news roundtable with leading defense analysts to discuss the major defense events coming down the pike in 2010. now this week in defense news with vago muradian. >> good morning, happy new year and welcome to this week in defense news. i'm vago muradian. 2010 will be a critical year for the defense establishment. how much will congress invest in defense, will the quadrennial defense change what is discussed. the year of living dangerously for the obama administration. steve grunman, lauren thompson, pierre thomas and fred downy

welcome to the show. >> so for years the impression has been the defense spending is finally going to level off. it was going to go flat at 534 billion, add inflation and $50 billion, and so everybody's expectation that acquisition spending will come under sharp pressure. but the obama administration decided to add $100 billion to the budget that will be submitted to congress next month. that is a heck of a lot of money. there is stimulus obviously affecting their focussing on the industrial base, lauren, how do you manage to do this with the rising deficit. where does it go? >> when you consider the fact that this is the candidate who got the nomination by pledging to pull out of iraq we're headed for an amazingly high level of defense spending. we'll be in the next fiscal

year, 2011, will be somewhere around $550 billion in the regular defense budget and somewhere around $150 billion for overseas contingencies. $700 billion, more than george w. bush ever asked for. >> how do you handle the deficit reduction part of it which the president at the end of last year was talking about making it a priority for 2010? >> you do it the way congress often does it, smoke and mirrors. >> and you were up there for a long time helping with the smoke and mirrors. >> there are a number of ways that it can be manipulated. let us remember that some of this add-on is back-loaded in the palm and it may not yet materialize. the fact of the matter is that they have to find this money even in an environment on the hill where the deficit and deficit spending is becoming much more of an issue. the good news for defense is

there's a lot of constituency for defense money, especially in congressional districts. so my bet is that they'll find the money. >> i suspect in an environment where in an afternoon, in five minutes, the house can pass a $50 billion stimulus measure i would bet that secretary gates would be able to walk into the white house and argue if it is that easy and even in the fiscal environment generate $50 billion, it would be in the baseline budget. >> is this happening because mr. obama discovered this defense thing you must do, he wasn't planning to dorks or do we have total lack of discipline in fiscal policy because at these deficit levels people think $50 billion or $100 billion doesn't matter anymore. >> the driver in the end you have to look at everybody in d.c. watches the deficit. the interest is on the debt.

that is a real cash number that needs to be paid. that number starts to go up, and then i think you'll see the tightening. the broader deficit number as horrifying it is is a bit of d.c.kabukky. >> these big hard decisions, unless you take them right now, this is what it takes. >> lot of this, guys, is on the personnel side. the force increased by 96,000 people, that cost $10 billion a year and people costs are going up between 8 and 10% a year. remarkably large amount of this number. >> a lot of the adds that you talked about, that is actually to cover things like defense health care, not for buying weapons, necessarily. personnel cost s for pay, benefits, retirement, are skyrocketing. >> i don't think industry should read your story this week and gain that much solace from it necessarily. >> i'll quote a little bit from

the perspective it is a relief valve to the extent if you raid the investment budgets to pay that health care bill, the fact you have outside money to pay for it, provides a little bit of a relief. >> you shouldn't go out cheering but -- >> i think, pierre, you're right to a certain extent. this recognizes reality. personnel and operations will be more expensive than many assumed it was going to, but recapitalization and modernization costs that will have to be paid are going to be higher than many assumed, and i think that's coming to light during this qdr process, hence, the money -- the money has to be found. >> recognizing some reality. it doesn't recognize the reality we're running a budget deficit of $4 billion a day. >> is the qdr -- what should we expect to see out of the qdr when it comes out? >> two things to look for, a codification of what gates has

been trying to implement in the obama administration trying to do philosophically. i don't think there is going to be too many surprises there. there are real analytical challenges inside the qdr, about what to do about long-range bombers. i'll talk about the other wildcard, which is afghanistan. afghanistan and progress in afghanistan. >> and iraq. >> and iraq, will create requirements and generate needs, the demand for up-armored humvees is not in any document you have ever found. that is going to be the wildcard for 2010. how does afghanistan progress and that will take any piece of paper and junk it in 30 minutes. >> industrial base impact from the qdr? >> i certainly heard the director of industrial policy, indicate that there will be an industrial base segment, perhaps, in the qdr.

i don't think in this stage in the formulation of the administration, that there will be anything profound there. there will be some statements of principles that were telegraphed by the two of them along the lines of let us protect skills, not programs -- skills, not jobs, i think was the slogan i've heard. >> coming up next, is there an end in sight for the pentagon's long running struggle to buy long running planes. >> stay tuned for vago's notebook coming up later in the show.

