be. and for a small number of poor performers, we do need to be able to fire them more quickly. it is just having managed a group of civil servants, there comes a point and you know there are always a few underperformers, it is such -- it is so difficult to actually make changes or to actually fire them. it's just not worth the effort and the time it takes in management. so absolutely, we need to improve the civil service but we also need to tell the majority who do work hard and are getting things done that they are doing things right so they will stay with us and new people will come in. >> michael, do you have any domestic questions you want to pose?

>> yeah. let me just mention two categories of spending. i would be curious if you folks have ways of thinking about whether the spending is high enough, too high, too low. ron, you mentioned mental and nih health issues, nih, but i'm curious about science writ large, energy research, other kinds of physical sciences research, whether we spend enough and how do we even set up a methodology to figure it out and secondly, environmental protection. that of course partly overlaps with energy issues with global warming kinds of considerations and trying to find alternative energy sources. but more generally speaking, how do you feel about the resources we have for environmental protection? >> i think they could be spent better but the effort to make sure that we don't have polluted air and polluted water and too many greenhouse gases going into the atmosphere seems to be really important.

now, people complain about the environmental protection agency. i don't think they are complaining much about the spending. they are complaining about regulations that could be simplified or about doing something in a more market-friendly way. personally i think we ought to have a carbon tax. it would be a lot more efficient and effective to control carbon emissions through raising the price by a tax than by putting the regulations on all of the coal-fired plants. but we aren't doing that and if we're not doing it, then we have to regulate. >> i think the only thing to add to that that i think is important, you can count on there will be constant criticism and attempts to rein in the epa. i wouldn't be surprised if republicans might even try to cut their budget. but there will be a constant

stream of criticism of the epa and overemphasis on environment and so forth. the republicans have been very bold about this in recent years and i don't see any sign of it stopping. >> alice, isn't one of the perverse effects of the caps that there's this ever-present temptation to do tax credits and then they are accused of having a complicated tax code because doing the same thing through the tax code doesn't count against the spending caps? >> absolutely. if you think something is a federal responsibility and we ought to be doing more of it now it's very hard to say well, there ought to be a spending program that does that. but sometimes you can accomplish the same thing by regulation and sometimes you can accomplish the same thing by adding one more provision to the tax code and we have been doing that for decades, and the result is that we have a tax code riddled with special provisions which are essentially spending programs.

we decided we wanted to favor home ownership so we made more generous deductions for your mortgage interest which benefit you more if you have a larger mortgage and a higher income. so we have a spending program which goes differentially to richer people with bigger houses. what sense does that make? i don't think very much but it is part of the fallout of not having a spending program. >> to give an idea of the magnitude of this, estimates run as high as a trillion dollars in losses in the tax code for exactly these kind of provisions alice is talking about. if we really have tax reform ryan says we will have tax reform, i think they will take a run on it. if they do, they will pass it in the house, i think. senate's another matter. but one of the big things is they will get rid of some of the loopholes and it will be fun to watch. it was in '86. it will be very lively.

>> what odds you giving on tax reform in the next two years? >> 1%, 2% at least. >> ask the defense guys a question. there must be something you wonder about the defense budget. >> wonder in the sense -- >> i want ron to ask you a question. >> yes. i have a question. explain to me how i have seen numerous articles in fairly reliable places like national journal and so forth, i have never been in the department of defense, about the cost overruns on program after program after program after program. i think it's pretty much accepted that you see the original estimate of what it costs for a new weapons system for example, and before you know it it costs twice as much or even more than that. how does that constantly happen? >> well, i'm afraid it's human nature. first off, you are roughly right. i used to say take the price early on in a weapons system and double it in real terms and ask yourself whether you still want the weapons system because

there's at least a reasonable chance that will happen. there tends to be underestimates early in the process in order to get the program going. after all, budgets are always constrained. you want to get your program going and then unfortunately what we tend to do with these programs when we finally get them nearer into production is reduce the rates to accommodate budget changes and that inevitably induces inefficiency. so overruns are a problem. they are a little lower than they have been and i think they've gotten a fair amount of attention in this administration, but i wouldn't want to sit here and say this problem is solved. i think part of it is human nature. i think you see it in most infrastructure projects outside the department of defense as well. i have seen articles although i can't quote them but i remember some that mentioned infrastructure problems of similar complexity and unfortunately, many had overruns as well.

>> go ahead, alice. >> isn't part of it this representative government that -- >> democracy, the root of all evil? >> how did i miss a chance to pick up -- >> the importance of military spending, both procurement and military bases as -- for jobs in so many congressional districts. and i have heard very conservative members of congress say government doesn't create jobs, it destroys them, and all that sort of thing. but it doesn't apply to the military base in my district. if we lost that, we would lose jobs. is there any way around this? >> i don't know how other than a fundamental change. i remember seeing many years ago a map, i think it was the b-2

bomber subcontractors. there was a pin in virtually every congressional district. >> i remember that one. >> companies are smart enough to be sure that this happens because they know the reality of it. i think to some extent representative democracy is inherently inefficient. that doesn't mean there aren't things you carve out and ask government to do because they can only do it, but you probably do want to minimize them because it's not going to be as efficient as if you've got a truly competitive industry. >> yet we ought to at least acknowledge that base closure commission turned out to be a very effective mechanism and we closed hundreds of bases. >> we did five rounds -- >> we've got a few more. >> got a few more to go. >> but this is not a problem thaw can't deal with. we have dealt with it under the terms of democracy, it's been very impressive. >> we have done five rounds of base closure and the annual savings from those five rounds which are now all complete is $12 billion a year. so if we hadn't done them, starting in the '80s, we would be spending $12 billion more in perpetuity. absolutely and we need another round. >> is there a way to apply that

to the procurement problem? >> you know, i don't see how easily to do that. congress is part of the problem but i think a lot of this is in the executive branch, department of defense in the case of defense procurement. several things happen. we don't tend to corral appetites as well as we should. there's a realization by the creators of these systems that are going to be around for 20 or 30 years, they want them to function well so they push the requirements to a level that is very expensive, and then the problems i just cited of human nature, keep the cost down low get the programs started, tend to lead to overruns. go back to what i said earlier it's a little crass and i certainly have never said it as a government official but i think you should look at a price of a weapon early in its life and say do i still want this if it is somewhat more expensive. and if the answer is no, you better worry. >> what i would add, i certainly agree with the difficulty here.

but i think, alice, there is essentially a way in which there's a check on the system which is if the question is do i need to buy 22 b-2 bombers and they are each costing me $1 billion, congress might just say no. with the f-22 fighter which was originally going to be a lot less expensive and i'm not blaming lockheed martin. they made a beautiful jet, it's the best jet in the world and i'm glad we have 189 of them. we were supposed to have 750. two things happened. the cold war ended so we didn't need as many but also the price kept going up and so the congress and the pentagon decided we better curtail this program. so what we do instead is we keep the f-15s flying longer so there usually is an implicit backup plan which is use the existing system longer, refurbish it, remanufacture it, and frankly, i think there's room within today's pentagon budget to do a little more of that but i would say this is the one point we haven't really touched on, just to sort of wrap up as we move towards wrapping up this initial part of the event, even if you look for a lot of sort of reasonable reforms in how the pentagon does business, you do that additional round of base closures, you get the health

care premium changes that bob and others were promoting, you make a few other efficiencies which they are trying to accomplish. even if you do all of this, you are probably going to essentially pay for the needed increase in your budget because you are too optimistic about how much various things would cost. in other words, you need to do all this just to tread water. you need to do the base closures and the military compensation reforms just to sort of tread water and make the administration's plan self-consistent. now if we sequester in addition, or we cut further beyond where the administration's going, even if you do the base closures which there's no sign congress will do, and it takes five years to get the savings anyway, even if you do the compensation reforms, you are not going to begin to be able to pay for sequester with those kinds of efficiencies. so you are going to have to cut the army down even further. you are going to have to cut the navy at a time when china's navy is growing. so these are the kinds of specific issues that we probably

