Hamilton, an important contributor to our project over the years. We have done it ends with him before. Job, he was the comptroller of the pentagon, the chief Financial Officer of the pentagon, during the five years of greatest fun one could have possibly had. When we think about stanford these days, we are thinking about katie ledecky. For all the great pain she has gone through in the swimming pool, i dont think it begins to compare to the pain bob has gone through in trying to injure sequestration because he was the guy at the pentagon who found a way to survive it. Some people would say he almost did too good of a job because it almost made sequestration seem. Olerable to remind you, sequestration is the automatic spending cuts that kick in to bring us down to a lower spending level if there is no other deal and this is all necessitated by that budget control act from 2011. Bob has been a distinguished and very patient government servant on some of the toughest issues in finance and in management of the pentagon throughout his career. Previously, he had been comptroller of the air force and director of the National Security division at the Congressional Budget Office. As my good friend, the president of the committee for a responsible federal budget. She also runs the fix the debt campaign. She has been one of the most tireless maybe the most tireless and persistent people favoring responsible fiscal policy in the United States for the last kid of decades and has been exemplary and how she has found many different vehicles through which to get the word out, including through a great deal of writing, a great deal of testimony with congress, coalition building, working with younger people whose future is perhaps most at stake in many of these conversations, and it has just been an exemplary sort of scholar activist on these very important issues. Im thrilled to have her. This one more time because Hillary Clinton has not yet been elected president i hope she will be soon. Thats my own personal view, but until she is, if she is, alice in my mind remains the most a congresswoman in american political life in our history, and im not exaggerating. Shes founding director of the Congressional Budget Office, head of the office of management and budget in the Clinton Administration, vicechairman of the Federal Reserve board, and when some people would have called it a career after all that, interspersed with a number of periods at brookings when she was writing on a number of issues of the day, and when she quote unquote retired from the fed, she decided to help d. C. Fixes finance issues. She remains one of our most distinguished and eloquent voices on matters about the economy and, certainly, the federal budget. We started by talking about the overseas Contingency Operation and then we will get into a federaldiscussion about budget policy and really federal Economic Policy and the future of our country, for that matter because that is what it is all about in the end, as you well know. I will just a one more thing beginning with a broad question, and by the way, i will do a quick advertisement for my little booklet, which is about the pentagon budget called the and nowlion bargain, you know all you need to know. My argument is we should spend about 50 billion a year on military, a little more than were spending now, and that raises the question if we are going to spend more on the military, what about the rest of the pentagon budget . Another 15 or 16 is all the other socalled Discretionary Spending that we do as a federal government, and that term, for those of you who do not follow not day in, day out, means optional stuff, necessarily, but programs, capabilities that have to be appropriated each year by the congress, and if they are not, then theres no money. Unlike entitlement, which is, along with interest, the other 2 3 of the budget, which are all the things we value as individuals, but which may, frankly, have less to do with longterm national power. If you are thinking about longterm national power, the strength of the country, at least i think about military, highways, infrastructure, federal support for education, which is a modest fraction of total education spending in the country, but all these things are in the socalled to mystic discretionary accounts, and therefore in my minor not so discretionary, and they are getting squeezed pretty hard through the budget process we have all come to know and love as the budget control act with the looming specter of sequestration hovering over our next every year or two. Thats the broad context, and now im going to ask my colleagues to expand on some of these themes and begin with bob. Noting you begin by have often said that the turbulence in the budget at the pentagon has been one of the greatest handicaps, leave aside the level, the turbulence and uncertainty. Could you explain more about that problem and how to solve it. Bob thanks for the chance to be here. If i was looking at the next administration and the issues they face, the most important would be finding a predictable and reasonable level of funding for federal agencies. I will focus on defense because i know it best. Since 2010, we have gone to the enormous turbulence in the department of defense, 2013, we had the sequester cuts which harmed in the Mission Effectiveness by leaving inefficient and funds for training, wasted money, we did not allow Civil Servants to work. At the time, many Senior Leaders could have spent time on better things. We need a reasonable, predictable level of defense and funds. To do that, we need a longterm deal. This includes mandatory spending, Social Security, revenues, and considers all of that in context of the deficit. In that deal, i would keep the budget caps, because i think the process needs discipline, but i would raise them for defense and probably nondefense also, probably to the levels currently proposed by the Obama Administration. Certainly put pressure on the overall negotiations. You would need to also look at some ups and downs. You may say to yourself, this guy has his head in the sand. With the divisiveness and a political debate, how could we see such a deal . I remain hopeful that we will get beyond this divisiveness. We will elect a president who will have to deal with these issues. I am at least hopeful that we will see a broad budget deal. I think it is the only solution. The other issue for defense in particular the next administration has to deal with is the future of the overseas Contingency Operations put in place in 2012 to cover the cost of the iraq and afghanistan war. I just wrote a paper and there are hard copies out there if you are interested. It is very important financially to the department of defense. Oco served the nation well, making sure it nature funds were available, so that those involved in combat with have the resources they need. I think theres probably nothing more important than the department to do. There were also some timing problems, the supplementals use before oco were enacted late, not enough time for dod to effectively put them in place. It has been harshly criticized because it has been used to get around the caps. Oco is not subject to caps, so we have put money into oco that shouldve been in the base budget. If you are interested, we can go into it more. So what does the new administration do . The ideal thing to do is to put oco back where it was but only use it for wartime needs. That would probably mean moving several tens of billions of dollars out of this war budget into the base budget. Given what i said, that they are already too low, i dont think that is practical. Regrettably, in my view, the administration will have to keep oco, try to keep it back in its box, maybe make some small moves, but i think a practical solution will require that it continues. We need a broad budget deal that helps defense and other agencies get more stability and reasonable levels of budget, unless the administration has to do something about the future of oco. Host one followup question. I would like to ask more about the paper itself, recommend it very strongly, a shorter version is being published on national interest. Org this week. A longer version on the Booz Allen Hamilton website. It is a very nice read. If you could summarize some of the key points, including out of that 60 billion oco budget, roughly how much has gotten divergent for purposes that would not be optimal . Secondly, if you have any notional sense about what the pentagon budget should be. I guess you said consistent with president obamas request. If you could spell that out for some