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welcome to this week in defense news, i'm vago muradian. for the first time in two years, the pentagon should get real budgets of $500 billion a year instead of funded through

continuing resolutions. it is also going to get $30 billion in sequester relief. and cut the cost of living adjustments by 1% for working age military retirees, in part to do so. d.o.d. however still faces $70 billion in automatic spending cuts over the next two years. and more cuts are likely as lawmakers work toward a broader deal to cut america's $13 trillion debt. meanwhile talks with iran with the nuclear program, to give it up, in exchange for repealing crushing sanctions could change the region's security dynamic as china raises tensions across the pacific by trying to enforce the claims to the east china sea. joining us today to discuss these issues and more are four of washington's top defense analyst, all of whom happen to be listed on defense news's 100 most influential people in u.s. defense. mackenzie eagland of the american enterprise institute. todd harrison for the center of strategic and budgetary asegments. gordon adams of the simpson center and american university. and lauren thompson of the

lexington institute. welcome welcome back, gentlemen. welcome back from maternity. how is life at home? >> three months over, the insanity is over and i have a perfect baby. >> and we join the washington budget insanity. welcome back for the holidays. >> we finally have spending caps and a budget sequestration. there are some people who look at this and say, you know, there is only upside from here, how do you interpret the deal, and what do you expect next? >> i think they ought to be jumping for joy in the pentagon, because in the short term they are getting things that they have been arguing for, forever. budget stability. they are getting the flexibility that you have when you don't have sequester. and they are getting a kind of a holiday gift in their stocking which is the $80 billion worth of war supplemental funding that nobody talks about anymore. but is in the operations and maintenance accounts and will help them out. i think, however, to assume that this means the whole thing has turned around is a mistake. the pressures are going to continue. and the budget is going to

continue to go down. if you look at this deal, it still says the budget is going down in the out years and i don't think that is going to change. it could go down deeper. >> i made a mistake at the top of the show, i said $13 trillion. and shy are have said 17 -- and i should have said $17 trillion. >> and to pick up on that, i think gordon is exactly right, they have a temporary relief. it basically gives them a glide slope down to the budget control act cap levels they were going to hit anyway, so they have a few more years to get down there. that is a lot better than the alternative of the cliff. but still, we end up in fy '16, we're down at levels that we were going to be at and you got to ask yourself, with a $17 trillion debt that is still growing, and we see a lot of the other parts of the budget start to really explode, around that time, around fy '17, '18 and '19, social security, medicare, medicaid, and i think this is not over yet. >> and what happens in 2016? the deficit starts going up, up, up again. the annual deficit. and until in 2018, we hit $20

trillion. do the math. 1% increase in interest rates, and you go up $200 billion a year in debt services. >> which is what has brought down a lot of the european governments. >> and if you look internal to the defense budget, to all of these points, the buying power of the pentagon is continuing to fall. off a cliff. and so each dollar is going towards less and less, because of the bureaucratic benefit, the bureaucracy, the numbers, the people, the inability to shed civilians quickly enough and you're seeing that and congress rejecting of course a lot of the proposals by the administration. and so they're not out of the woods by any stretch. there are still more cuts to come. >> and pay and benefits are going up 4.2% annual rise under a fixed dome so that creates enormous pressure. and lauren, i want to ask you, you look at this, both as an analyst but as a strategic advisor to the industry, what is the industrial impact of a partial sequester? >> basically, there is no

industrial impact to speak of. because services have indicated this he are going to use all of the sequester relief to improve readiness. they had a real trough in readiness. >> we zeroed it for the entire time. >> the army claims it only has a handful of brigades that are ready to go. >> two. >> so that is where most of the money is going to be going. it is going to be going to increase training to get readiness levels back up and that leaves relatively little money to programs that we have been told have depended on diverting sequestration but in fact still can't be funded. >> we have had in the past before -- >> well engineering the last draw-down. >> i had a big hand in the last draw-down but the pentagon says the first dollars it takes down are on the equipment side and the second is the floor structure. and i think we will go down deeper especially than the budget design. and the am understand that goes back into operations and maintenance accounts, some of it hits readiness, although i think the readiness crisis is

