That said we really want to take a chunk of the i]budget, go over it and see whether we could do ataq things more effectively whether we could do emphasize some priorities better. I dont think you could do the owhole budget. You certainly couldnt do it every other year. ut you could set up a mechanism the budget say every three years or five years to see if the money could be spent better and the priorities were what congress reallyco wanted them to be. Bob . Can i just ask you a quick question . So is what alice describes on the domestic side, is the military really any different . Isnt there a certain amount of the air force, the navy, the marines, everybody has to get their share of the cuts . Broadly, the budget shares havent changed a lot. Thats a fair statement. Within those shares theyve changed a lot. Let me try to respond. First off i think its way too harsh that suggest that ovq all only 1 of Government Spending has any effect. I will offer just a couple examples. One obvious one, we havent been attacked since 9 11, folks. Some other countries have, quite recently, unfortunately. Thats a tribute i think to both our intelligence and to our military capability. We got in and more or less almost out of two wars you may not like the results of them, accordance with the will of the administration, the president and the congress. So we do do a number of things t ight and i think its unfortunate that we suggest otherwise. In terms of accountabilrty, we absolutely know where were spending the money down to a great deal of detail. You may not like the results that you see. Thats a fair point. Kg and there are priorities set. I mean ini will give you a current example. We have ua back much5zoore on Ground Forces over the last few years than we have any others. That waj a painful decision, i can assure you, within the department of defense, but it was one consciously made based on a strategy that we felt in the aftermath of iraq and afghanistan we could afford smaller Ground Forces and still cutting but not as much the naval and air force. So i think alice is right, we can do better, but it is not as if we are just taking this money and sort of randomly spending it wherever we want and its not the case that theres no effect. Its easy if you mischaracterize someone. Thats not what im saying. Let me give you some examples. If we resort to specifics, i hate to do that, but if we did, budget that i think even alice would agree are ridiculous like farm subsidies. Just to be fai to peter orszag, peter orszag wasnt saying only 1 of the federal government bought anything. What he said was talking about domestic programs, we dont its only 1 we know actually works, right . Thats correct. But you have to think about that. A little bit. For example, one thing w p do is air traffic contrjy i dont think we are investing enough in modernizing that system, but very few airplanes fall out of nhe sky. And another thing we do is interstate highways. We probably arent maintaining those as well as we should, but you can drive from here to new york. We know what were getting for that. So its not i think its sort of silly to say we dont know what were getting for government programs. Theres a diffq ence between knowing what youre getting and you usq the example of air Traffic Controllersn we have several air Traffic Controllers that are using cathode ray tu 1n probably the only ones remaining in the whole world in airports thats why i said it needs to be modernized. You need to spend more money on things like that and less on things like agriculture subsidies. Michael you want to defend agricultural subsidies . Bob gave us three scenarios for what could happen to defense im sort of interested in what odds you assign on those whats going to happen this year . Yep , i think bobs right. I guess just to s ell out one or two of the options before congress, ron and i have done a little writing on this too. It seems to me this overseas Contingency Operations fund that bob talkedym about and where there is some play in what you use it for, but 4i . Complete liberty to use and abuse that term. You could have Congress Actually modify the law to allow a little oeven broader definition so for example, with putin doing what hes doing in ukraine, should we be able to say that any activity in europe by the u. S. Military, even routine training is essentially something we can fund through the account because until we have a new president in two ye aak i doubt we are going to have a fundamental repeal of the budget control act so theres a very good chance we have to live with the caps and np r t hahp hc therefore, our overseas your main safety valve. Its already helping. You can find a way to let it help more. You can define anything thats going on in terms of operations in europe essentially, as a deterrence related cost. And you could even do some of that with the asia pacific given there has been a fair amount of turbulence. Bob im sure can think of all the complications in doing this more easily than i, and is probably thinking about how i have been in a think tank too long and not in the real world and i realize but there are ways to stretch the definition. For example,e1 thetp rier goes from the United Statesjf to the persian gulf today or the arabian sea, and it flies a few cf1 o sorties or even just 10 of its whole six month deployment near afghanistan, as i understand it, the entire deployment could be counted and funded out of the oko. I think thats reasonable because to get to the arabian sea, you had to actually do that long deployment and so its not a complete abuse. Its not its not deceitful but it is a broad and somewhat lenient definition of what a war cost is. You could find ways to expand that. That may be the most realistic thing. I think everyones learned that sequestration per se is sz painful and so ineffective that