with some rough numbers for the crowd. Bob they just set it higher than what they think the Department Needs. There is a lot of money in oco that is in a gray area in terms of its contribution to wartime needs. If you were to get it down to war needs only, i cannot give a specific number. I think it would be several tens of billions of dollars that you would need to move out of oco and put into the base budget. The reason you do not want this money in oco, several reasons, but the most important one, dod tries to do longterm planning to have a consistent fiveyear plan, so you dont buy a bunch of stuff you cannot support in the out years. It is hard enough to plan wartime needs one year in advance. If you start putting large amounts of the budget in oco, you lose all of that consistent plan a, you lose the budget discipline. I think it is just a bad idea. Paul ryan, when he was speaker of the house, said that he was using oco to undermine some of the budget needs. To the greatest amount we can, we should avoid it. Michael do you have a number that you would be culpable with with the pentagon budget . Bob i would be comfortable with the Obama Administration proposal, summer in the 540, 550 range. Michael there is a handout, for those of you here in person, which tries to summarize some of the numbers. These get confusing. Bob just gave the cunning on base budget, so he did not include the oco fund in that, and also not the Nuclear Weapons activities of the department activity. I tend to pull them together, if you want to look at it in a global sense, the National Defense function. That is summer over 600 billion. Once you have added the base budget, oco account, Nuclear Weapons activities. That does not include the veterans administration, which is another 175 billion a year roughly, which is not relevant to future defense needs, but the debt we owe to those that have been wounded or killed, their families, in previous military operations. It also does not include the department of states foreign assistance program, including security assistance, two countries we are working in partnership with. It also does not include the department of homeland security. So there are a lot of things related to defense not within that 0505 budget. They are all in nondefense discretionary, so everything is getting squeezed. Anyways, depending on what number you are looking at, the definition, in broad terms, i would say defense spending is just over 600 billion a year. That is considerably above the cold war average in inflationadjusted dollars. I still think it probably needs to go higher, as bob argued. Now lets broaden further. I want to ask alice what she would think of as an Adequate Funding level. We will get into the issue of the budget control act and what the next president should do. Even though you may not to give a precise answer, i was reviewing the Historical Data on how much we spend on nondefense discretionary. As a percentage of gdp, in the 1960s, it started in the low 3 range, went up to 4 in the johnson administration, 5 during that liberal Richard Nixon presidency, stayed up there through the 1980s. Ronald reagan never dropped it below where it is today, about 3. 3 of gdp. It has been in that range until the Obama Administration got into the low 4 . Now it is back to about 3. 4 of gross domestic product, and it is headed down to projections of about 2. 8 , the lowest level since the Eisenhower Administration relative to the size of the economy. So that raises the question of how much is enough for these domestic investments. Alice with all due respect, mike, that is a silly question. It would be nice if one could say, here is a number. There is something sacred about this number. It is silly on both sides of the budget. I once sat down with a group of defense experts, people with stars on their shoulders. I was the economist in the room, and they said, just give us a number for how much we should spend four defense. How much we can afford to spend on defense. Then we will figure out how to spend it. That may sound reasonable to them, but what you need to spend for defense depends obviously on what the threats are two the country, and how we think we should be dealing with them. We are spending roughly 3 of our gdp on defense right now. There was a time when you did not mention mr. And the cold war, when you are spending 10 of gdp on defense. We perceived that we had to do that. We do not perceive that now. The domestic side of the budget is roughly the same situation. In my opinion, the two big problems facing the u. S. Economy, as we look ahead, are we need to grow the economy faster. There are various ways you can think about doing that. But there are some obvious ways that we are not doing. We are not modernizing our infrastructure, roads, bridges, highways, train systems, sewer systems whatever. All of those need to be modernized. It would create some jobs in the process and some not bad paying jobs. Infrastructure is essential to looking at the future, as is development of the skills of the workforce, staying on the forefront of science. That does not tell you exactly what you should spend it for. You should spend it well and on sensible projects. We dont always do that. That is the question we ought to be talking about. The other big threat that we are not talking about at all maya keeps trying if we go on doing what we are doing in the federal budget, we are facing a growing debt, and one that is growing quite rapidly looking down the line. Why is that . We have an aging population and we are committed to Social Security benefits, but more importantly, to Health Benefits for people as they get older. And we have an inadequate tax system which will not keep up with those spending needs which were already committed and is pretty inefficient system to into the bargain. The real conversation we ought to be having, and bob suggested this is how are we going to bring those to give your budget lines together in the future, with the needs of an aging population, and the revenues to support those. That is partly a question of can we deliver health care more efficiently . It is partly a question of can we have a tax system which is more progrowth, but also more productive of revenue than the one we have got. The answer to that is yes. We had a lot of conversations about that five years ago when we were in the simpsonbowles mode. The president was talking to speaker boehner, everyone was trying to get to the grand bargain. We did not get there. The budget control act is a bizarre piece of legislation that was supposed to get us to the grand bargain, to say we will create some cuts in domestic and defense spending that are so unacceptable, nobody would want to do them, and therefore, they will get us back to the table to do the grand bargain. Maybe it was a nice idea, i thought so at the time, but it did not work. Now it has gotten us focused on the discretionary part of the budget, both defense and domestic. Discussing things like the problem of the overseas Contingency Operation, which is essentially a problem of how the Defense Department was able to live with unrealistic caps and cheated a bit in the bargain. Now we will figure out how we get back to something sensible. Something sensible is talking about what we want the government to do and how we want to pay for it in the long run. We cannot be incapable in doing that. Michael if i could follow up on the overall budget, i want to make sure i understand, whether you think the current track we are on for Discretionary Spending is acceptable. Alice no, i think it is much too low. That is because of the need to invest in the future. If we just let these entitlement programs, which are mainly for older people, and i am one of those, if we just let those escalate without inking about how we control the spending, then we force out investment in younger people and investment in the productivity of our economy. Nothing could be stupider than that. Michael bob has talked about being content with obama proposal numbers on defense. I would maybe go a little higher. We are talking about a few tens of billions added to the annual budget. You have a rough order of magnitude for the domestic side . Alice no, i dont. I think you need to look carefully at proposals for what you would actually invest in, and it should grow slowly over time, as you get more experience in what works. People are talking now about bringing private sector money in through an infrastructure bank. I dont think that is a bad idea but i dont think it will solve the problem. I do not have an exact number in mind, but it has to be