greete exaggerated. and this have the account to backfill on the readiness side as well. >> if we go back to the last downturn, the buying power of the procurement budget falls by about 2/3 over a 10-year period from the reagan peak. now it is true that the military personnel goes down by 25%. but guess what the number of recipients goes down by even more. so there is no real cut in the benefits. >> and you look back in previous draw-downs we have always cut in strength by at least a third or more. the problem though with this buildup is we didn't get larger. so we are going to be cutting, on a force that is already smaller than it was on 9/11, and the cost per person, keeps rising and that's the problem. >> the cost per person is the problem. >> and the civilian work force, the same unfortunate rules apply. in the '90s when d.o.d. cut the civilian work force what they ended up doing is paying more for the smaller force and they cut the junior

work force and grew the white color workers and we didn't save any money at all. >> and increasing the deficit and the debt ceiling, no sooner han it passed that paul ryan, who got brutalized for his own party very badly for having cooperated to do this temporary increase, as well as mitch mock comfortable got up and said, we're -- mitch mcconnell got up and said we didn't do anything to the debt ceiling. >> are we in the same place with another fiasco in february? >> the key was john boehner tead off on the tea party. basically what that he said is that there is running space election, and the politics of doing it don't work. and the politics of doing a big budget fight next year don't work. and i think the republican parties we're after obama care and we're not going to run the people who shut down the government or stuck the budget. >> i think there is a split in

the republican party. the republican establishment is looking at what is obama care and turning out to be an electoral term and we can do real well in the midterm if we don't shut the government down again. but mitch mcconnell and the other, they feel the club for growth, the right wing, the heritage act, breathing down their necks in the primary. >> you're a good republican analyst. what do you think. >> there is an absolute split in the party and i don't think which way they want to go and gordon is right, that the speaker has said previously, the same thing. he has chose the government funding side on purpose because he didn't want to mess around, as he shouldn't. i think he will stick around to that position. and they will have to attack something of messaging or some other type of bill because lauren is right when ryan laid that marker down he is not going to be able to back off from that now. that they want a debt ceiling fight. i don't think it will be in february. i think we will have time throughout the spring and summer before it comes out. >> they will need democratic votes in order to avoid the debt ceiling fight. this is the fourth or fif the

time in the last year and a half that john boehner has depended on democratic votes to pass stuff that his own party is split on. >> all i know is there is still a very, very large debt bill and defense doesn't escape from it. more with our round table in just a moment. you're watch "this week in defense news." there's only so much you can do to prepare for an all-out assault like that. we hunkered down, we braced ourselves... we just didn't have the numbers on the ground. what did we do? we used our navy federal cashrewards card to fly in reinforcements. nana. hoooaah! alright nana! 4 million members. 4 million stories. navy federal credit union.

we're back with our round table. i want to get to the qdr in just a minute but i want to start by finishing off the last point we were making. defense is the largest discretionary account in government. doesn't that mean that whenever you're going to try to do any sort of debt reduction deal, it is a place that you can tap for quick cash the way you can't in other lines of budget? >> absolutely it becomes an easier and easier target. when you start looking at the

other parts of the budget, nondefense discretionaries already shrinking, there are only so many times you can go back to that on its own and the democrats are digging in their heels at that. and you start to look at the other parts of the mandatory budget, social security, medicare, medicaid, it is difficult to get near term savings with adjusting those programs without cutting back on a benefit or taking a benefit away from recipients. those people vote. so congress will try to tackle the long term deficit by going after the mandatory accounts, and i will bet anything they go back to the defense well. >> but not before '16? that is sort of the understanding? but it is coming. >> in '15, even. when the rubber hits the road and they're trying to figure out how the numbers work in '15, it could still go down in '15. >> let's go to the issue of pay and benefits. there was a reform controversial line of cutting colas of military retires of 1%

and they got $6 billion to do that. it surprised everybody. the military coalition included. >> this deal would not have worked. it would not have passed. it would have not gotten through the democratic if they hadn't had that in there. so the deal would have fallen apart without it. and you look at it. >> because they're try to use that to set precedent? >> it was a fairness issue that if you're cutting back for federal civilian employees, you should be doing it for military as well. i don't necessarily agree with the argument. and i don't think we need to do it in a piecemeal approach. i think it should be more comprehensive. and it gives 6 billion in savings. and the other thing it isn't realized it reduces d.o.d.'s requirement payment of 8 billion and that frees up more in d.o.d. >> it is very controversion until political terms. on the other hand it shows you how important these cost of living increases are in terms of the total deficit. cbo estimated that if you just

