<html><body><A class=eResources href="http://www.aei.org/events/eventID.985/event_detail.asp">The Pentagon Budget Cuts</A> January 13, 2005 Unedited transcript prepared from a tape recording <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="25%">1:45 p.m.</TD> <TD vAlign=top align=left width="75%" colSpan=2> Registration</TD></TR> <TR> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="50%"> </TD></TR> <TR> <TD vAlign=top align=left width="25%">2:00</TD> <TD vAlign=top align=left width="25%">Discussants:</TD> <TD vAlign=top align=left width="50%">Steven Kosiak, Center for Strategic and Budgetary Assessments</TD></TR> <TR> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="50%">Michael O'Hanlon, Brookings Institution</TD></TR> <TR> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="50%">Loren B. Thompson, Lexington Institute</TD></TR> <TR> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="50%">Dov Zakheim, Booz Allen & Hamilton</TD></TR> <TR> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="25%">Moderator:</TD> <TD vAlign=top align=left width="50%">Thomas Donnelly, AEI</TD></TR> <TR> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="50%"> </TD></TR> <TR> <TD vAlign=top align=left width="25%">4:00</TD> <TD vAlign=top align=left width="75%" colSpan=2> Adjournment</TD></TR></TBODY></TABLE> Proceedings: MR. DONNELLY:  We'll get started.  My name is Tom Donnelly.  I do defense and national security studies here at AEI, and I'd like to welcome everybody to our discussion about the curious situation of the defense budget as we now are about to find it, and we'll talk a bit also about the looming Quadrennial Defense Review. Just one very brief procedural note.  Because of Dov Zakheim's schedule, we're going to give him the unique opportunity to speak first and completely for about half an hour or so.  Dov will talk, and then we'll have a bit of Q&A from the audience, and then the penetrating cross-examination by the rest of the panel, and then when Dov has to go, we're essentially going to re-boot and start all over again.  But we've really got a distinguished and knowledgeable group of folks to speak about this subject.  Not only do we have Dr. Zakheim, but with is Michael O'Hanlon of Brookings, Steve Kosiak from the Center for Strategic and Budgetary Assessments, and Loren Thompson of the Lexington Institute.  Their bios are in your packets, so I won't attempt to try to remember them all, but, really, we couldn't find a more experienced or insightful group of analysts to try to bring both some passion and some understanding to these very complex questions. And so I will be quiet for a bit.  Dov, the microphone is yours.  Let us proceed. MR. ZAKHEIM:  Well, thanks very much, and I do apologize for having to leave a little bit early.  It's with trepidation that I leave because the folks all to my left--I think the seating had something to do with politics--are all very, very good friends and top-level analysts, and that's a scary combination for me because as friends they've always been blunt and as analysts they've always been sharp.  And so I expect that I will have to somehow see these proceedings to find out exactly what really happened. I'm also in the presence of quite a few friends of mine in the press who were probably more used over the last three years to seeing me get up there and flip slides and do my ritual.  It's going to be a little different today, folks, primarily--not only because I'm not longer the comptroller, which is self-evident, but because I'd like very much to address some of the issues that have arisen over this purported leak of a budget document.  And there are a lot of myths that have sprung up, things that have been told to me either first- or secondhand.  And I want to address some of them.  It will give you a feel not only for some of the budget issues, but also for the budget process itself. I've been told, for example, that this new document that appears--it's called the program budget document.  My office used to produce them.  They still produce them.  I used to sign them with the exception of some of the more controversial ones that I heroically passed on to my superior, Paul Wolfowitz.  I've been told that this was just a trial balloon, that this wasn't serious at all.  Other people have told me, well, you know, this is cast in concrete.  The truth is neither. These documents are signed and they indicate 95 to 98 percent of a decision.  But until the very last second, or as people in the press would say, until this is put to bed in the budget, things can and do change.  And then what is issued is, not surprisingly, a revised document. So it's not a trial balloon.  If it were a trial balloon, it would not have been issued the way it was.  But it's not final either.  Bear that in mind. Now, one of the arguments that I'm hearing now is, well, this is all phony, anyway; these cuts aren't real; they're all in the out-years.  I was just telling Mike O'Hanlon here that when I was comptroller, most people hand out little coins.  You can be a general or a sergeant, and you hand out a coin.  I figured I was the comptroller, and coins were too heavy, anyway; we deal in bills, not coins.  So I started printing my own bills, and I called it "out-year money."  My colleague at Treasury once asked me whether I was breaking the law, and I said, "No, because it says at the top this is illegal tender." [Laughter.] MR. ZAKHEIM:  The point is, though that out-year money many people consider to be funny money.  