should get into with our friends here. >> i understand the terms here you're not really talking about the process of across the board spending cuts. you're talking about living with the level of spending that would exist if they either avoid the sequester by appropriating that much money, or being stuck -- >> i think the caps are too low regardless of how you get there. >> i think the same thing is really true in the domestic side. there are things that appear on people's lists of things that could be done better. for example, we have an awful lot of job training programs and they don't work especially well. i would be heartily in favor of serious look at those programs and consolidation of them, and improvement of them. so that they are actually better at training people for real jobs. that said, it's not going to save much money, you ought to be doing all those kinds of things

but even if you do, the same thing is true. this amount for the whole set of discretionary domestic programs is quite small and getting smaller in relation to the needs of a growing economy. >> we are going to turn to the audience here unless somebody wants to make another point. all right. raise your hand. wait for a mic. tell us who you are and try and keep your question short. behind the -- the gentleman behind you. >> thank you, dan morgan russell at the university of southern california. dr. o'hanlon, you touched on this a little in your first answer but now that we have put these caps on defense spending and can't necessarily guarantee world stability, has this encouraged any of our nato members to begin picking up the slack and if it has not, what level of defense spending, reduced defense spending, will encourage them to spend a little bit more on world defense and stability? >> big question. let me give short answers in the

spirit of david's admonition. short answer to your first question is no. allies are spending less as a rule except in the middle east. at least in east asia they are sort of holding the line but most of them don't really spend enough, in my judgment, and certainly nato continues to go through the floor. nato's spending among our allies in europe is very mediocre even against the standards the alliance collectively established. so they are down to about 1.5% of gdp on average. we are still over 3%. we are headed towards 2.6%, 2.8% for us. cold war average for them was 3% to 4% but they are way below even their own current standards. secondly, your second question very good question, but i don't see evidence that there is a correlation partly based on my first answer. so if we cut more, i don't think the answer is necessarily that at some point the allies get serious about providing for their own defense.

i think the answer could be they become vulnerable to attack or they wind up overcompensating and engaging in a regional arms race. one of the nice things about a strong american linchpin is that it tends to keep sort of a lid on some of the regional tensions, for example, japan korea, china, which three countries that don't necessarily get along all that well if you leave them to their own devices. so i actually prefer a system in which there's a fairly strong american linchpin and i'm not sure i see evidence to think if we simply cut, it will get a happier outcome from the allies doing more. >> you think putin will lead to higher defense spending in europe? >> their economies are in much worse shape than ours. >> the gentleman in the front. >> thank you. i wanted to ask, actually provoke you to think about disruptive events that might change the calculus for good or evil. call them wild cards, ticking time bombs.

for example, nobody i think predicted oil at $50 a barrel. i don't think anybody thought the swiss were going to take caps off the franc. in the case of the defense department, there may be hundreds of thousands of soldiers who come back with traumatic brain injuries which have not been detected but will be, which will put huge pressure on the budget. you've got a replacement program for the ohio class for the bomber and sometimes for the whole nuclear industry. what sort of disruptive events do you think could really change the calculus that you worry about or could worry about both domestically and internationally? >> in defense? >> go, please. >> ok. interest rates. interest rates are amazingly low and yet they are going to increase 262% in the next ten if the interest rates went up, it would be -- that would really be a difficult event to contend with and i don't see another way except cutting spending and we would have to raise revenue, i'm sure.

>> i will take a couple. this is probably more mike's line. we've got an unstable ruler in north korea. i don't think anybody can know what he is going to do. we have several tens of thousands of u.s. troops not very far away. i think that could definitely be a disruptive act. iran, i mean, has certainly got to continue to be worrisome. events in afghanistan could be disruptive if things go poorly there. so i can think of a number of foreign policy issues that would involve the department of defense heavily and probably change the willingness to spend on the department of defense on the part of both the president and the congress. >> i will just add one which is, i know you thought about this yourself, all out competition with china. something that i know alice fears. we had a panel here several years ago where she and bob

kagen and i were talking about this, what an arms race with china might look like. but right now, it's not an arms race, it's an arms competition. we are spending 3% of gdp, $600 billion a year, they are spending 2% of their gdp, $150 billion a year. you know these numbers. but they are on a strong fast upward trajectory and it's not really clear how we are going to react as the curves start to converge. are we going to try very hard to keep our defense budget level well above theirs and by how much and how is this going to play into presidential politics. right now i don't think d any likelihood of a big disruption just based on political debate5 and strategic debate in brookings events and presidential campaigns but if you actually had an exchange of gunfire, perhaps provoked by or not provoked by but catalyzed by some of our allies with iraq and china in an unfortunate way and we see an american ship sunk maybe the chinese weren't even shooting at us, they were shooting at the taiwan navy and missed, who knows, but something like that, even if it doesn't produce all-out war, could produce an all-out arms race. that would be a disruptive event.

>> seems to me another possibility, so we have a very big debt to gdp ratio. we borrowed a lot of money during the recession because we had a huge recession. it's not clear to me we could do that again and i'm not so confident that we won't have that threat again, whether from outside the united states or inside our own financial -- >> nothing positive from the panel? >> well, you mentioned something, oil prices -- >> [inaudible] >> you really caught us. look, economic side, we could have seen the worst of the last -- of the problems. we could be on the cusp of an increase in productivity and faster growth that would spin off more revenues and allow us to grow -- reduce the debt to gdp ratio much faster than we anticipate if we got lucky and had a good stream of growth. i don't put a high probability on that but i wouldn't count it out. >> keeping the caps on will help

that at a tremendous cost. >> help the numerator, not the denominator. he was looking for good news. >> well, i'm not sure what good news he's looking for. >> faster gdp growth. >> i think it would be good, i think it would be good news if we had more domestic spending of the right kind and what would trigger that. possibly some kind of disaster that we don't want like another bridge falling down or an air traffic disaster, or something competitive. we did react to sputnik for those of you old enough to remember sputnik. the russians put the satellite up there and then we decided we better spend more for science. >> question over here? gentleman in the front row? >> hi. scott mosione from inside the pentagon. the defense department has been working on the long range research and development plan,

industry's kind of indicated they have been a little reluctant because the aperture is so large on it and the funding isn't that large. i was wondering what you saw for the future of that program, the funding of the program and maybe its success. >> what is it anyways? bomber? >> no. you're talking about defense innovation initiative? >> yes. >> so it was a program announced several months ago by secretary hagel looking for initiatives that could be game changers from an r&d standpoint. a new stealth, for example, was certainly a game changer precision guided munitions are things that have changed warfare. you know, i think it is still in gestation and at least that's my sense. i'm not deeply and i'm certainly not deeply involved in it, but the process of going through thinking about where we should invest r & d for the futures is a healthy one even if nothing dramatic comes out of it. i'm not sure you can legislate

innovation or mandate innovation but i think it is healthy to require the department to think ok, am i spending in the right places, are there areas where i should be more innovative. and innovation to some extent is a state of mind so maybe the department of defense needs to look for ways to be more agile maybe assigning some of its people to startups, for example, to interact with them in ways that may produce new ideas. i think it's a healthy process. i don't know where it's headed but i'm glad we're going down that road. >> the gentleman here in the middle, and then -- right where you are, then the guy right in front of you. >> john goring from city university. gao did two reports studying the effect of sequestration and given alice's concern about the

slow eating away of the maintenance or seed corn of domestic agencies, what is the chance that brookings would adopt the methodology that gao used and create a sequestration monitoring project so that in addition to the many things you do, you provide every two or three years, regular reports on the state of the impacts of sequestration so rather than have ad hoc events like this one, there would be a permanent monitoring? >> i think that's a good idea, but i would amend it. i have been bugging dave because he runs this new -- >> you put him up to this, didn't you? >> to undertake some kind of a discretionary spending initiative. i would want it not just to monitor the effects of the caps, but also to undertake the bigger question of where should we be spending more and where should we be spending less and can we assemble some evidence about how programs are working or not working that would be guidance for the congress on just that question.