change from the normal consumer price index, to change the cpi, you could save $100 billion on entitlement programs over 10 years. >> let me just ask you, go ahead, finish up. >> i'm worried about the danger though of the deal falling apart because everybody is backtracking immediately. as soon as it passed. even patty murray one of the authors of the deal. so that is worrisome because it is a door that needs to be cracked open because we need to have these uncomfortable and adult conversations about it. >> and there is a commission that is looking at this very issue although my understanding is they want to increase compensation, not decrease it. >> and the commission has a problem because it is unhinged from any policy. and they will be able to apply a lot of things and they may try to increase pay but they are not going to be wired to decisions that actually get made. it is going to be another study that lays out their elected qua drenle review of military compensation. >> the timing is off. they need to extend the commission so it doesn't report back until after the election because nothing is actionable until after the election. >> and get the president's guidance to the economies.

and basically says don't change anything for anybody who is in the service today or who is retired and getting benefits. it has no political or fiscal impact in the near term. >> let's talk about the fiscal impact. the national defense authorization act is working its way through congress, and what is the correlation, the connection between what we saw on the dell deal and the -- >> one of the fun nest things they did in the armed services committee, is in order to avoid making tough choices in the bill they authorized a level ha is more than $30 billion above the budget deal. well, that is meaningless because authorizers don't shut budgets anyway. the budget committees and the appropriators set the budgets but they avoided choice in this bill by pretending, by playing let's pretend and we will have $552 billion to play with. let's have fun. >> and the administration is pretending with the budgets that it has been submitting to congress that it will get more money than it is. my understanding now is they are going with the, instead of four different budget, they will go with the all program

alternative program objective memorandum, the self-year spending plan, that is -- the six-year spending plan that will be built to the new budget caps. >> it has to be built to the new bill. otherwise, they're breaking the deal. they can't come in and make a budget like that. they have to make some hard decisions. it is going to be revealing of what are they cutting and what do they keep. >> omb is giving them more time to do it. >> omb is giving everybody time and apparently omb will defer their pass-back, the vise they give to agencies about what agencies are supposed to, do they're deferring it until the appropriators have marked up the 15 bills in january. >> and what it means is they increasingly make themselves irrelevant in the defense authorization bill and handing their power back to the d.o.d. to sit in the driver's seat. and the defense department is going to dictate those, where they could have laid out their priorities at a reduced bill, marking it at a lower level and the appropriators are in the drivers seed in 2014.

>> what a surprise. >> he . >> they could get back into a normal psyche until 2015. >> and the bill being rammed through on the floor, it sets a bad precedent. >> they're trying to make sure that they don't blow it for the first time in 52 years and they have compare lousily close close to blowing it. coming up next, afghanistan and qdir. stay tuned.

we're back with mackenzie egg land of the american enterprise institute, gordon adams of the simpson center and american university and lauren thompson of the lexington institute. before we get to the whole strategy. one last budget question. the service chief, worked very hard, lobbied very, very hard to avert sequestration. so did the defense industry is. this a partial victory with partial sequestration or did we end up here for reasons totally different? >> i think this is a bigger political deal. frankly i think it is always a bigger political deal. when the budget committees are making this deal i don't contribute a lot of impact to the defense attorney or the service chiefs. i think it is a bigger budget deal and everybody gets through the sequestration. >> here is how we mow it is partly true, the part of the deal that affects military retirees, pull out all of the service pieces, and political pieces, and they took them by surprise and probably not

support it by politically when they are asked in february. so this tells that you this was part of a bigger political deal. it was something that the super committee actually had looked at two years ago, as part of -- before the budget control act was taken into effect. >> and industry was divided. some of them pushed hard. some of them didn't want to push at all. so they get some credit. but it was mitigated by their own division. >> let's go to the question of strategy. this is a qua drenle defense security year and talks with iran could be taken off the table. and war planning construct for us, which is i have to go to the persian gulf because iran goes bananas, and north korea is obviously its own case and a very, very aggressive china that is coming up very quickly. and the military service chiefs have said if you got to cut our budgets this much, and we can't execute the war plan. and can they execute the war plans and does this shift standards and requirements at the end of the day? >> first of all, i think the