a balancing act between what is productive spending on the one hand, and how much can you slowly grow spending in the future, so that you are not getting onto a worse debt trap and we are already on. Michael you may not want to give an exact number. Do you think it is the same kind of magnitude that we are talking about on the defense side, tens of billions of dollars, plus or minus . Alice that is a largely political question. It will be roughly the same magnitude because that is the way congress thinks. If we raise the caps on one side, they will be raised on the other. That doesnt mean it is the right number. But on both sides, we need to think about what we should not be doing. As we invest in the things that are high priority. Michael my act, id love to get your general reaction to the conversation but also interested in how you would prioritize your Major Economic concerns for the country, looking forward. Maya thank you. Nice to be with all of you. I will do but somebody does whenever they follow alice rivlin, which is pretty much reinforce everything she just said. I will start by saying, i love spreadsheets. I love them so much, my favorite gift of recent years has been from a colleague who gave me a coffee mug that said i love spreadsheets. I assume that was custom made. Another colleague ran out and got an even larger coffee mug that said i love spreadsheets more. That is how fun it is where we work in the budget world. That is how we think of things. Certainly, when youre talking about security policy, its a great reminder that that is not where you start with the question of the budget. The budget should be bottomup. You need to look at what your priorities are and figure out what is important. That is most true probably in the issue of security, where the last thing you want is budget experts telling you what your security number should be. You want to think through your security threats, longterm investments, come up with your security budget, and budget responsibly around that. I also think that is true for the rest of the budget. We need to think about what our National Priorities are, prioritize them, establish which one we are willing to pursue, and then from my perspective, think about how to pay for those things in a fiscally responsible way. With infrastructure right now, there is a broadbased agreement, and there is a good thing there is a broadbased agreement that infrastructure is an important priority. Well get into politics and what would happen under the next president. If there was an area that was most likely to move first, that would be the area. When you are also seeing is the oneupsmanship that will happen in infrastructure. I think we should spend as much on it. Somebody else says i think we should spend twice that. Suddenly, we want to spend 100 times more on infrastructure. Part of the discipline process is what we want to spend the money on, evaluating it, looking at the returns, and thinking about it as the overall objective of the budget, which is growing the economy and doing important things to meet the needs of people. Economic growth is critically important. I also think bringing a lot of issues of economic security, which we are hearing a whole lot about in his campaign, are very true and real. All sorts of policies that we need to think about that reflects the change in the economy. The pace of change is so much faster than anything we have seen and we have not updated our social and economic policies to reflect the changes that people are going through. I believe that what contributed to growing the economy in a fair way as well. You also have to think about the fiscal piece of it. Where we are fiscally right now, you would not know it from the headlines. There is a whole lot of talk about how deficits have come down. Anyone that has read the recent cbo report knows that they are coming back up again. This is quite predictable. Whenever the pressure comes off, congress started borrowing more and more, and we put in place legislation last year we had a budget that was supposed to save over 10 years 5 trillion and bring us to a doubt budget. I would argue that is probably an overaggressive goal. I think that is backed up by what congress did, pass legislation to add another five chilean dollars to the debt. There is a whole lot of questions about how you are going to do with the fiscal challenges that not only are reflected in the growing deficit, but the fact that right now, our debt is a near record levels. Relative to the economy, the highest since when we came out of world war ii. And it is not as important as where we are today. We are still lucky. Even when we mess up the global economy, people come here. We are still the safe haven. That gives us an incredible luxury to get a hold of these risk of problems in a gradual way that will not derail the economy. So we can put in place longerterm plans that would get control of the record level debt, deficit, but we havent. So what we have today is looking forward a debt that is growing faster than the economy, that is the definition of unsustainable, Interest Payments that are the fastestgrowing part of the budget, even faster than health care. This is an incredibly vulnerable situation to be in. And we are not borrowing for smart investment. We are not borrowing for things that will help grow the economy over time. What i look at is the path that we are on is completely unsustainable, does not make sense, does not think about our priorities as a starting point. I come to the frustrating conclusion that many people have. In many ways, this is a reflection of a broken governance system right now. We have two parties that refuse to Work Together, even when they have shared objectives, shared priorities. They do not even disagree on the way to fix things as often as you would think. I often think there is an agreement in congress but they still walk away from the table. But there is an inability to Work Together on any of these problems together right now. I would summarize by saying, we have taken the easy way out. The brokenness in washington has allowed us to allow the ester to hit. It was created because it was a policy that was so Stupid Congress would never let it go in place. It was supposed to encourage more responsible choices on the big picture situation. Oops. They let it go in place. Instead of replacing it with something else, coming up with the appropriate spending levels, when we are spending more on discretionary and getting longerterm control of our events entitlement programs, reforming our tax code in a way to make us more competitive, grow the economy, and raise more revenues. Instead of doing that, we let the sequester hit. Now we are governing by default, only making choices when we have to, when there are actionforcing moments. Really overly focused on shortterm priorities. There is no longterm focus. This was your point. We need a longerterm set of objectives, longerterm budgeting, and put in place some kind of stability so you can make choices about security policy, Economic Policy, dealing with income insecurity. All the big challenges that we had. You cannot change if you you cannot make plans if you dont know if the sequester will be there or not. These are basically twoyear plans. There have been times when we are budgeting for three months at a time because congress cannot figure things out. And when we do the deals, they often rely on huge budget gimmicks, oco being one. The good news in all of this, if we start to make small progress, you start to see built on trust, better policies, more security, more certainty, and a whole lot of upside in the economy. You are not just doing this because fiscal responsibility is the right thing to do. You do it because it helps to contribute to a thriving economy. Now we have to figure out how to get that done. Michael that leads to my last question which i will ask you each one of you to comment on. It is the issue of, would it be tolerable to have a revision to the budget control act by the next president and congress, whereas the caps go up a bit, we find a way to pay for them, but they go up by smaller numbers, 20 billion, and that becomes the new cap, roughly 5 increase from where we are now. Similarly, on the domestic discretionary side whatever the number is. Is it acceptable to have a revision to the budget control act that keeps the basic mechanism, basic numbers in broad terms but justpluses up the discretionary numbers, or do we need to just get rid of it and have a whole new fiscal plan for the country . Probably all of us would agree that the latter is better, although