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for sure. how will this play out? >> there will be acquisition strategy that involves competition. this is not an administration that will accede to either competitors' attempts to corner the buyer. as necessary they may have to redot acquisition strategy, but they will do it that gets competition on this program because they recognize the value at stake is going to require competition. >> there is a broader question here. given the issue of major competitions now, the fact that the pentagon acquisition process is not nearly as good as it should be, can a major acquisition happen without a tremendous amount of delay and in the end protest. the stakes are so high and the, jooshgs the skillset question for you, do they have the capability to be able to run something so big and complex in

a way -- >> it keeps getting worse and worse. people complain there was too much subjectivity last time. so now they're being so objective that the solicitation is so absurd. 773 mandatory requirements. that is absurd. and then on top of that a fix-pricing requirements that extends over into the decade into the future? this is not a well constructed slis sey tation. >> i'll be mr. silver lining, from the perspective of if there was something that all of the acquisition reform studies have focussed on over the last four or five years and a lot of people who worked on those are inside the administration, if there was a lesson that came out of that, was if you get acquisition reform, focus on the front end of the system, getting the budgeting right. if you start these things on the wrong footing you're doomed from the beginning. for as much as there is angst and pain about this, take the

silver lining we would rather have angst and pain in the beginning in getting the competition right, the acquisition requirement right, put the budgeting right. and that is coming up on the strike fighter. >> does this get decided in 2010? is this a this-year issue or next-year issue. >> it may be mercury poisoning the body politic. i would be amazed that secretary gates on the day he leaves office will have somebody else making tankers. >> i tend to agree. i'm not so sure you can bring this to a conclusion without some legislative changes in the acquisition process, and that's going to be very hard because of the individual constituencies. >> let's go to a quick -- to -- shift gears a little bit because we could spend the rest of the show talk about the tanker and not arrive at anything sensible at the end of the day, talk about the joint strike finder.

the program obviously remains a top priority. secretary gates killed the f-22 back in april in order to say, hey, we're going to focus on the strike finder. toward the end of last year, more money was put into the program, essentially to fund the program to the worst-case cost estimate so that in the event something goes wrong we have the money that's in the budget. does this mark a change, positive change, in terms of budgeting accurately for programs as opposed to low-bawling the programs and going back to congress and going, wow, gee, we blew the budget cap? >> i don't know if that particular program else straights the point, but to cycle back on the budget increase we talked about, that some of that money i'm sure pays for more fully funded, more adequately funded programs than the ones inherited by the administration. i do think ash carter is focussed on fully funded programs. the legislation created a more

of a statutory obligation to enroll rather i suppose for the cost analysis group. so there is something changing there. i can't say without reference to the details if the jsf is the best example of it but there is a trend line there. >> most of the coverage changes has been negative but i think it is the positive on f-35, joint strike finder. they're taking money out of production and putting it into development and doing more complete testing up front, so there are fewer surprises later. i think this is a good-news story in the end. >> i think the pentagon right now is very focussed on its cost estimating. whether the f-35 is the poster child for this or not, i think this is -- this is something that ash carter actually intends to implement. >> and again when you take a look at all -- at acquisition and actually 200 years' worth of acquisition reform issues, one of the central issues you come

back to, that is at the very heart is -- and it depends on either the tyranny of structural optimism or the system lying to itself, depending on which ever way you want to phrase it, about how much something is going to cost. it has been done to launch programs, everybody buys into it, the congress does, buildings does, administration does and then you pay the price, you pay the political price later. it comes at a price. and everybody we're always trying to fit 100 pounds of program into an 80-pound programs. now we're admitting we have 80 pounds of program. >> when the budget comes out i think we'll see increase in investment spending but no new net content. a lot more fully funded

programs. >> except driven by whatever the war -- >> there may be increments like that. >> a look at this year's bigger challenges. we'll be right back.