pentagon has been in a testimony qdir mode since the last -- in a continual qdir mode since the last qdir mode. >> and you could argue it has been a long time. >> and they have had the skimmer that we just completed. >> the strategic choices. >> and management. >> and management review. >> yes, skimmer. scammer. that's how we like to refer to it. >> and it is one more iteration. i wouldn't expect to see anything earth shattering or a huge deviation. i think it is a gradual evolution. >> budgets are driving strategy. strategy is not driving budgets. we're in an era of scarce budgetary sources and that will determine and drive where people are going to go in strategic terms but you don't write a qdir and then implement the strategy. >> they are doing that as they come to grips with the budgetary constraints. >> they have been cracking open war plans and reducing them down to meet the budgets and

how many times can they dial up the risk meter and dial down the strategy meter. we're kind of at the end if that. and in addition, the plans are not the only thing that the military the only thing that they need. there is the homeland security and steady state presence and they're already hurting with everything at once. and they continue to do so and accept for risk. >> does iran and china change the security dynamics fundamentally that we have to respond to? >> i think they contradict each other in a way, because iran, where i think there is every likelihood of this agreement actually getting to a permanent stage, because i think the iranians want it even more than the united states wants it, but the chinese continue to play at the edges of the perimeter as they have been doing are making some people very happy which looks like a major threat eamericanning and good for the air force and good news for the navy and not necessarily good news for the army. >> and it pushed the administration in the direction it wanted to be when it introduced the specific ideas in 2012, they said we will still be big in the middle east

and this pushes us back to the tides of china rising. >> and some of these war plan concepts driven by the combatants and commanders, canaled the president of the united states say -- can't the president of the united states make minor plans and the material requirement goes down? >> that is absolutely a big driver of some of the core structure that we have today, and what the combatant commanders say they need on a steady state basis. and regular peacetime. and that largely, that debate has been unconstrained for resources. >> one quick thing. we have less than a minute. afghanistan, karzai, is the united states there saying whether they sign or not or is this just an irrelevant debate? >> i don't think the united states can stay there if they don't sign and i think the size of our presence will be in fin it findon tesimally small. >> whether he signs it now or whether he signs it in april, does it matter? >> no. >> and the question is how

quickly do we come down and what do we come down in the steady state? >> and what is the supplemental funding. 80billion is what the army wants as a ramp-out. >> i think it is what the pentagon is waiting for and it will solve some of the readiness issues and nobody is talking about it in general. >> everybody time the talking goes through a cycle, it shrinks a little bit. >> and we will have no more in two years -- >> and no more in the base budget. >> thank you very much, coming up, my notebook.

the budget deal congress approved last week, would it usher in an era of bipartisanship? senate minority leader mitch mcconnell and house budget team paul ryan who teamed with patty murray to craft the compromise, both said they won't raise the debt ceiling without deeper cuts in government and medical entitlement programs cherished by democrat. ryan did the right thing by brokering the deal but blasted by the party to not do more by cutting the $17 trillion debt of the nation. mcconnell is in a particularly truck re-election race. the budget deal only found $85 billion in cuts and revenue increases over the next 10 years, including unpopular moves like pairing cost of living increases for working age military retirees by 1%, to raise $6 billion. it is also an election year. and the republicans will fight higher taxes and fees just as democrats fight medicare and entitlement cuts. that's especially the case because some democrats fear republicans are pushing them to cut entitlements as a weapon the g.o.p. can use to beat democrats in

november. so anyone who thinks defense spending will escape future cuts should think again. defense will remain a target. and the current deal may prove to be temporary relief at best. thanks for joining us for this week in defense news. i'm vago muradian. you can watch this program online at defense news tv .com or e-mail @ vag i don't at defense news tv .com. a word of appreciationing for rick bernard the founding editor of defense news who became the 35th recipient of the prestigious lineman award for excellence in aerospace and defense journalism administered by the aerospace administration. and he hired and mentored me and other reporters across the business. on behalf on all of us, especially at defense news, a heart felt thanks. your lessons are passed on to future generations as well. i will be back next week at the same time. and until then have a great week and a very merry christmas.

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