And so the argument that's being made is, well, this is all in the out-years, look at some of these programs:  the F-22, it's not being terminated supposedly until after this administration's term is over, and these sorts of things. Well, I would argue, first of all, that the cuts are real, and let me give you a little background as to why they're real.  In the first place, there's no getting away from the fact that our estimates about the cost of Iraq were very different a year ago.  In fact, we were running a billion dollars less a month in Iraq than we are today, and a billion dollars is a low estimate, frankly.  So that means that on an annual basis we are running approximately $12 billion plus, if we sustain the same number of troops, than we were a year ago. In October, I believe, of 2003, the monthly cost of operations in Iraq dropped below $4 billion.  We are now above $5 billion.  That's real.  It's not exaggerated.  Those costs tend to fall into two primary categories:  personnel costs and operations and maintenance costs.  The personnel costs have a particular sting to them because, to the extent we use reserves, we are paying them as actives, which is considerably higher than what they would be making doing their two meetings a month, plus all the benefits that they receive.  Operations and maintenance, pretty obvious.  We're paying to maintain all the systems we've got out there. That tells you right there that if you're going to look for money, you're not going to look in the operations and maintenance accounts, and you're not going to look in the personnel accounts, unless you can find something that doesn't relate to the troops on the ground that is in the operations and maintenance category.  And so the reports--and, again, as I say, until it's finalized, it isn't finalized.  Yogi Berra was right about this one.  It ain't over 'til it's over.  But the reports that point to the reduction of a carrier do make sense in the sense that this is operations and maintenance money. Now, the other major element, which, again, can't be wished away, is the deficit, and it does create pressure, and it creates pressure now just on the baseline budget but on defense spending as a whole because the deficit adds to the national debt.  And whether you call something emergency spending and it's on-budget or not emergency spending or a supplemental or not a supplemental, if you're spending the money, you're borrowing the money, you're adding to the national debt.  And, again, these are outlays.  This is money that we're spending now.  This isn't what's called in the jargon "obligational authority," commitments to spend.  The real concern here is outlays, and that, again, reflects back into why you can't go after personnel and operations and maintenance and why the dilemma is so great, because they are the biggest source of outlays. Well over 95 percent of any given budget year's personnel costs are spent in that budget year.  Approximately 90 percent of the operations and maintenance costs are spent in that budget year.  So you would naturally look to those.  But you can't. Where does that force you?  It forces you to the acquisition accounts.  It forces you to look for money in places that aren't the obvious sources of outlays.  And those are research and development and procurement. Well, if you look at al these stories about this document, you'll see that it's very heavily oriented to research and development and procurement.  Well, then you'll say why didn't we cut everything this year?  Apart from the fact that you will be disrupting production lines, apart from the fact that you have in many cases bought initial parts last year for production this year, you just want to have something that's coherent and that is essentially smooth.  So people will say, well, but that means you can always retract.  Yes, you could always retract and you could decide next year that this was all nonsense and we're going to restore everything.  But, you see, the cat's out of the bag.  And while there are many people in Congress and in industry who will fight for particular weapons systems, the only way they're going to get those systems restored is if they go after other systems, because nobody's going to have, I think, this year the stamina either to go after personnel and operations and maintenance accounts beyond what's already being done or just to add money so that we have an even bigger deficit.  It's not good politics.  Which means that if you're not going to add to the defense top line and you want to restore System X, you're going to have to go after System Y.  And then guess what?  All the proponents of System Y, who are breathing a sign of relief, they will now all get fired up. The cat's out of the bag, and those who say that this was all a ploy by the Secretary of Defense, he expects it all to be restored, believe it or not, he's a very powerful man, but he's not that powerful.  The last time I checked, he doesn't control Congress.  The last time I checked, I don't know who does. Now, let's home in, just to be very clear about what I'm talking about here, on one of the most written about reductions, and that's the F-22.  