what bob said is hopefully true, that the idea of congress appropriating above the caps and thereby necessitying this formal process of sequester which is as youx board set of cuts, and then Service Chiefs in the d. Ou m world have to implement this its crazy. Its just nuts. I would hope that for all of our disagreements, we co 3 n recognize there are legitimate disagreements over pa defense there is no legitimate ole for a sequester as the mechanism to go to a lower funding. Bob can you just talk a little bit about whats it like to be in the pentagon and have to deal with these across the board spending cuts . How much of a waste of time is it . Technically interesting, i have to say to a comptroller but the pricefa was way too high. Several things wente1 wrong in 2013 sequester and as alice said, all government leaders including myself, thought we wouldnt do it and so we didnt slow spending in the earlyq part of fiscal year 13. We didnt, ther ase we used in the pentagon, want to sequester ourselves. Well, they did it. Suddenly we found ourselves with six months to go in the case of the department of defense, a 38 billion cut exacerbated for d. O. D. Because that was the year we underestimated some wartime requirements and incidentally, the oko is outside of the caps. It does get cut by the sequester. I never understood the logic of that but the lawyers insisted so we saw l a cut in oko we had underestimated the amount. It all came together and had particularly devastating fnects on the operating accounts. We saw services do things we never thought they would. I] the air force stopped flying at 12 squadrons. The army stopped sending units through its National Training center. The navy is saying we are not going to send a second strike group to the persian gulf even though the combat commander wanted it. othere wereebn significant effects. Overall it was exceedingly discouraging and of course followed hard on by the shutdown. It was a lousy year. You autttauq that even though theres no formal oco escape e hatch there is always some way, emergencies or whatever, but lets say that the epublicans hold the line, that they want to stick with the caps. That . What are the practical consequences . I think the things that i mentioned likeok we wontb. Have our air force will continuq to be among the worst in the world. I think we are rated Something Like 13th in terms of efficiency. Our infrastructure will continue to deteriorate. Theres a recent report that shows we are Something Like 17th in the world in the quality of our infrastructure. So those are very concrete impacts. A lot of people are very concerned about nih. Nih, look at the budget of nih. Its shocking. It goes up its astounding how much it went up. Somebt hjjtt told me the president has a certain level,qn thencw the house gets it and adds to that and the senate gets it and adds to that and they vote and come out with the Congress Report and its still higher. Now for the last five years, at least according to the baseline its actually been reduced. It looks like a mountain and now its coming back down. Not as much as the mountain you talked about before on defense but its coming back down. There will be many many practical consequences. I dont think republicans will i talked to two pq staffers who are involved in the budget process and they both said the same thing that there will be ways they will be able to get you know, a buck here and a buck there and they wont ave to they will be able to say they lived by the caps but they really didnt live by the level have the cap n well, im less prone to think they will find ways around it but i think rons got some of the right things. What do you do when you have immediate needs that have to come out of your budget, whether youre a family or an institution . You generally let the maintenance go. You dont put on the new roof if its not actually leaking. We have been doing that for a long time in the federal government. And im not just talking about roads and bridges. Im talking about National Parks and as we said air Traffic Control and a lot of prisons and aok lot of things that we think need to be there and should be maintained in a modern way but we havent quite be able to do it. Now, if you look at the projections for the next ten years it will get worse and worse. We will put off moreko of the routine maintenance. We will just not do those things and at some point it will catch up with us. What about how this affects federal employees . I know theres a caricature of federal employees that they dont work very hard and arefa overpaid and they have too high pensions and stuff, but is that really true in the past given the caps and the shutdowns and jr computers do a lot of things clerks used to do. Its partly because they do work very hard. So any defense guys have a domestic question . I will turn the tables. Well, i would like to add on to what alice said regarding federal employees. First i distinguish between the military and civilians. We give a great deal of credit as we should to the military Public Opinion polls show its the highest rated organization in terms of trust in the United States. The civilians on the other side tend to be linked to government as a whole and the public has a lot of distrust for government. So i think they do get a bad rap. I think if you step back, i supervised many of them, watched many others during my tenure in the pentagon. They do a lot of things right. Some of the overall things we havent been attacked are certainly partially of their doing. But more specifically 80 of the work force in the Financial Management community, department of defense is civilians. They manage through some of the toughest budget times in the sequester period and before and after, i might add and its still chaotic budgetarily. A large percentage of the logistics folks are civilians