i want to hear how you would react. It gets to the point of political practicality. Which ever is better, would it be also tolerable to have a revision to the budget control act, if that is the best we can get . Maya certainly, if that is the best you can do, you want a revision. When both sides cannot live with either the fence cap sword domestic discretionary caps, is to start with reasonable numbers. Offsetting the cost through reforms in other areas of spending would make sense, if it is not another twoyear deal. The shortterm deals to so much damage. What i really think is important, we need to do this bottomup. It does not need to be done like this over and over, but you need to think about the actual priorities that you want to spend money on. If you dont do that, you never have the chance to get rid of some of the inefficient spending which leads on forever in the budget, because we dont spend time thinking through that piece of it. I personally think spending caps at the right level makes sense. There is no actual right level, so it is a level that people can live with. The disciplining notion of a cap is useful. I think it should be paralleled on the revenue side. This is about spending and revenues. But what worries me is when you have caps on the discretionary side of the budget. Think about how easy it is for a policy maker to say, all we need to do is put in spending caps and live by them. They had not told you a single thing of what they would cut. And a small portion of the budget, not the portion growing, and they made it sound simple and free. We will put a cap in and the budget will fix itself. A budget is about tradeoffs. You need to say what kind of policy changes you would make to live within those cats, and then keep them as a disciplining process, so you have to go through your agencies and figure out what is better spending. An arbitrary cap does more damage than none at all. Michael bob, would you want to get rid of it were could you live with a revision . Bob i agree with my, you need a disciplining process. The effort to decide, in the case of defense, when you want to spend, should be bottomup. In fact, it partially is right now. Many of you participated in this process. The president picks a number in the beginning of the planning process, revises it later in the process at defense. In between, there is a great deal of bottomup effort which is abased, as best one can. There is never a simple calculus. I think there is a bottomup process, absolutely important to and my book tries to look at it in broad terms. In the end, i would keep a cap. I think discipline is important. Whether we need caps, we also need more debate inside the discretionary portion of the budget. Maybe i can set up alice by quoting an idea that she had, which i thought was good, which is that congress should start appropriating for the entitlement portions of the budget. Right now theyre on automatic pilot. At least it would force them to debate what are growing portions of the budget. Yes, we need caps, but we need them higher in the case of Discretionary Spending. We need to do something analogous in entitlement portions of the budget. Alice i think revising the budget control act depends of course what you mean, but revising the budget control act is a mistake because the act was a mistake. It does not relate to the problem of the whole budget. What you need is to scrap the attention that is being paid to Discretionary Spending, which is after all, less than a third of the budget. Not that i am against it, but the notion of revising the budget control act just keeps the focus on this one third of the budget, which is not where the focus ought to be. It is not what is driving the longterm increase in debt. I think we are all saying the same thing. I would revise the bca, repeal it, and replace it with a broader budget process that forces the congress to think ahead, and several decades ahead, about what we will do to put Social Security back on the firm basis. That is not a very hard problem, but it needs to be done. What are we going to do to control the cost of medicare and medicaid, so that we can make a decision every once in a while about what we want to do . That is not to say we want to punish old people. We want to think through what is the appropriate amount to spend, and the way to do that is to say here is what we want to spend, we will review it in five years. If we are off the track, then we have a decision to make about what to do. Similarly with the tax code and tax expenditures, we spend an enormous amount in the tax code on things like housing, other things that we are not spending terribly well, and we never get a chance to review it. I would not just revise the bca. I would say repeal it, and put that something that deals with entitlements, socalled mandatory spending, the tax code, including tax expenditures. Michael some of you would have a similar question, but i wonder if the only counter argument that i can think of to what you are saying is that you are now requiring reform in a number of politically contentious areas. Put that together, you dont have a new bill to agree on everything, so do we want to keep it until somebody can agree on tax reform . Democrats have wanted to raise rates on the wealthy. Republicans traditionally do not. Are you setting yourself up for paralysis . Alice that is how we got where we are. We have had paralysis for quite a long time, and that is leading us in the wrong direction. It is probably a total brick breakdown in any budget consideration of anything, worse than reconnecting the budget control act. Michael we will take to questions at a time. Wait for a microphone, identify yourself. You can address the question to one person or to the panel. Seventh row. The very nice tie. [indiscernible] you mentioned oco for the department of defense. I wonder if you have any comments about the use of oco for state as well in defense . The second question for the entire panel as well, you recounted the use of oco, the use of supplemental before that in afghanistan. We just reprogram the money. We do not have a mechanism for dealing with unanticipated major contingencies. As you said, the department of defense likes to plan ahead. Afghanistan in 2001, iraq, these do not fit into the budget planning. Do you have ideas how we could handle those more effectively than we do now . One last comment. Instead of automatic budget cuts, why dont we just have automatic tax increases if the budget cannot be balanced . Michael one more, and then we will go to the panel. Larry with accountability central. I would like to come at this with a different angle, from revenues. I did some research recently on the irs. They came up with a report that says a combination of unreported income and uncollected income from 2006 two 2010, every year averages about 400 billion. That is a huge amount of money when you are talking about 30 billion in raising the caps. A lot of that is because of the unfairness of the tax code. I think that is something that needs to be addressed. The other thing that will make the problem even more dire is the fact that the iris budget is being cut by 17 . It is not only the perception of unfairness, it is the perception of enforced audits. It is a crapshoot. The odds are more in your favor every year as long as they keep cutting the iris budget. If we look at it from a revenue income position, we might not be having the situation we are in now. Michael lets start with bob and work down the panel. Bob oco and state is a lot smaller, but as a percentage of state come is larger. In some ways, it is more important to state. On some issues, im less familiar on the details. I think department of state needs oco, just as dod needs oco, so that it can finance wartime needs. I suspect there would be the same practical problems getting rid of it, that is the state Department Budget would have a great deal of difficulty in absorbing those amounts. I think we would probably need to keep oco four states. In general, probably not enough money on the department of state, too much on defense, not enough trying to prevent war and negotiating, too much getting ready for it and fighting the we have to. In terms of unanticipated needs, if it really occurs in the middle of the year, you dont have much choice to move to an emergency supplemental. Congress is quite good when something serious happens. 