>> the gentleman in the blue. >> bob hines from here at brookings. you all agreed that sequestration is bad. the budget caps probably aren't good, either. a republican congress probably isn't going to be raising taxes any time soon. dave, you kind of threw out there a minute ago faster gdp growth. where is the discussion, though, regarding say effect on the fiscal policy, worky on the fiscal policy from the congress, you know, to perhaps free up the corporations to do more under capital spending, that rising tide, all boats float kind of a thing, and wouldn't that really get rid of a lot of this entire discussion? >> corporations are sitting on a lot of money right now and they could borrow more at very low interest rates. they are not investing enough. it's not entirely clear what the

government could do about that. maybe you're suggesting corporate tax reform. i would be for that but i don't think there's much evidence that it would unleash a tidal wave of corporate investment. >> phil? over here? >> hi, phil law from brookings. i'm wondering at what point these caps become painful enough and the decisions difficult enough that mandatory spending that's not the subject of this event becomes more on the table, more a focus of debate, more maybe even a regular subject of budgeting for congress. >> i think that it's going to happen regardless of the caps because with ryan being on ways and means committee and talking about tax reform, also he's been a consistent supporter of premium support which could really be a game changer and he's not going to give up on premium support which could really be a game changer and

he's not going to give up on that. i wouldn't be surprised to see the house pass it again. what would happen if the senate passes it. there are some possibilities irrespective of the caps that republicans will actually do the right thing and go after entitlement spending. as long as we have president obama i doubt that anything very big will pass, but it will be interesting to see. >> but it's very hard politically, even if you are a republican, to cut -- to either get tax reform t raises revenues or significant entitlement reform, and it's much easier to cut this discretionary spending. i was, as dave mentioned at the beginning, a veteran of both the simpson-bowles commission and the deminici-rivlin commission and we proposed tax reform entitlement reform and caps on discretionary spending.

what have they done? they tightened the caps way below what either commission recommended and they didn't do anything about either tax reform or entitlements. >> i think the one thing that might have changed enough that there could be some action on entitlements is that the republican house has worked very hard to educate its members about how important medicare is as a part of this problem and how premium support is a reasonable solution, and they have supported premium support for three or four years and haven't suffered consequences in the electorate yet so i'm more optimistic than you are. >> but i think both entitlement reform and tax reform have to have bipartisan buy-in. they have to have a lot of people around the country saying we understand this and it's ok and that's hard to achieve. >> i agree that it's hard, but the other factor that makes me a little hopeful is now the looming 2016 presidential race.

when i think about the individual players, first of all, everyone's going to have to say how their plan will at least do as well for the deficit as the budget control act which is as we know, not very good over the median to longer term. so even though our deficits have been cut back to a manageable number at the moment, it's not going to stay that way based on baby boomers retiring and medical costs growing and all the things people in this room know well about. alice can correct me but it looks like the projections are for trillion dollar deficits again not too long into the next decade. >> 2024, according to cbo. >> so that becomes the would-be second term of the next president and therefore, a president who presumably is going to be asked on the campaign trail to explain his or her vision for the country and presumably is going to want to explain the vision also in terms of american power, military safety and long term national growth is going to have a hard time avoiding this question. and just to give two names, if hillary clinton runs as

expected, she is a strong advocate of a strong national defense. she is also not going to want to leave any gray area about her bona fides on that subject trying to become a woman president from the democratic party and obama's former secretary of state. it will be incumbent on her to explain how the u.s. military will do well under her watch and also, how the country will grow in terms of its education, infrastructure, science and so forth. these are things that amount to a presidential vision. and they require some degree of budget discipline. now, anybody campaigning is going to have a temptation not to want to talk about cutting entitlements, i agree, but having said that, there are ways to limit the growth, you know, the cost of living formulas, you can phase it in gradually, anybody who is near retirement doesn't really have to meaningfully lose anything that they would have gotten otherwise. and for a republican running republicans may have the tea party within their broader gop umbrella, but it's still the party of ronald reagan when it comes to presidential races.

and i'm going to believe that until i'm proven wrong. and any -- even rand paul, rand paul is now becoming the guy who wants to build up american strength and just not intervene which is actually reagan's legacy as well. reagan didn't use the military a lot. but rand paul i think has recognized that you don't become the republican nominee by being the tea party guy. paul senses he can win, this is my interpretation, obviously and you are probably a better expert on this than i, but any gop front-runner or likely nominee is going to have to explain how american power will improve on their watch because that's the legacy of the party of ronald reagan. so i see presidential politics as a hopeful indicator not for what's going to happen this year but for what could begin to happen certainly by 2017. >> gentleman in the aisle there. >> zach biggs, a reporter with james. i was hoping we could parse the differences between the 2016 caps and the rest of the years under the budget control act because with 2016, the last year

we have this flat spending for defense in particular before we start to see some of that increase that might be able to keep up with inflation. we heard the horror stories of what was going to happen as a result of the downturn. we are pretty much through the major part of that downturn. now you could say that it's going to be flat with inflation but what's different this year versus the subsequent years when there is an actual increase in the cap? >> well, i find it hard to get too excited about those out years because so much is likely to change, but you're right. i mean, even in 2016 under the caps for defense, there's about a 1% increase, probably not enough to keep pace with inflation, but there is an increase and then it gets up in the two range so it will be roughly flat. i'm not sure whether -- if the gist of your question is sort of nothing has gone wrong so if we're flat, we're ok, i would take issue with that. i think military readiness has been significantly damaged especially in 2013 with the

sharp sequestration cuts and the other problems i described earlier, and there's a gradual attempt to recover, but it's not there yet. we have underfunded in the out years of the defense budget support activities. military construction's an obvious one. it was quite well funded around the 2010 period. it's now clearly underfunded. we're not spending enough to maintain. you can do that for a number of years, but you will pay the price eventually. so there are problems that exist right now and when you add to those the threats at least i see as being pretty severe to u.s. national security, they lead me to believe that we do need to -- order to fully meet our national security objectives. >> i will give one example. just look at the u.s. navy. so then u.s. navy right now,

which is probably the centerpiece service for dealing with china's rise, has about 285 major ships as they define them. and that's in contrast to twice that many in the 1980s, and about 350 even in the 1990s. so in other words, it's substantially less. meanwhile, china has substantially increased its fleet. i'm not saying we should be ready for an all-out fight with china navally but i am suggesting that our ability to sustain presence and commitment and keep the region stable and help persuade china to rise in a generally reasonable and peaceful way, does depend on our being able to sustain capability . the navy has tried and president obama i think with a very smart rebalanced policy has tried to say we are going to base a little higher fraction of the navy in the western pacific

region so the historic average of 50% is now being increased to 60% by the end of this decade. that's the trajectory that we're on. and that makes good sense. that's just a way hillary clinton was part of that, i think it was a very strong legacy of the first obama term and i think president obama's tried to sustain it now into0 his second term. this trip to beijing i think went well. he's trying to keep this concept going. the problem is, 60% of a smaller navy could still be less than 50% of the old navy, if you're not careful. and right now, the navy's ship building budget depends on increases in that budget top line, even if the ships come in on cost which they won't. which means if you want to even grow the navy modestly, you are going to have to see us get out of this, you know, downturn that we're in, certainly avoid the sequestration mechanism and i think see modest reals growth in the navy budget in the years to come. and i would say that's a reasonable standard by which to judge military efficacy. you can debate, you know, the number of ships is not the be-all and end-all. it obviously depends which ships and what capability. i'm not suggesting that numbers by themselves answer this question. but the logic of saying that we should at least be headed upward towards a somewhat larger navy