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astrazeneca may be able to help. i'm back with steve grunman of charles river associates, and so as we look at this year what are going to be the real sort of unknown unknowns or big issues we can end up walking into,

pierre? >> one of the biggest issues is outside the defense realm is the general economy. it will drive the broader economy. it will be driven by interest rates because that will drive the deficits and the amount of budgetary and fiscal leverage we have. also the general economy globally will dictate where some of the national security threats will come up to the extent that some of these countries are getting somewhat unstable based on where the general economy is. >> iran and continued nuclear program, so if something has happened on that front that will drive spending as well? >> this economic issue is crucial and the place i would focus our attention is willingness of other countries to continue buying $4 billion worth of u.s. debt per day because that is what our deficit is and most of that is going to foreign countries. if the chinese decide they don't want any more ious, in which well have higher carrying cost for our debt and that has ripple

effect for defense and everything else. >> the general economy is clearly an issue, the fact of our continued armed sales abroad will be an important factor for the pentagon, their ability to do cooperative programs, to change our export control procedures and laws in order to enable that, and the willingness and ability of our allies to buy our equipment. that will go a long way to determine how affordable our programs are. >> a lot of your headlines in the coming year will be about corporate strategy in the defense industry as a reaction to and in response to the things we're talking about here, including interest rates and other phenomenon in the general economy. i think this will be a year where the capitalization of the industry turns over, i don't know what the net of that will be, but there will be a lot of new capital in and capital out. >> lot of private equity money. >> private equity, basic positioning issues at stake, how

much if at all will diversify, whether anybody will try a g.e. 1992 focus strategy. big news on that front. >> however, i think a lot of us thought we were going off a cliff and now what the numbers indicate we're not. it might be a soft landing for the sector so there could be less pressure for consolidation, so that's why the comment has been made that given the lag times everybody has two or three years to strategically position themselves. so the last thing anybody can say, i wasn't ready, i didn't see it coming. >> that should be a start. what is the mind posture going to be towards diversification, how much, how little, if at all? some m & a will play out around that, for example, around that question. >> some of the answers to the questions is how clear the qdr is on future direction, what the companies are able to discern

about what capabilities, the pentagon will want in the out years and how much of the capacity the companies are willing to retain and that may be a big problem for the pentagon. >> i want to get back to that question. let me ask you about the export control. that is an administration every white house started working on. huge review of the export control system. it is not like we're very, very aggressive and very successful on world markets. just before the show we were talking about 68% of global arms sale comes from the united states. how do you think this review and what are the kind of changes do you think it will yield to the control system? >> the first thing that is happening is that the process is actually moving more efficiently than it has in the past. the thing that isn't done yet that's got to be part of this is revision of the munitions list. we still have a cold war munitions list. we still haven't -- >> list of stuff that requires

-- >> when you run a trade deficit of a billion dollars a day you need to loosen up on some of these restrictions. >> it is about as much of technology that comes out, more uponly about a system that tracks technology when it comes in and in making people afraid of putting technology into the united states. >> because they can't get it back out again. >> that is the critical issue and i think that is the driving imperative for control as well as our ability to cooperate with our allies and share in the technology for the fight for today. >> and some will take reform in the pentagon. the five different committees that generally act sequentially can result in as much as a two-year process to get a decision. we can't live with that. >> we have one minute, very, very quickly. do big programs get shot in the next 12 months? >> i think the big program that got shot, got shot in april. >> they're being shot. >> they're being shot. >> yeah, i think we don't have a lot of new starts but we also don't have a lot of new

cancellation's is. we have a good visibility on the future. >> they have already got the low-hanging fruit. rest is substantively and politically difficult to kill. >> thank you very, very much. we appreciate it. lot to discuss over the coming 12 months. coming up in my notebook, why 2010 will be a make or break year across the defense landscape.

every once in a while you arrive at a make or break year. the next 12 months will decide nato's 8-year campaign in afghanistan. will renewed commitment reveal success or failure. it will be hard to justify for what is an increasingly unpopular war. logistics system will be tested in reverse by withdrawing with extreme speed and care millions of pieces of equipment. next month, the administration will deliver to congress its quadrennial defense review and

five-year budget one that will continue unprecedented growth. will congress go along in the face of mounting deficits. iran's nuclear program looms large. will it compel israel to use military force? in asia, china's rise to military prominence vexes the region as japan redefines its relationship with washington. and will the world's largest defense program the joint strike fighter stay on track for become the major effort to fall into a self-defeating effort of rising costs and slipping schedules. thanks for joining us in this week in defense news. i'm vago muradian. can you watch this on defense news tv.com. or e-mail me at defense news tv.com. have a great week.