in the department of defense. They conducted an exit from afghanistan. Again, you may not like the results of the war but they got us out of there in a landlocked country where we had extreme problems logistically. I could go on with other examples. I think federal employees do a lot right and as managers, as a former manager one of my goals is to try to say that to them because they are we do see a degradation of morale and i think it is of concern in terms of recruiting new employees into the federal government. I think that the Public Perception among people who dont work for the government is that there are a lot of people who work hard and the incompetent people never get fired. That is true . That is a problem. I certainly wont sit here and say theres no improvements that should be made in the Civil Service. Two things need to happen. One, we need to be able to hire people more quickly. They worked that issue hard and made some progress its still not where it needs to be. And for a small number of poor performers, we do need to be able to fire them more quickly. It is just having managed a group of Civil Servants there comes a point and you know there are always a few underperformers, it is such it is so difficult to actually make changes or to actually fire them. Its just not worth the effort and the time it takes in management. So absolutely, we need to improve the Civil Service but we also need to tell the majority who do work hard and are getting things done that they are doing things right so they will stay with us and new people will come in. Michael do you have any domestic questions you want to pose . Yeah. Let me just mention two categories of spending. I would be curious if you folks have ways of thinking about whether the spending is high enough, too high, too low. Ron, you mentioned mental and nih Health Issues nih but im curious about science writ large, Energy Research other kinds of physical sciences research, whether we spend enough and how do we even set up a methodology to figure it out and secondly, Environmental Protection. That of course partly overlaps with Energy Issues with Global Warming kinds of considerations and trying to find alternative energy sources. But more generally speaking, how do you feel about the resources we have for Environmental Protection . I think they could be spent better but the effort to make sure that we dont have polluted air and polluted water and too many Greenhouse Gases going into the atmosphere seems to be really important. Now, people complain about the Environmental Protection agency. I dont think they are complaining much about the spending. They are complaining about regulations that could be simplified or about doing something in a more marketfriendly way. Personally i think we ought to have a carbon tax. It would be a lot more efficient and effective to control Carbon Emissions through raising the price by a tax than by putting the regulations on all of the coalfired plants. But we arent doing that and if were not doing it, then we have to regulate. I think the only thing to add to that that i think is important, you can count on there will be constant criticism and attempts to rein in the epa. I wouldnt be surprised if republicans might even try to cut their budget. But there will be a constant stream of criticism of the epa and overemphasis on environment and so forth. The republicans have been very bold about this in recent years and i dont see any sign of it stopping. Alice, isnt one of the perverse effects of the caps that theres this everpresent temptation to do tax credits and then they are accused of having a complicated tax code because doing the same thing through the tax code doesnt count against the spending caps . Absolutely. If you think something is a federal responsibility and we ought to be doing more of it now its very hard to say well there ought to be a Spending Program that does that. But sometimes you can accomplish the same thing by regulation and sometimes you can accomplish the same thing by adding one more provision to the tax code and we have been doing that for decades, and the result is that we have a tax code riddled with special provisions which are essentially Spending Programs. We decided we wanted to favor Home Ownership so we made more generous deductions for your mortgage interest which benefit you more if you have a larger mortgage and a higher income. So we have a Spending Program which goes differentially to richer people with bigger houses. What sense does that make . I dont think very much but it is part of the fallout of not having a Spending Program. To give an idea of the magnitude of this, estimates run as high as a trillion dollars in losses in the tax code for exactly these kind of provisions alice is talking about. If we really have tax reform, ryan says we will have tax reform, i think they will take a run on it. If they do, they will pass it in the house, i think. Senates another matter. But one of the big things is they will get rid of some of the loopholes and it will be fun to watch. It was in 86. It will be very lively. What odds you giving on tax reform in the next two years . 1 2 at least. Ask the defense guys a question. There must be something you wonder about the Defense Budget. Wonder in the sense i want ron to ask you a question. Yes. I have a question. Explain to me how i have seen numerous articles in fairly reliable places Like National journal and so forth, i have never been in the department of defense, about the cost overruns on program after program after program after program. I think its pretty much accepted that you see the original estimate of what it costs for a new weapons system for example, and before you know it it costs twice as much or even more than that. How does that constantly happen . Well im afraid its human nature. First off, you are roughly righ