at a time of such rapid chinese growth, i think is a fairly compelling logic but it's at risk under the caps that are now, you know, potentially going to arrive. >> right behind you. to your left. >> jason tom from here at brookings. there is a large department that gets grouped into domestic spending and that is dhs and they seem to take care of similar to d.o.d. and they get funded appropriations when others sometimes do not. and going back to this system shock incident, we have what is playing out in france and the ongoing discussion of what to do with dhs in february and might this be instructive as to how congress approaches the issue of domestic spending and security or is this a one-off immigration

issue. and i don't want to get into a debate about immigration. thank you. >> i think it is a one off immigration issue because of the president's order. i doubt there could have been any problem about moving ahead with the dhs budget but for that. >> don't you think it could be symptom of one of the few things congress can do is holding up the spending bills to have leverage with the president. if they can't override his veto in the senate, the temptation is enhanced. >> it is a temptation. and here is an example. they did pass them all. so they don't get a chance to do that with an appropriation bill for a while. >> back there.

>> hi, my name is stiekki from japanese newspaper. i have a question about infrastructure investment. i think u.s. government, local and federal, were spending about 2%, 3% gdp and now it is less than 1% and so my question is why the u.s. government hasn't reduced investment or infrastructure, does that reflect republicans asking for a smaller government or does that reveal public spending in general? >> i think there are several examples. it has been going on longer than this congress. and if you look at spending on the highway trust fund which people known is a problem for a long time and congress has done virtually nothing about it. maybe they will this year, but

it is nonbipartisan -- well it could be republicans fault in the sense that in order to do something serious about spending on infrastructure, i think they'll have to be additional revenues of some kind and that republicans are clearly completely against. so you need to think of creative ways like investment bank of some kind, maybe a devoted change in a tax code that would produce revenues and a fund that could be used for investments and infrastructure, something like that. so we are way lower, lower than the rest of the world. we've been deck laning for well -- declining for well over a decade and we have problems, inefficiencies and how long people lose in tax and time and the airports and what not. we'll have to do something. but there will be a requirement on some kind of financing. republicans are reluctant to increase the tax gas.

car is more efficient and oil is cheaper and so forth. so i think that is the most important holdup, some creative way to finance more investment in our infrastructure. >> well, i think you're right that the financing question has been the whole-up. we decided to finance through a gas tax and that was a great idea for a long time but now americans are driving less and more fuel-efficient cars. there are plenty of other ways to finance highways, including different kinds of taxes. vehicle miles driven tax would make a lot more sense than a gas tax. but it's been hard to get people together and i think it would have to be bipartisan around a new look at how we finance

highways and bridges an other infrastructure. >> so it sounds like your answer is two-fold. one is, it is a symptom of how disappointing or dysfunctioning our political system is is that something as popular as infrastructure can't get done and secondly how to finance it has become part of that. >> i would say it is more than congress has not focused enough on ways to refinance it. i think that is the problem. they need to think of things, i agree it probably has to be bipartisan, but can be made to appear like it is not a tax increase. i think they're going to have to do something. >> i think the idea that there's some magic out there that, call it an investment bank or whatever that is going to bring in a whole lot of private money to finance roads and bridges is something of a

fantasy. >> do you think it was a mistake that the stimulus bill didn't with the benefit of hindsight have more infrastructure? >> i think it was a mistake it wasn't larger. and there was so infrastructure and some investment. yes there should have been more. but it was a very hard case to make. >> don't you think there's just a general skepticism about government that has made it impossible for a lot of projebts to get dobe? i don't know if high speed rail is a good idea but i didn't know it would be a symbol for everything about government. >> i think that's probably true. but still, at some point reality is going to intrude. and the congress is going to have to do something and it will. >> ron said at some point it will interfere and something good could come of the 2016

presidential campaign. in these conversations that passes for wild-eyed optimism. join me in thanking our panel. thank you for coming. there's a paper cup under your seat or sheet of paper, pick it up and put it in the garbage can we'd appreciate it. thank you very much. >> >> >> >> >> you can watch the interview sunday at 10:00 and 6:00 p.m.

eastern here on c-span.

>> all right, look at that. ok. thank you, everybody for sitting tight and waiting. all right ok here we go. well congressman price assumes the budget chairmanship at a important time in our country's history. as we know, the country has enormous challenges right now and the house budget committee is at the forefront of addressing the challenges. he has big shoes to fill, frankly. congressman paul ryan has been a very effective advocate for reform. in his tenure as chairman, he introduced the ryan road map which began a national conversation about where we go in the future, about entitlement reform and how to repeal obama care and what to put in place. before the ryan budgets, these were the third rail of politics. reform those at your own

political peril and there was a lot of criticism at the time when the ryan budgets first came out that this was too dangerous for republicans. we've seen what happened. the numbers are going up. this is not the third rail of politics any more. liberal scare mongering has become fairly ineffective. not that it is something to be considered but we've seen it can be beaten back. remember the ads of pushing granny off the cliff. those didn't work so well in the last election. and i think that what we've learned about this is that the american people are plenty smart, have plenty of wisdom and when they see you take a bold stand for something that will help them in their daily lives, they'll rally to your side. it is a reason to be encouraged and a reason for more members of congress to have political courage to address these kind of issues. so congressman price picks up

the mantle on the success of the past and we they there is not -- and we think there is no better person to do this. he's been an ally of the heritage foundation and so taking this chairmanmanship and pushing on is something we are looking forward to. and we are looking forward to hearing from him today on what we are doing and looking to the future. so please help me in welcoming tom price to the stage. >> thanks, tim. great to be with you and back at heritage. i want to thank heritage for the opportunity to be here and heritage action for the work you all have done. it is incredibly important work to continue the advocacy on behalf of all americans.

and thank you all for showing. i see some familiar faces in the audience and not so familiar. so welcome. you may have stumbled in out of the rain and stumbled into a fascinating opportunity but hopefully this is the spot where you intended to be this hour. i have a hard stop at 1:00 but i'll make some remarks and we'll do q&a and i'm happy to talk about what you want to talk about. but the house budget committee and the deadlines coming up early in the year so that you can hopefully get a handle on what we're looking at. i can't tell you how excited i am about the opportunity to chair the house budget committee. the opportunities that we have are really remarkable. the past four years, if we're honest, have been a muddled mess. with what we've seen from the senate democrats and the kind of activity that the house struggled to get through the floor, even though they would

