we asked richard gil to comment on the long-range significanceof productivity growth and factors possiblysing its decline. many people fail to understand the true significance of productivity growth because the numbers used to express it, 1% or 2% a year, seem very small. these small numbers involve ge changes inutput per capitaanliving staards over long periods. our historic rate of productivity increase ofetween 1.5% and 2% a year means a vefold increase in real incomes over the past century. producvity gwth is important. any decline in it is necessarily a matter for concern. but was the decline we obserd in the 1970s permanent orerely temporary? many factors were at work during the970s. the oil shocks made energy input much more expeive. pid inflation increased economic uncertainty. e composition ofheabor force with young and inexperienced new entrants was changing, and so on. on t other hand, ceain factors, for example, government regulations to protect the environment may be with us for some time. we don't know if the 1970s' high inflation will be our last nor what new supply shocks

. >> gil rozman, formerly of princeton. >> richard, when you brought up what china should think about what russia's doing, i think you underestimated what china is doing about that and one thing is strengthening military ties with russia so what can russia sell china? what is the possibilities, this is the main theme here of a strengthened chinese military through new connections with the russian military and how should the u.s. respond to that? >> i think what we'll do is just work down the row and answer your questions and any concluding thoughts. folks may have. i'll begin with one thought on u.s. military spending. i don't want to peg things to a certain percentage looking out indefinitely to the future. even if sequestration occurs, i'm hopeful that the dynamics of the presidential race will change the calculus of the united states, so it wouldn't last more than two years, i would hope. i think there is a case for modest, real increases in the u.s. defense budget and here's a very, i hope, stark way to put it. that i hope is compelling. a paying