9 11 is certainly an example. They made money available within days in that case. The oco mechanism should be maintained. It has gotten a bad name because it has been misused, but it has served the department well. That allow the department to make sure people in common have the resources they need, and that has to be critical. I think we should keep oco for state and the department of defense, try to restrain its use to just things directly related to wartime requirements, and for truly unanticipated needs midterm, we will have to use emergency supplementals. Maya i will make a quick comment on oco which may or may not be right, so if its wrong, correct me. I think, given where spending could allegedly fall into oco was going, it may increase in the coming years, so there may be more funds spent on isis or other things that can go into oco. If that happens, that will put some of the pressure assuming oco does not grow will put pressure back onto the caps. I just wonder where that is headed. Contingency budgeting is a critically important thing, and i will completely over simple five. Anyone who runs an organization you think about how you want for civility in your budget, so as opportunities or threats come along, you can meet them. We still do not do that well enough at all in terms of our budget. You can see that from fights going on right now, whether it is natural disasters, health care threats, we need to do a better and more systematic approach of building into our budget crisis funds, things that you dont expect, emergency funds, that are a certain share of your budget. You know these are the likely cause that will come but you dont know where they are. And you have that paid for. One thing that concerns me, it should not just be an excuse to not pay for something, just because it is important. There is a huge emergency. It is critically important we get funding to it. We should not have a budget that is built so that we dont pay for it and borrow it. Instead, we should have budget and resources for those emergencies ahead of time. On your question about revenues, its an excellent question. When we created the sequester, there was a judgment call that was made. Because you would include in the sequester acrosstheboard cuts to defense and domestic discretionary, both political sides of the aisle would not want that to happen. Presumably, republicans would be worried about defense cuts, democrats worried about discretionary, to overgeneralize. They did not put revenues into the sequester, i assume, because it was too hard to include them. I think that was a mistake. We did an internal commission at the center of a number of years ago, and we had a plan where you would have debt targets that you would have to get to, so that it was coming down relative to the economy. If you fail to get there, there would be acrosstheboard spending cuts and revenue increases. It was many of the republicans that were a part of the commission who said you need to have the revenue increases. That is what we will not be able to tolerate. We will not let the sequesters hit. But the lesson of sequester, there are two models. You fill it with bad that lawmakers will not get it in place. We have learned that we do not know how to make it bad enough because we allow them to be in place. The other thing when you built sequester, that you build ones that are pretty decent policy that went if they wanted to place. Smart triggers. If the government did not act and the trigger went into place, for instance, thoughtful reform to Social Security that would look at how you change benefits and a progressive way that would help the system head back toward solvency. If we are going to let those dumb triggers go off, it might be better to have smarter triggers in place. Alice back to unforeseen emergencies, there has been a bit of progress in budgeting for things like forest fires, floods. That happens, and you ought to be able to budget for a significant Contingency Fund that allows you to spend when those things happen. It gets reconsidered every once in a while, but the emergency legislation to which everyone attaches their favorite spending program, calls it an emergency. But as bob said, if you have pearl harbor, 9 11, you are going to have to do something really special. On the revenue side, yes, if we are going to have sequesters, revenue should be in them. But it comes back to my basic point. We should not be budgeting with gimmicky stuff that forces us to do what we ought to be doing anyway, namely, here are some big problems, lets sit down together we the republicans, we the democrats and figure out what to do. That is what we are not doing. We are not talking in bipartisan groups on the hill, between the hill and the white house, on how to solve the problems that we have. Until we start doing that, all of these gimmicks are going to be just unfortunate ways of coping with something that we are not doing. Maya none of us answered the tax cap question as well. Alice absolutely. If the irs had more money to do audits, we would be collecting more taxes. If hhs had more money to do audits of the medicare and medicaid programs, there would be less medicaid fraud. And that is not trivial either. It shocks me that doctors are willing to put in false bills, and there are places where they are, and they collect a lot of money. Nobody goes after them because the budgets are too constrained. Bob dod does have some contingency money appropriated for humanitarian disasters, which congress monitors. If it is spent, they add to it. There is some flexibility. Although i never would have said it as a dod comptroller, but there are relatively smaller contingencies in the operating budget where you can move money around. Libya is a good example. We spent a couple hundred million in operating cost. We screamed for a supplemental, the white house was unwilling to do it because they did not want everything attached to it, but we found a way to find the money. For smaller items, the size of the departments budget gives it some flexibility, although i would have disavowed that statement aggressively as a comptroller. Michael a couple more this round. These two gentleman. Thank you very much. Im elliott hurwitz, and it has only been 43 years since i took a phd in economics. First, i want to congratulate dr. Ohanlon for his article on foreign affairs, and i would like to ask any of the panelists about inequality. Inequality has grown significantly in our economy in the last kid of decades. If anyone would like to comment on that, i would appreciate it. Thank you. John harper with the National Defense magazine. My question is for michael and whoever else on the panel wants to weigh in, but based on what president ial candidates have said so far, what level of spending might expect from a Clinton Administration versus a Trump Administration . First, i would like to, that i had a coauthor. One of the things we felt strongly about is the army has been cut enough. The army today is smaller than it was in the 1990s. So in broad terms, it hundred thousand or so under ronald reagan, who was cut to about half a million under the Clinton Administration. It went up a little during the wars in the 2000s. Now it is around 450,000 active duty. Around 500,000 guard and reserve combined. The whole army is still around 100 million. But that is substantially less than the cold war and less than the 1990s. That is one area we see an argument in modest increases in spending. By the way, so you do not think the traders is about eating up his service, much of the article was his coined phrase was half airpower, half intelligence, which he credits for the success we have had in recent years. On the issue of trump versus clinton and defense spending there are important differences between those candidates. Im not sure this is one of them. I do not know that there is any great specificity in either candidates defense platform. I think both would like to argue they are improving the military. Trump has called it a disgrace. I think he is used rhetoric that does not hold up. But in fairness to trump which i do not often use that phrase it is a time honored tradition to identify problems of the military and exaggerate or emphasize them in a political campaign. Sometimes, good comes from that, because you get people to focus acutely at the shortfalls that always exist, even if you have a generally well resourced military. When i put all that together, i would expect either one of those potential president s to spend a bit more than we are spending now. To advocate a military if it larger and more expensive than the one obama prefers. That is just a guess, because as you know, this campaign is not producing quite as many specifics on every policy issue as we always get. Alice let me speak to the inequality point, which is an