-- we would put good policy in the senate, it just got shoved into harry reid's bottom drawer. so i can't tell you how excited i am to work with a senate that wants to get something done and hopefully get things to the president's desk. i think we're in a win-win situation. if we can get anything to the president's desk, we win. because if he signs it, it will be good policy for the american people and if he vetoes it then it begins to demonstrate to the american people the contrast we have been unable to do so because of the muddled mess over the last few years the contrast from those trying to solve the challenges and problems in the country and who is standing in the way. the president will be laid bare and the emperor has no clothes. so i can't tell you how excited i am looking forward with the budget committee. the budget is not just numbers on a sheet of paper. it is our vision. it is the kind of policies and

programs we could put in place to address the challenges and the problems that we have so that we can provide for -- an opportunity for all americans to have a greater opportunity to succeed. and that is what a budget is. and so we will lay out our path for real hope and real opportunity as we move forward. a few years ago, many of you will recall that the chairman of the joint chiefs of staff then mike mullen, was asked what he thought was the greatest threat to national security for the united states. the greatest threat. this is the highest ranking military officer in the country is asked what the greatest threat was to our national security. and you all know what he replied? the debt. the debt. $18 trillion and growing. and the total debt exceeds the gross domestic product and we're on an absolutely

unsustainable path. and the budget committee is where we get our fiscal house in order. why do we want to do that? again, it is not just numbers on a page and making things add up to zero to get a balanced budget, but with a debt that size, paying the interest on the debt, servicing that debt, every single dollar that services that debt is a dollar that can't be used for education, can't be used for healthcare, can't be used for transportation or energy. that can't be used for national security. it is literally at a point where it is approaching choking off the actual vitality of our great country. so that is the reason. it is not just numbers on a page. it is making certain that we provide for a greater amount of opportunity for all americans. you all know now that we find ourselves in a situation where

we as a nation are spending about $3.6 trillion a year. and $3.6 trillion a year in its entirety. $2.6 trillion is medicare, medicaid, social security and interest on the debt. interest on the debt by the way is scheduled to approach $1 trillion within a ten-year period of time, within the budget window. all of that money we can't use for something else. so $3.6 is the big number and $2.6 is what we spent for the debt and right around a trillion for everything else. so when you think about the federal government and you think about roads and energy and education and national defense and all of the kinds of things, legislative branch and commerce, everything else except for medicare, medicaid and social security and interest on the debt, you are all a bright audience and you know we've had deficits of

greater than a trillion for the laxt six years which means you can do away with the entire government with the exception of medicare, medicaid and social security. and if you get rid of everything, in those four years we wouldn't even balance the budget. so that is the magnitude of the challenge before us. so when you hear folks say, you don't need to worry about social security or medicare or medicaid they are doing just fine, not a problem. that is not only irresponsible it is deceitful. they are just not telling you the truth. so we can continue as a nation to stick our head in the stand but we can't save and strengthen the programs that are vital for so many of our fellow citizens. that is at the same time on the revenue side, the money coming into the federal government, as you know, is at the highest absolute rate. more money collected in the

last quarter from the american people than ever. so if you have that kind of debt and growing debt and those kinds of deficits and you have those kind of revenue numbers, increasing numbers coming into the federal government, the problem isn't revenue, the problem is spending and you all know this so very, very well. the three ways to solve the problem, all right. raise taxes. it is our favorite way to do that from our friends on the other side of the aisle. or you can decrease spending and to be honest with you, the house has done a pretty doggone good side, on the discretionary side, the nonautomatic side. those numbers have been coming down in real numbers minimally, but coming down each of the last four years. but where the problem and the spending is is the spending, medicare, medicaid and social security.

so you can raise taxes decrease economic and hope to grow the network. an we hope to put in place and lay out the vision for how we would grow our economy in a very positive way, expand success for the american people. how are we going to do that? we are intent on building on the success we've had already at the budget committee over the last four years. as tim mentioned, the budgets that have been laid out have demonstrated how you get the balance and demonstrated the remarkable things that can be done, if you think creatively and have faith in the american people and have faith in the -- the free market system that has made us the greatest nation in the history of the world and we'll build on that success. we will lay out a budget this year. the budget has to be done by the end of the march. we'll lay out a budget this year that will come to balance

within the window. within a ten-year period of time. i hope it is shorter than that and i'm excited with the ten or 11 new people on the budget committee and we're going to challenge them to come up with ideas to get to balance in a shorter period of time. second, one of the things we can do at the budget committee and that is to normalize the debate about controversial issues. as tim mentioned, four years ago no one would have given us a prayer to lay out a solution to save and strengthen and secure medicare and sustain the onslaught from the other side. and everybody said no, you can't do that. and we worked and worked and convinced our friends and colleagues and moved forward with a positive solution, so positive that the romney-ryan on that proposal won the senior

vote. we need to find those areas, we need to normalize the debate about how you resolve the remarkable challenges that we have. we believe that it is important to save and strengthen medicare, medicaid and social security. and the other side believes they are alright with going broke because every one of the programs is going broke. every single one. social security/disability runs out of money next year. this isn't in 2080, this is next year. the urgency is huge. so we believe it is important to put in place the programs an the policies, the positive solutions to save and strengthen and secure medicare medicaid and social security. and i can't wait to have the

new members on the budget committee sink their teeth to the wonderful issues that are so important to solve if we're going to get our fiscal house in order to create an economy that will thrive and grow. third, i think that we have on conservative side, we have either ignored or put on the back burner or lost the whole principal of federalism when it comes to federal government spending and federal government policy and budgeting. it is one of the areas that i hope to normalize again, the debate from the federal budget committee. federalism isn't just having the states and the counties doing what they should as opposed to -- what they ought to be doing as opposed to the federal government, it is a principal that puts into place solutions that allow greater amount of choices and solutions for every single american. that is what federalism does. and that is what we're going to -- we're going to work hard on

trying to identify the ours where we ought to be able to move forward in a big, big way. and fourth, regulatory reform. the burden, the incredible burden of the regulatory oppression that has come out of this town, on steroids for the last six years, has to be stressed. we talk about how the corporate tax rate should be decreased. and individuals pay taxes and corporations collect the taxes. and we collect about $300 billion a year in corporate taxes. the burden for americans, large and small businesses and americans across this country is at least five times that. at least five times that. annually. the amount of money that goes into complying with all of this federal regulatory scheme is over $1.5 trillion a year.

again, those are monies that -- well we all believe in regulation. ought to be appropriate, right-sized, accountable regulation. not just because somebody in this town has a grand idea of how somebody ought to do something. as a practitioner, i will tell you there are practitioners that think they can take care of patients and they don't. and they should not be able to write the regulations to dictate to practitioners and other individuals who they know nothing about what that kind of practice or what that kind of endeavor is. so we believe that the budget committee is the place to begin to get more of a handle on the regulatory oppression going on. and i believe you've heard of reconciliation and it is an important tool of congress to be used but it is not a silver bullet. it doesn't solve all problems.

it is absolutely important and comes through the budget committee. we'll provide reconciliation directives that we hope the senate will agree upon. the reason it is important is because then it can come -- when it is agreed upon, it can come back to the floor of house and in an expedited section and it doesn't take a super majority. all sorts of reconciliations have been used for good things and bad. reconciliation in some variety was used for obama care and the tax reductions for the previous decade, 2001, and 2003. and the balanced budget act of the late 1990's when we got to a balanced budget. but as i say, it is a powerful tool but not a silver bullet but a important tool. and finally at the budget committee, we believe budget process reform is absolutely imperative.

we are in a budget process written 40 years ago by folks who wanted the default in this town to be -- to continue to spend and spend and spend more and more. so i look at budget process reform in two areas. one short-term, we got off to a pretty doggone good rules with the macro scoring we put in place and i'll talk about that in a second and there are other short-term things, baseline issues we might be able to do. and in the long-term, but not in this congress, because i don't believe the president has any interest in reforming budget process, but in long-term i think it is important that we re write the 1974 budget act and write it in a way that's much more accountable and makes it that the government's role in terms of spending is a default to

spend less not a default to spending more. so i look forward to working with folks on the committee to make certain we move in that direction. that is a longer-term prospect. let me touch on some specific issues an then i'm happy to address any questions. macro economic analysis or scoring, i call it accurate and realistic scoring, the congressional budget office is i believe, imprisoned by rules that make it so they can't get to the right answer. over the past two months, i've been spending a lot of time on the telephone with economists from around the country. bright minds, men and women who have spent their lives in the economic arena and ask them what they think they ought to be done and one of the questions i tried to get the answers from each and every one of them was on macro economic scoring. and almost to a person, they were wholeheartedly supportive