And I know Loren Thompson in particular has written quite a bit about this. If you were only going to go after acquisition accounts, you couldn't go after the Army, which, frankly, is totally enmeshed in Iraq, has itself just cancelled a major acquisition program in Comanche, after having previously cancelled another major acquisition program in Crusader.  So you look to the services that are more capital intensive, which is Navy and Air Force.  So let's focus on the Air Force. The Air Force is committed now to maintaining two major contractors in the space program, even though economists will tell you that it's not the most efficient way to do things.  But for reasons of national security and the industrial base, the commitment has been made.  So that is a commitment that has to be funded. The Secretary of Defense has made very clear that unmanned aerial vehicles is a very high transformation priority for him, and I'll get back to this whole business of transformation and whether these supposed changes reflect his views about that or not.  But just for the moment, I don't think anybody will argue that unmanned aerial vehicles are transformational for the simple reason that when I was on panels like this one eight or nine years ago, no one seriously believed that the Department of Defense would spend billions of dollars on unmanned aerial vehicles.  So you've got that Air Force commitment. We've just gone through, shall we say, a traumatic experience with the tanker program.  That does not in any way minimize the fact that in this plan at some point, whether it's addressed this year or not, but over the next five to six years were going to have to address the tanker issue.  There's a cost there.  And then there's the whole question of how much mobility do we have, do we need, and there may be additional costs there. Well, once you factor all of those things in, where are you going to look for Air Force money?  Tactical aviation.  Not too many other places to look. Well, now, let's look at tactical aviation, and here's where the issue of Program X versus Program Y becomes extremely salient.  Essentially, there are only two choices to make:  Joint Strike Fighter and F-22. What happens if you go after the Joint Strike Fighter?  Well, not only do you upset all those states, all those Congressmen and Senators and industry that are involved in the Joint Strike Fighter, you also happen to upset some of our closest allies, in particular, the British.  The British are very heavily invested in the Joint Strike Fighter.  They also are very heavily invested in Iraq. Do you honestly believe that if the Pentagon had or would recommend reducing the Joint Strike Fighter, as there have been reports the Air Force wanted, that Tony Blair would not immediately be on the phone to George W. Bush and say, "Mr. President, the last time the United States did that to us was in the early '60s with the cancellation of a missile called Skybolt, and as a result of that, Prime Minister Harold McMillan applied for membership of the European Economic Community and changed the face of the Europe"?  Of course, deGaulle being de Gaulle didn't let him in the first couple of times, but eventually it happened. And how long do you think it would take for the President to the United States to say to Tony Blair, "I get you"?  And, oh, by the way, the Dutch are in it, too, and many other close allies, the Danes, for example. Well, once you do that, you discover there aren't all that many choices left.  And having, if they indeed will, as it's being predicted and reported, having committed to reducing the F-22 at some point, do you really think it'll be that easy to walk that program back, particularly in the years that are being discussed, when the space program, the tanker program, the mobility program, the UAV program, and the Joint Strike Fighter are all coming to a head?  All I'm trying to say here is that these are not phony reductions. Now, I mentioned transformation, and I'd like to talk a little bit about that.  As I say, there are those who argue that this administration has talked the talk about transformation but hasn't walked the walk.  Well, I happen to be a pack rat, and I looked at an unclassified briefing that I had received--I looked at it today--that I had received in 2002.  It was a transformation briefing that had been handed out all over the place.  And here are some of the systems that were listed -- [blank spot on tape] -- hawk.  Global Hawk is ongoing--it's back, yes.  Thank you.  Global Hawk is an ongoing program.  Nobody would argue it's not transformational. In that briefing, you have unmanned combat aerial vehicles.  We've put money into that.  Clearly transformational.  In fact, some retired pilots--I don't know what the ones who are active would say, but the retired ones see unmanned combat aerial vehicles as the greatest threat to manned tactical aviation, that is, to the jobs they used to hold. We had Cruise missile submarines, SSGNs, as part of our transformational program.  Those are moving down the building ways and were unheard of in the late '90s.  We have a Joint Training Center, and the whole program that Admiral Giambastiani has been pushing down in Joint Forces Command didn't exist in the 1990s.  Transformational. Laser communications, still being funded.  Transformational.  Striker didn't exist in the 1990s, really.  Transformational.  Krypto modernization, the global information grid, space-based radar, these are all programs that are still ongoing.  These are all programs that changed the way we fight, whether it's through training, through equipment, through what's called situational awareness on the battlefield.  