extremely point, and probably we should all emphasize early. We have had over quite a long period very serious increases in inequality, which is hardly at the top. In a lot of attention has been paid they are, to the 1 . Which i think there is overcompensation of high Corporate Executives and of the financial sector. Some of that is fixable in the tax code. Some of it is hard to fix. The more important problem is what is happening at the bottom. It is average wages falling behind. And particularly for people who are limited in education. That is not easy to fix, but it is fixable. We know a lot of things that will help. We can invest in the skills of everybody, but especially in those who have low skilled and are coming out of either difficult circumstances or have lost jobs as the economy changes. We should not throw down change. The idea that we can stop the world and globalization is fanciful. We need to be managing change. Managing the people and finding opportunities for people who are displaced, either by trade for technological trade, or anything else. To give them more productive futures. Maya first the question about the candidates. One of the things we have done is done a tally, a look at the candidates proposals and look at how it would affect the National Debt. I encourage you to go to our website and look at it. We are still looking for someone who has a plan to deal with the debt, because it does not exist yet. But there are some significant differences. On the area of defense, there just is not the specificity at all to figure out what would happen to the budget under either a President Trump or a president clinton. Trump has made comments, but both have said that we need to do more. Both can be true. I think it is important about budgeting. That there is probably every area were you should be spending more in some places and less than others, but there have not been any specifics that have allowed us to come up with a cost. Likewise, Hillary Clinton has said she would like to get rid of the sequester and would like to pay for it, but she has not said that she would get rid of it, and she has not talked about how she would pay for it. So we do high, medium, and low estimates. Sometimes, we estimate that she would get rid of the sequester, and sometimes we do not. On the question of income inequality, this may turn out to be one i believe it will turn out to be one of the most important issues of our time. A lot of times, you about issues, economic issues, affecting individuals. There are a lot of things people will talk about. Poverty. Economic mobility. Economic security. Economic opportunity. And income inequality. For some reason, income inequality is what people get most nervous about. A lot of times, you will hear people say it is not about income inequality, it is about mobility. But he has gotten bad enough that it really is about income inequality and all of those other things. There are different policies you need to meet those objectives. One of the problems that income inequality is leading to in this country is we are supposed to have an Economic System based on merit and a political system completely separate from your economic situation. I worry you are seeing cracks in those. We are in a fastpaced, changing economy, where it takes money to make money income inequalities are exacerbating it. That is a problem. You are also seeing it influence the political sector more than it used to, and in new ways. You are seeing the consolidation of income wealth is leading to consolidation of power. These are huge structural issues in our country that go to the core foundations of fairness. We are just scratching the surface of what we will do about them. Bob having watched Defense Budgets now for more than four decades, my sense is republicans would start a little higher, debate between threats with concerns about deficits, and then go down. Democrats tend to go the other way. In the reagan era, you saw that happen. It started high, congress brought it down. The democrats tend to start low. And then as threats and concerns come up, it goes up. I guess they will end up in roughly similar places. Given the threats to security now, it will be finally higher than where we are now. Michael lets do another round. I want to make sure i use the back of the room as well. But we will start in the second row. Then i promise you guys in the third and fifth throw, we will come back. Yes, sir. I am hank gaffney, 54 years in defense. One thing i have not heard when talking about debt, i read all of the articles. We are entering a period of secular stagnation, or are deep into it, and do not really know the way out. I the same time, Interest Rates, like 1. 37 on bonds, and it looks like it will be that way for a long time. I heard ben bernanke, in a brookings session, note that the National Debt would increase to 77 over the next 10 years. I am not sure with the big problem with debt is. Michael we will do one more question. Charlie clark, reporter from governor executive. Question for mr. Hale. Do the pentagon lobbyists and planners restrict themselves to what the Defense Budget ought to be, or do they take note of the fact that it is linked to domestic spending and revenue . Is it kosher for them to get into that at all . Michael lets start with maya and alice on the debt and then go to bob. Maya no surprise, Everyone Wants to borrow things that they wanted to borrow before. So what happens when there are emergencies and other things, everyone changes the story for why they want to do what they want to do. But there is some merit to the argument. There are rarely free lunches when budgeting in the economy. There are a lot smarter things we can do. But we cannot fix all of our problems without actually tackling the basic tradeoffs that comes from budgeting. What i do think we have on our side, because rates are so low and because we are still a safe haven, is not worry about our record debt levels today. Not look at our budget and say we need to cut spending and raise taxes immediately. But say we still have faith in our economy to deal with the fact that growth is not what it could and should be and put in place policies that will help get growth up now at the same time we put in medium and longterm plans to get our debt back down. Part of a conference of Economic Growth policy is how to grow the economy. One is to not borrow too much. There are arguments that are compelling that excessively high levels of debt slow Economic Growth. So you want to put your economy on a trajectory to get that debt growing slower than the economy. You can do those together. Put in place more spending, tax cuts, if you think it is the right thing, in the short term, as long as they are offset in the long term. The Biggest Issue is what you spend on. I think the argument you hear about is infrastructure. Lets borrow from infrastructure is lets borrow for things that grow the economy. Infrastructure is desirable because it has longterm effect and shortterm job creation. Jobs that tend to have good wages. But the problem with the argument that rates are so low, we can just borrow is we have already we have been borrowing so much for consumption, for things we should not have borrowed for, that we have kind of used up a lot of the borrowing space. If we had a budget where we pay for the consumption items but borrowed for the things that were actual investments, that would be a sensible budget. What is not sensible is to borrow for your consumption and say the rest is investment, so i will borrow for that as well. If you already ready borrowed for your spending splurge it is hard to say i borrowed for college when you have been borrowing for major Shopping Trips for years. The final thing is i encourage people to think about this issue the Congressional Budget Office came out with a report that shows spending in infrastructure is a good place to make investment, but it would help grow the economy more if it was paid for over a reasonable amount of time. It is like tax cuts do not actually pay for themselves. Borrowing for infrastructure does not pay for itself. You have to find a way to pay for it. The because rates are low, we have a longer time period in which to pay for it. Alice let me address what is wrong with the debt. Why we should not just have lots of dead. I think two things. One is you do have to pay interest on it. The amount of debt dedicated to debt service is not is rising rapidly. But it is not huge, because Interest Rates, at the moment, are so low. I do not think we can count on that forever. If you think about what a very large debt with