of this and some had great descriptions of what that means. one of them we can either do what we are doing now, which is incorrect or do what we ought to do is be unprecisely incorrect. and when we sent something to the budget office and we don't allow for the human aspect, we change policy in this town because we think it will affect something and we send it to the congressional budget office and say don't assume it will change anything. in fact, you can't assume it will change anything. so that number is zero. as other economists said, we know it is not zero. it may be somewhere between 1-7, but we know it is not zero, so why would we say it is zero? doesn't make any sense at all. so in the rule we passed last week in the house, we're

dipping our toe in the water. this is not changing the sun and the earth as it relates to scoring at congressional budget office. what we said if a policy would result in a change -- that was greater than .25% of gross domestic product, that is about $40 billion. three bills in the last congress would have come under that provision. then you ought to be able to look at what the effects may be use those in our process from a scoring standpoint. this is a small step in the right direction. second big issue that is coming up quickly is the sustainable growth rate, the sgr, the doc fix. it expires on march 31st. it is time to fix this. this has been broken since it was instituted but clearly broken for the last 12-13 years. every single year congress runs

around trying to figure out how to find the money to cover the hole, to cover the patch to make it so we don't push more and more physicians out of the practice of caring for medicare patients. this is not to add for something -- something to add to a zero page. but the practices that see seniors, has limited the numbers they see. not because they don't want to take care of them, but because the numbers don't add up because the federal government is imposing the restrictions. one out of eight physicians in a practice that would normally care for seniors said we are not seeing any more. not seeing any more seniors. again, not because they've forgotten how to practice the medicine, and i'm hopeful we

can fix this by the end of this quarter. and third is the debt season coming due on march 15th. but with the extraordinary measures that are able to be taken, it probably runs into june july, august time frame. i think it is important that we appreciate that the debt ceiling provides focus on this issue, but the problem isn't the debt ceiling. the problem is the debt. the problem is the debt. and that is why we need to get our arms around this debt and our arms around the policies and procedures we need to put in place to put us on a path to balance and pay off that debt. again, a great opportunity. a great opportunity to focus on the budget committee and we will be front and center on that. and finally in terms of an issue, i would be remiss if i didn't mention obama care or healthcare. obama care is not only harming health care in this country but it is harming our economy.

it is doing in ways big and small. not just for medical practices or physicians and hospitals trying to care for patients but for businesses, small and large who of their own volition want to provide health coverage for their employees and found it difficult. wanting to hire more folks and have a cap on the number of individuals they can hire so they don't come under the forces and the regulations and the rules of obama care. that is not a system that works for people. it may work for government. it may even work for insurance companies but it doesn't work for people or for patients. so i'm excited about the opportunity to continue to put forward patient-centered positive solutions and i hope we're able to use our budget to put forward some of those programs as well. great, great opportunity is going to come, i believe, in june when the supreme court will rule on king v. burwell. this is the case coming before the court. they'll hear the arguments in

march and rule likely the last week of june and probably the last day of their rulings. and this is the one that said if the law itself, the bill as passed and the law put into place did not provide for subsidies to be able to be utilized to provide health coverage for those who get their coverage through a federal exchange, it is very clear -- the law is very clear. and this law -- if this position, if the supreme court agrees with what we believe to be the letter of the law, then this unravels obama care pretty doggone quickly. that is a good thing. but it is not a good thing to not have any replacement or solution ready and available for congress to act upon. and so we need to be ready willing and able to move forward with making sure we stick to the principles of healthcare, accessible and coverage and choices, not destroy those those principles.

if we do that, i think we'll have a great opportunity for the president to support positive reform when it comes to health care. so exciting and challenging time. let me thank you for your interest today and thank heritage action for the wonderful advocacy on behalf of the american people. thank you so much. god bless. >> thank you very much congressman price. we have about 12 minutes where the congressman can take some questions and we have questions online, we've got a lot of folks watching online and we have press and we have attendees here so we'll try to cycle through the various questions. first question. right here. >> there are a lot of things that can be done to save budget costs through management reforms and the bureaucracy and related to your discussion about dynamic scoring, have you thought about doing anything on

the cost side. you can't legislate management savings and it is estimated $50 billion in potential cost savings by squeezing out redundancy and streamlining the government's back office without touching a dollar of program remission, have you thought about looking at those kind of savings and considering a way to get around the bird rule in the future? >> getting around the bird rule is i think going to be a real challenge without the comprehensive reform of the budget act. i view that as a long-term solution. i haven't met anybody on the senate side appearing to be willing to tackle that and because it is statutory, it would take -- i think that is better done in the re-write of the 1974 act. if you look at other items and in terms of where we can find savings, the gao and heritage and all others point to

significant savings that could be identified and utilized and it is the energy and enthusiasm or excitement of the ten or 11 members or our budget committee that we will rely on to help push those kind of solutions. so absolutely. we have to be more creative. we have to be more inventive in how we're solving the challenges on behalf of the american people from a budgetary standpoint. the challenges get more difficult every year. and the president who refuses to act on these kinds of things makes it difficult for us to get our fiscal house in order. but we're up to the task. and i know the american people are interesting in making certain that we fulfill that task. >> right here. yes. >> mr. chairman, just to follow up on your comments on obama care, are you suggesting then that you are going to have an

alternative ready to go, if you will, once the supreme court rules and if so, can you give us a little preview of what you have in mind? >> boy, i sure hope so. but i've hoped so for the last four or five years. as i mentioned, the principles of healthcare that the vast majority of the american people, regardless of your ideological standing or position, the vast majority of people support principles that say we ought to have a system that provides for greater afraid -- affordability for health care, greater accessibility, greater quality of care and more choices for the american people. almost everybody believes in that. the problem that we have right now is what the president has put in place with this law is something that violates every single one of those principles. so affordability is going down. costs haven't come down by $2500 a family, they have gone up at least that on average per family. accessibility has gone down. you've heard of the narrowing

of networks. physicians -- patients aren't able to find abscessability with physicians. quality is decreasing. talk to my former colleagues they will tell you that the quality of health care in this country is being diminished because of the law and choices are clearly limited. if you step back and say we want to put in place a policy that would adhere to those principles, what does it look like? it looks like something we need to make sure it's affordable. we need to expand to make sure they gain coverage in all sorts of ways. those individuals in the small group market truly threatened by increasing cost and pre-existing illness exclusion that has existed, those folks need to be able to access a risk pool, insurance risk pool large enough to spread the risk so their costs come down, don't go up. i think we need to say to folks any health care policy you purchase approved by your state insurance commissioner or state

insurance department. anyone they deem to be appropriate coverage you should have access to. we ought not to dictate from washington what you can buy, through your pocket book. quality matters need to be determined in the field of medicine not bureaucrats in washington, d.c. choices need to be expansive for patients. so if you step back and accept those principles as principle for the american people, you pretty much have a clear path to what the policies would be. >> right here. >> dr. price, should you win on obama care, the administration would have at least two responses, one to congress change the law. that will be up to you. they will also go to the state and say lots of people are losing subsidies, please set up the exchange and we can start the subsidy money flowing again.

what would be your advice to the states, 35 or 40 states pressured by the obama administration? should they ask for complete freedom on medicaid spending? what should they ask for? they can't say set up and not negotiate. >> the mental to the states is there's a better way. there's a way that respects your constituents and citizens of your state to make certain we follow principles so dear to americans with health care. medicaid, we believe state flexibility is an absolute vital component. in my state of georgia, there are about 1.8 million on medicaid. 1.2 million of those folks are healthy moms and kids for whom health care costs are miniscule compared to the system. we don't allow the state of georgia, as a federal government, don't allow the state of georgia to come up

with a more realistic way to cover all the medicaid population, thereby saving money for sickest of the sick. huge flexibility is important. indiana is doing great things as it relates to medicaid. we ought to be able to have the states be laboratory of ideas when it comes to health care coverage for medicaid population. so the message is -- there's a better way. and we believe we are going to be able to get to that point. i think the president is actually going to be open to a better way. we're not interested in just having the states turn around and say we'll set up the exchange when we're encumbered by rules and regulations from washington, d.c. nothing will change from the day before the decision is given if given in favor to the day after as it relates to the states and the decision they made two or three years ago when they said, no, it didn't make sense to set up an exchange. it doesn't. it doesn't have a financial

standpoint and from who makes decisions and who has choices to make decisions. >> right here. >> thank you. congratulations on your new position, doctor. >> thank you. >> you said you want to bring down the debt. you said $2.6 trillion of the $3.6 trillion budget is in medicaid, medicare, social security and interest. you also said you want to save strengthen and secure these three programs, these entitlement programs. >> yes. >> so my question would be where are you looking to find the savings? are personal retirement accounts on the table for social security? vouchers to buy insurance and medicaid? where will you cut if the goal is to save and strengthen and secure those programs that are costing? >> that's where the good news lies. these programs, medicare medicaid and social security

all of them are destined to go bankrupt on their current course with the current policies. and again as i mentioned apparently our friends on the other side want them to do so because they haven't proposed anything to save any programs. the good news is you can strengthen, save and secure them and save money at the same time. the model that we have proposed for saving and strengthening and securing medicare actually covers more individuals, saves money for the individual and saves money for the federal government at the same time you respect the principles providing greater choices and higher quality of care for seniors. why would you turn your back on that? it astounds me our friends on the left say i see that would make more sense. you spend less, higher quality care and greater choices for the american people. we don't want to do that. we want to make sure we continue to control the system. medicaid, state flexibility, huge state flexibility actually saves money. a more predictable line item for the federal government, a

more predictable for state government, provides better choices for patients, higher quality of care, greater access to care. we as a federal government says, oh, no, let's don't do that. this is lunacy. in the areas of social security, it has, indeed, been the third rail as tim mentioned. i'm hopeful what the budget will do is normalize discussion and debate about social security. this is a program right now on its current course will not be able to provide 75% or 80% of benefits individuals have paid into in a relatively short period of time. that's not a responsible position to say oh, you don't need to do anything to it. so all the kinds of things you know about, whether it's means tested, increasing the age of eligibility, the kind of choices, providing much greater choices for individuals to have voluntarily, select the kind of

matter they believe they should be able to invest their working dollars as they go through their lifetime. all those things ought to be on the table and discussed. again, that's why i'm so excited by the new members on the committee because they have great enthusiasm and energy on this issue. >> any other questions? >> is mitt romney the kind of partner you would want to have for budgeting in the oval office or is there somebody you would rather be working with? >> anybody i've heard that is thinking about running on the republican side is a better partner than the one we have now in the oval office. what i'm hopeful we're able to do at the budget committee is to lay out that vision and have it be so exciting and so positive and so productive that whoever is able to succeed

through the gauntlet of the nomination process on the republican side looks to the budget committee and looks to the house and says those are the kind of policies that i support and we'll take to the american people. >> thank you, congressman. >> thank you all so much, take care, god bless you. >> ok, thank you, congressman price. great stuff. now i'd like to introduce two panelists. we're going to have a conversation about all the things we just heard and what we might be able to expect in 2015 budget-wise. romina boccia is with budgetary affairs at the heritage foundation and jason fichtner is a senior research fellow at the mercatus center. we'll have a 30-minute conversation here thank you.

i've asked both jason and romina to give brief opening remarks and then we'll open it up for questions. rominea, could you begin? >> thank you for the introduction, tim. thank you all for being here today. i want to focus my remarks on how the new congress can control government spending and reduce waste and so i'm so pleased to follow representative price with those remarks. the first thing that the house and senate have an opportunity to do now is to agree on a budget resolution. and that budget resolution needs address growing spending and debt at its root. the current half a trillion dollar deficit of this year has been hailed as a great improvement but to the extent that it is an improvement, it is a very fleeting one indeed because before the end of the decade, the deficit is projected to exceed trillion

dollar levels again so in order to rein in this growing deficit, it's important that we understand what's driving it and then we can control it. so what's driving this growth in spending and the debt? 85% of the projected growth in spending over the next decade is driven by healthcare and retirement entitlements and interest on the debt so that's where reforms need to target. to balance budget before the end of the decade, we saw in the last house budget, it takes more than $5 trillion in cuts and that is assuming you start cutting right away. if you decide to cut in future years and not address spending next year, it takes bigger cuts to get to that balance point but the sooner lawmakers can start cutting, the better. and where exactly should they start in the repealing

obamacare has to be their first priority simply because 44% of the growth in entitlement spending is driven by the healthcare law. so if we are to rein in growing spending and debt, obamacare is where we need to start. this needs to be combined with reforms to medicare, medicaid and social security. during the process, lawmakers should be guided by focusing benefits on those individuals with the greatest need and delivering those benefits in a more efficient manner. as we'll hear from my colleague, jason fichtner, improper payments are a big issue and healthcare entitlements are where some of the highest improper payment rates are in the federal government. now, beyond that, there's also still too much waste duplication and overlap in the federal budget. sequestration has helped to overcome some of that but the sequester itself is very small and is a very blunt instrument so we need other reforms that

really get at reducing overlap and duplication and rooting out waste, fraud and abuse. and one recommendation is to adopt a waste commission that operates similar to brac. what that commission would do, it would have to be bipartisan and be guided by objective criteria and go through the federal budget, through the domestic budget by agency, by program, and identify those areas also guided by work from the government accountability office, identify those areas where we can reduce waste, cut duplication and make government work better and more efficiently for taxpayers. so that's another reform that i think would help to root out big spending. while we're talking about sequestration, it was intended to be a mechanism that forces lawmakers to agree to important budget reforms that actually

address our spending and debt crisis. unfortunately, that mechanism failed but the sequester will return next year so we have another opportunity to have this debate. to honor the original intent of the budget control act and what the sequester was intended to do, we need to focus on our -- what's our core national proprietary which is national defense. national defense has been underfunded in the base budget and lawmakers have been evading the budget caps using the war account to fund things that should be part of the base budget. so recognizing that, recognizing that we need to fully fund our defense needs and cut spending in those areas where it's growing the fastest and cutting those things where the government shouldn't be engaged in in first place, namely priorities that are purely private or should be done on a state and local level. those are the kind of guidelines that should guide the budget committee and should

guide lawmakers this year and the following year. >> thank you, romina. jason? >> thank you. i want to start by saying i was really heartened with chairman price's talk. for a lot of us who have been -- i always joked i'm on the 22nd year of my five-year plan in d.c. i would come in in undergrad three years work and going to colorado. but i have been here longer and oftentimes we hear members say one thing, do another. sometimes they misspeak, don't understand the issues. congressman price went through a laundry list of things he wants to change that have been on our list for a long time and it's heartening to hear him lay them out and be honest about it and the challenges in front of us. a gentleman said you can't get budget changes for management changes which is very important but we have to look at these because they are important issues. one is improper payments.

these are not just fraud, waste and abuse, but what happens when you give the wrong check to the wrong person or the wrong amount. it could be doctors overbilling, underbilling, people ineligible for a program but continue to get benefits. take medicare, fee for service last year we had $36 billion in improper payments in medicare. that's 10% of the program's costs. take something that seems to be popular amongst democrats and republicans, the earned income tax credit. a 25% improper payment rate. that's $14 billion, 25% of the program costs. these are things we look at again, trying to cut down on improper payments. better management of the program, not just fraud, but waste and abuse, can save us money. whether it goes into the baseline or not, should be things we look at and encourage agencies to do better. similarly, congressman price did talk about how the 1974 budget act imprisons some of

these actions we see going on not just in the administration but also in congress and one thing hurt is year-end spending, a use-it-or-lose-it phenomenon. if the agencies don't spend their money, they lose it. it all goes to the treasury. we see this kick at the end of the budget year in september for agencies to spend more and more money on things they may not need so they can go to congress and say, guess what we spent all the money, give us more next year. i did research a few months ago because there's more data online and we pull it down just contracts, what agencies are doing with contracts, and if you think about a year cycle, if you smooth out your contracts, you spend a little more than 8% per month. you may want to do a little less at the beginning but for example, the department of state had 38% of spending on contracts in the last month of the fiscal year. seems high, doesn't it?