even moderate Interest Rates, as we have experienced in the past, does to the federal budget you have to pay the interest on the debt. You have to pay that off the top. That means you cannot spend as much for all of the other things you need to do, including debts. That is a risk. Not an imminent risk, but definitely a risk. Way back at the end of world war ii, we actually had a larger debt in relation to gdp than we have now. But we owed it all to ourselves. Now, the holders of u. S. Government debt are all around the world. Other governments and Financial Institutions and other places. The chinese, oilrich countries, and others. That is a vulnerable position to be in. But i think the problem with the recruitment argument is it is a onesided argument. The problem with the paul krugman argument is it is a onesided argument. I agree that we ought to be spending a lot more on investments that will grow the economy, but i think we can do that at the same time that we rein in the longer run expenditures on consumption, primarily for the elderly. That should not be growing as fast as it is, and not growing faster than revenue. And we have to fix our tax system. So in the argument, the thinking is you can only concentrate on one thing at a time, and the only thing you can concentrate on is growing the economy at investing. I think you can do both at the same time. Michael can i follow up isnt there even a third argument, which is if we have another economic downturn and start at 75 debt, our ability to get through that without running the risk of losing a lot of Foreign Investment and driving the debt up to preposterously high levels of sacrificed . Alice yes. Look at what happened in 2008 , we went into the financial crisis with debt levels that were quite moderate. 35 under 40 of gdp. Just because of the recession, we ended up in the 70s. We cannot do that again. Maya and to add onto that, the number you said was that the debt would grow to 77 in 10 years. It would actually grow to 87 of gdp the next 10 years. If we do nothing, from the new cbo numbers, we are on track to borrow 8. 5 trillion the next 10 years, and the debt will grow more than 10 of gdp. That is before you have unpaid for priorities. In the point mike brought in is this is not about fiscal flexibility. We were able to deal with 2008 because our debt was in a healthy place. If the Business Cycle is a normal length, we are closer to the next downturn than the last downturn, and we are not in good shape to go forward with that with our debt where it is. So it increases the Interest Rates . Alice ben bernanke says that as well. Not about the cbo, but about projections of Interest Rates. The other piece of good news is Health Care Spending increases have come down. So we are not in as dire as situation as we were six years ago. But we have more time to fix it. That does not mean we should ignore it. Maya and in the newest cbo report, Interest Rates were projected to be lower. That made the deficit slightly lower. The sad news was the reflection of more dismal projections about the economy going forward. So lower Interest Rates are not necessarily a good thing. They are good in the immediate budget reflect, but it is reflecting the fact that we do not have confidence that we are growing the economy the way we should be. Regardless of Interest Rates, it is preparing for the next economic downturn that people have been identified. Bob so pentagon officials and talking to others. First, please do not use the word lobbyists. In the pentagon, it is illegal for federal employees. But they restrict themselves from talking about the Defense Budget. There are exceptions. Bob gates spoke out publicly, but for the most part, they restrict themselves. That is not mean they do have a debate. Part of their job is to lay out for the president and senior advisers alternatives, defense and nondefense, and the president s political advisers would certainly be discussing it. But pentagon officials generally restrict themselves to defense. Michael i want to add a note on that. Ben bernankes name has been tossed out a couple of times. He made the excellent point that much of the cold war, when defense spending was 6 to 10 of gdp, defense had a default science we do not think of it trying to build our future domestic economy, and americans surely did not want to have to pick winners, but implicitly, we put a lot of money into our longterm economic foundations, which spilled over into the domestic economy. But if defense is only 3 of gdp, you do not have the same magnitude of effect. Have to think about science and infrastructure strategies deserve more attention directly focused on them, because they are not getting it from spillover in the Defense Sector that they were before. That was the theme of the conversation for a while. So we will go to the front. Gentleman the third row and then the fifth. I am a union officer, and i think the real problem is getting stuff through congress. Even when you talk about infrastructure, there was a story today on npr about gas consumption being the highest ever, because prices are so low and no one is willing to increase the gas tax. The budget control act, at least from the perspective of inequality and domestic spending, was set up to protect the domestic discretionary budget. That is why until congress is responsible, we still have to have a budget control act. As to oco, we want that to be as low as possible to increase the ceiling for the budget control act, to the extent we still have the act, so we can increase domestic Discretionary Spending. Thank you. Michael, you have talked about reforms, and alice as well, platform services, retirement, accounts that would make the military more efficient. Is there a trigger to induce that . In the current budget levels, we are perhaps not investing too much in retirement. Thank you. Michael maybe we will take one more, because the first was an eloquent comment. Right here. Yes. Tom olson. A lot of European Countries spend a lot less money on education, on defense, and on medical care, and they seem to have more equality and, somewhat say, better lifestyles than america does. So what would happen if we started to spend a lot less on education, medical care, and defense . Wouldnt our economy suffer from that . Michael i guess we can work on the real. Briefly bob hale will want to comment, i am sure, because he saw a number of proposals by the pentagon to congress to make modest reforms in personnel accounts, and they often did not go far. Like the base closure proposal did not go far. There are a number of reasons, some valid. That we realize we were asking a lot of our men and women in uniform. Unless you could project a commitment to sustain good compensation, people could easily get nervous that we were not being fair to them. I think the Obama Administration was fair to them, to be clear. But the politics, obviously, can be difficult. On retirement reform in the military most people here probably know that we have the oldfashioned system of you do 20 years, you get a nice pension. If you do 19. 5 or less, you get zip. I do not think that is fair. My first concern is equity and fairness more than saving money. There are commissions that have looked at ways to save money, recognizing that retired officers make a pretty nice pension. Many come out in their 40s, and there is room to rethink those pensions. But we should at least give a modest 401klike benefit for the person who did eight years and got out and may not have as good an economic path going forward. On medical, i do think you save a little. Maybe a higher copayment. Bob has seen the difficulty of getting even modest proposals through congress. And looking at Nuclear Weapons might be more economical. Tactical aircraft. If you put a number of things together, and you get base closures, you may be able to get several billion dollars in savings that are sustainable and stay at that level. You will do well to approach 10 billion in the aggregate of those reforms, which is why i still favor a modest increase in the Defense Budget. Alice i would subscribe to the importance of pension reform. And i think there is savings to be had, and improved care, in reforms to the dependent and Retiree Health care. Let me get to the question about other countries, because i think it is complicated. Yes, much of europe spends a lot less on defense. That is because they have us to defend them. And they know it. So i do not think that one counts. They do spend less per person on health care, but they spend more, in general, on social services, childrens allowances, Early Childhood education, and social support, which is part of why i think they have less inequality. And why do we spend so much on health care and never seem to be able to have satisfactory assistance is for a lot of different reasons. We have a complex system with very High Administration it costs. And we compensate our Health Professionals extremely well. Especially specialists to you we use more specialists. There are other reasons, but it is a complicated question. And just saying if we spent less, we would have more equality and it would be good for our economy, it is not clear one way or another. Bob i think this administration has had some success. Congress did pass a modest reform in the military retirement system that provides a 401 k like vision for those of us with less than 20, and slightly reduces the pension for those with 20 or more. But restructuring copays, for example, Congress Actually mandated the use of mail order. Dod needs to continue that. They only to themselves, because themselves it to because they need the money. They over to the public, because public,we it to the because there are options for further reform. Hopefully, congress will cooperate. The history is if you keep trying, they eventually will. I think we will eventually get reform. They are running out of reasons to say no. We will see if the next president and secretary of defense pushes it. So there has been some reform. It needs to continue. Michael one last round and we will wrap up. The gentleman in the far back who has been waiting patiently. Then are my women friends in the room only going to make me call on men . This will not go well. So going once, going twice we will go to these gentlemen up here. Then we will answer everyones questions. One really technical question. When i think about debt structuring in the United States, we did away with the 30 year bond or treasury debt some years ago. With Interest Rates this low, would it he a good thing to bring that back . My second question is who is everyones secretary of defense nominee . [laughter] i have a quick question. It has been mentioned several times that we need to revise the tax system. Can we get some specifics . I was wondering how unified should the budget be, especially with entitlements . And should there be more and larger Contingency Funds . And like with dod, if you want to put an investment in place, you have a maintenance and replacement costs that are not immediately budgeted. Michael do you want to start, bob . Bob in terms of i will pass on the next secretary of defense. In terms of unification of the budget, i will give the same answer i did before. I think the Department Needs to argue for their own. The president needs to hear alternative views of what the Department Needs. But he or she has to defend on places like the office of on places liked the office of management and budget to bring alternative use of the balance. I think, in reason, that process works on its own. Alice headed omb, so she can take exception. But omb was free with their thoughts on alternatives to the president , which is as it should be. Maya writing about tax reform is brought in the base, lower the rate, and take some of that money to close the budget deficits. The tax base is swiss cheese. We have so many expenditures, credits, deductions they are incredibly popular. We need to broaden the tax base, but when you see that means a homeowner interested action, it is not so popular anymore. There is significantly over 1 trillion in lost revenue at year. That is a lot of money we could make up by getting rid of a bunch of the tax breaks that get no oversight. They are regressive. They pay people to do things they would be doing anyhow. They are not shocked or in ways that are thoughtful, and we never look back over them. It is difficult to do. Some of us came up with a plan that says if you cannot go through them one by one and make reforms, at least think about capping them. So limit tax breaks, relative to income, that people can get. That there would only be x amount of your income in terms of x amount of dollars. While i think there are a lot of things we have to do to reform the corporate inform tax, i think we have to think of different Revenue Sources the country needs. I love the progressive consumption tax. I think taxing more of what you do not want to consider what you do want is a smart thing. Consumption taxes can make sense, but they are regressive. So progressive consumption taxes, which are difficult to create but are nicer design. It is long overdue in this country. I think there are a lot of places we could go. The goal should be to increase the competitiveness. Taxing the things we want to tax. And raise revenue. Alice i agree. Let me underlying a couple of points. One is yes, the tax base is swiss cheese. And there are a few egregious things that ought to be fixed, like calling the income of Hedge Fund Managers carried interest, which is some kind of expense that should not be taxed. That is ridiculous. It would help a little on the equality problem. But there are actually only a few deductions that make a lot of difference. Deductions, exclusions. One of them maya has mentioned, the Home Mortgage deduction. It is a deduction, not a credit. So the higher your income, the larger your mortgage, the more it benefits you. That is ridiculous. We just went through a period in which we grossly overbilled high and housing in part because we subsidized it so much the the tax code. It does not mean we should not encourage homeownership, but you could convert it to a credit towards tax and design it so that it was not so costly and it benefited middle income people more and high income people less. That is a good idea. The other big one is the exclusion of your employers Health Benefits from your income. Which is a big incentive, to say, i want Generous Health insurance from my employer, because it is not taxed, and i would rather have that than wages. That is very unfortunate. Because it leads to overconsumption of health care. And, the people who benefit from that are the same people. High earners, particularly people who work for big corporations. So gradually phasing out that exclusion would make a lot of sense. Gradually phasing out that exclusion would make a difference. My copanelists and speakers today and thank all of you for being here today, i will briefly answer this last question about who might be secretary of defense. I am going to come to somebody else on the stage to might he, or at least i think so. People talk at under secretary of defense Michele Flournoy who womanbe the first secretary of defense. I believe she would be an serious choice. Carter i think is doing a good job where he is. President clinton that might choose to stay with the first situation a end of she doesnt want up with either of those two choices, the guy to my far right here today would be a pretty the choice. Take you all form being here. [applause] thank you all for being here. [applause] [indiscernible conversation] announcer on newsmakers, talking about the flooding in louisiana. Talk aboutsidy world the Affordable Care act, the following agenda for congress, and politics. Newsmakers today at 10 00 on cspan. 00 p. M. Democratic president ial candidate Hillary Clinton and feist president ial candidate tim kaine layout their plans for the economy. Steinreen candidate jill speaks from the warehouse the detroit. Into gary johnson continues in as tour, stopping at university in iowa. Watch on cspan a end cspan. Org. Of, the continuing impact agent orange and the other toxic chemicals in vietnam and laos years after their usage. Talking about the work helping andle with worst effects deformities sprayed with agent orange in those areas. Good afternoon everyone. Partnerships of for International Strategies in asia which is a program of the Elliott School of international george here at washington university. I am pleased to welcome you all this afternoon as well is the audience at cspan. It is an important issue and i am very glad that you are here. This is a timely session i would say, living with the 50sequences of agent orange years later. An update on the situation from the war legacies project. Decades,two collaborating with research institutions, government agencies, and Civil Society organizations to address emerging problems in international affairs. This includes climate change, human security. Also the consequences of war and conflict prevention. For our work in southeast asia, i would like to acknowledge the role the foundation has played in supporting those, particularly with respect to Southeast Asian issues