you had h.h.s., healthcare, 29% in september of the last fiscal year. some agencies do fine. treasury does 9.9%. d.o.e. does 6%. some smooth it out but we're seeing what i would call seemingly wasteful spending at the end of the year. looking at how agencies are spending year-end money and giving incentives to curtail that. this goes into the idea of the baseline. how you can balance the budget by cutting, in 2011, when senator connie mack was around we looked at what he wanted to call the one penny plan which we called the 1% solution, could you cut spending by 1% per year and if so, could you balance the budget. we started doing the research. you didn't necessarily have to cut spending. you just had to control the growth of spending to balance the budget in a 10-year window. when we did this in 2011, the government could run 2% per year and get 8% of revenues in

g.d.p. and balance the budget in a 10-year window. this is a funny time because of the baselines and congressman price alluded to talking about baselines. baselines assume a certain amount of increase every year so assume for a minute that a program is assumed to get 3% spending more next year and congress decides to only give it 1% spending. the democrats would say you just cut spending. you didn't cut spending. you're still spending more next year than this year but you're slowing the growth of spending. so we need to look at where to control growth of spending and reduce it and the second is where can we make realistic cuts that says you're spending x this year, we want less than x next year and prioritize. how baselines are interpreted by the media and by those who don't want to see spending curtailed and that's problematic. romina and congressman price pointed to areas to focus our attention. the debt ceiling debate and

controls for the murray ryan plan will cease to exist and expire. the disability insurance trust fund will be insolvent in 2016 and the budget process in general so there are issues we need to focus on what should our spending priorities be and focus on what are cuts, what are slowing of the growth, what's quote/unquote useful spending. we're not saying all spending is bad but the three major entitlements are growing rapidly and when congressman price talks about trying to save the programs, secure them and make sure they're around even with savings, the savings don't have to be cuts from zero, cuts from last year. really need to slow the growth of spending. if we can slow the growth of those programs, we'll go a long way towards balancing those programs, fiscal obligations and balancing our financial position in the u.s.

government. >> thank you. let's open it up for questions. you guys got to have some. right here. >> thank you and for your presentation and i agree. but i think when we start talking about what actually has to be done in social security reform, medicare, medicaid there are some concern about turning these programs into welfare programs, mean testing them. there's concern to increase retirement age and while i agree with you that we can find places to cut budget, we can look for the waste in this city. i, like you, have been here longer than i thought, as well. so we're looking forward to those opportunities but to ignore the obvious that these three programs are driving this city's growth, i would like to just hear a little bit more detail about, are personal

retirement accounts on the table, will there be discussion and energy toward getting that in social security and number two, on medicaid questions. it sounds nice to say we'll block it to the states and hopefully they'll get this work done. is there any discussion about changing the program from this city to include vouchers for the poor to buy insurance similar to what federal employees already have? how much energy is going into new ideas? >> that's a great question. we're not members of congress so i can't tell you what they're thinking but we testify on capitol hill and speak to members and their staff so we'll tag team a little bit but on the social security side, i think we also need to be very careful when we talk about increasing the retirement age because when we say increasing the retirement age, the left says, that's a benefit cut. social security, when it first started, the retirement age to get full benefits was 65. the average age people lived to was 65 or 66 so you have benefits for a year if you live

that long. now the average age to live on benefits is 78, going into 80's so in some ways we've had an artificial benefit increase by not tying the retirement age to longevity so we need to go back, have a neutral idea of what social security meant. now we're basically trying to fund 30 years of retirement on 40 years of work. the program's not sustainable like that. we talk about raising the retirement age, it's talk about a neutral position where people are incentivized to work. some can't, they work in hard blue collar jobs and might need to retire at 62, 63. we need to incentivize focus to work longer but provide a benefit for those who can't work past 62, 63, 64 or 65. it's the incentive part. you got to personal accounts. i don't know whether they're

back on the table or not but social security disincentivized people from saving originally and we need to look back at social security being part of something of the three legged stool for retirement. part was social security, part was employer provided pensions and the third was personal savings. social security crowds out personal savings. on medicaid, we're economists and focus on incentives or sometimes government programs we call perverse incentives. medicaid basically there's an old joke that says if you've seen one medicaid program, you've seen one medicaid program. you have 50 states, state-run programs with federal matching dollars. the way the federal government

gives money and incentivizes states to do all sorts of weird games to allocate money, part of that is block grants. we need to look at block grants and also vouchers because you want consumers having a stake in where their healthcare dollars go and that's not the current system now. >> when it comes to discussions private retirement savings, i think it's so important that people control more of their retirement decisions and that comes with control of their retirement dollars. social security's original purpose was to protect against destitution in old age. the program is very different today and it actually leaves many seniors with benefit levels that are too low where they are in addition to social security benefit relying on other welfare programs. so one proposal that i think is not receiving enough attention is to look at instituting a flat benefit that targets somewhere around the federal poverty level so that those individuals who have worked 35 years do live at a level where it's sustainable, but that also

means targeting benefits on those who need them the most -- there are many millionaires who receive social security today. the question is, does that make sense? do they really need that benefit? is it affordable for us to keep giving social security benefits to millionaires so i think means testing is also a provision that deserves more attention but still keeping in mind that social security is only one part of the retirement safety net. it's not supposed to fund a comfortable, generous retirement. that is what private retirement savings are for and there are certainly ways and i know there's interest also on capitol hill to eliminate some of the regulatory barriers keeping especially small employers from offering retirement plans to their workers. if you're looking at who has

access to a retirement plan today and who doesn't, those workers who don't, they tend to work for smaller employers and they are the ones who need those plans the most because they're less likely to go out and open an ira on their own so proposals like auto enrollment ira's can do a lot to help more workers save for their retirement and be in control of retirement decisions. >> one thing to add, it's a good point, the technical term for social security for retirement is actually the old age survivors insurance trust fund so you're trying to insure against old age and widows or widowers. it was never meant to be a long-term 20-year retirement program which is what it turned into. >> we have a question in the front row. >> 40 years ago i worked in the government in a very, very minor way and they were doing that same type thing. at the end of the year, they were given so much in their budget for the year.

they would come up with programs, they would take trips, they would spend the money some way and say they had to have that amount and ask for more. i assume that hasn't changed in 40 years. i don't know if it's ever been addressed and the other program is do all these programs need to be cut, we need to save on everything, what of the idea -- i can't remember if it was the penny plan -- whatever, you cut back 5% every year, every organization makes its cuts. what has happened with that? >> it doesn't get enough attention about what i would call excessive or unusual year-end spending and the incentive is to spend it, as you know. there have been very, very small pilot programs. the department of justice had one for their i.t. department that said if you don't spend all your money, you can roll it over and spend it the next year. senator coburn was interested in these programs to find examples of a pilot program to give agencies short hold on to some of that money and have g.a.o. monitor and report on it so we can get to best practices

and see what worked, what didn't, and try to expand it to the federal government. with the penny plan, one of the problems with sequester, which is an across-the-board cut. budgeting means setting priorities and making tough decisions. a cost cut of 1% is not setting priorities. it's a blunt instrument.