These are big-time changes.  I'll bet you dollars to doughnuts they're still in the program. So some people allege, well, these reductions are essentially fostering the Secretary of Defense's original plan.  If these reductions bear out, then the answer is, yes, they are.  And then the question is:  And what's wrong with that? So why don't I take your questions for the next 15 or so minutes, and then I'll take them from my colleagues, and then I'll duck out of here.  Thank you. MR. DONNELLY:  Well, since this is my party, I get to go first, even above [inaudible], but I will try to be quick, and it's just a really general observation.  Certainly the tenor of your presentation is that the defense budget is still kind of a zero sum game and that even in the middle of a war, the politics of defense spending are fundamentally the same as they have been throughout the post-Cold War era.  And so I think your description is one that I would find quite accurate, but I'm puzzled why that's the case.  Why now can't we break out of that box? MR. ZAKHEIM:  Well, when I took over the Pentagon, I think our budget was something in the vicinity of $211 billion, give or take.  One of you experts will correct me--311, excuse me.  Actually, no, it was lower than that, but okay, give or take.  We are now pushing 500.  That is quite a jump.  In a micro sense, the politics are the same.  In a macro sense, they're clearly not.  I mean, to have increased in the vicinity of $200 billion in the space of five or so years--actually less, four years, in my view is not the same as politics as usual.  The country has accepted that.  After all is said and done, money for defense supplementals is still money for defense.  The country has accepted it.  The opinion polls don't show any revulsion against it. The real question is not whether we're getting more money, because there still will be more money; but to the extent that you're looking into the future and beyond Iraq, how do you look into the future?  How do you spend your money?  Do you simply buy everything, grab everything like a kid in a candy store?  Well, you know what happens to kids in candy stores.  Eventually they have stomachaches and throw up. It seems to me that in a macro sense there's no doubt that the defense budget is very, very large.  Half a trillion dollars is not trivial.  You know, it is so big that people can't even imagine the zeros.  But, on the other hand, when you're talking about programmatic choices and given the restrictions I was talking about, the inability and undesirability, frankly, of going after operations and maintenance and personnel costs, and given also, by the way--and I should have mentioned this--the fact that there's an inexorable increase in personnel costs, Congress in its wisdom has added, for instance, TRICARE for reserves. Now, let me tell you a little bit about this medical TRICARE program.  Not everybody has yet signed up, even in the active retireds, to TRICARE.  But they're doing so, and the defense health program costs upwards of $15 billion now. The reason not everybody has signed up was because they weren't sure it really would work.  And initially there was only like a 20-percent sign-up for it.  But, of course, 100 percent are eligible.  Every year the percentage of those who sign up increases.  So you now have a bill that is growing and that is pushing against the defense budget, and it's essentially an entitlement.  Moreover, each time Congress adds eligibles, that bill  increases that much more. And, finally, internal to the bill itself is the fact that health care continues to grow in real terms in this country, nearly double-digit figures on the medical side, over double digits on the pharmaceutical side. So once you take all of that into account, you're back to the point that the only things you can really think about are the acquisition accounts.  And, yes, if you believe I want to buy everything I see, then maybe we're shortchanging ourselves.  I happen to think that's not terrible efficient.  It's not particularly good for the country.  And what normally happens, by the way, is if you buy everything you see, you tend to buy the things you see more of, which means that you move further away from transformation rather than in that direction. MR. DONNELLY:  Very good.  We have time for just a couple of quick questions, so I'll ask everybody to follow the rules.  Ask a question.  Wait for the microphone.  State your affiliation for purposes of the transcript.  Dr. Barry, I will give you the first bite. MR. ZAKHEIM:  Now it really feels like a pretty conference. [Inaudible comment.] MR. DONNELLY:  Wait for the microphone. MR. ZAKHEIM:  He really thought he was in the Pentagon briefing room. MR. BARRY:  Dov, hi.  John Barry, Newsweek.  Could you address one of the issues Loren Thompson raised in his  (?)   pieces, and that's the industrial base issue? MR. ZAKHEIM:  Well, again, the question isn't so much the industrial bases, the industrial base.  It's a question of which industrial base.  And, obviously, as you move from certain types of programs to other types of programs, what you're doing is shifting the nature of the industrial base. Now, as I said, with respect to space, you can't go to Silicon Valley, for example, to have a viable space program.  I mean, maybe there's somebody out there listening to this who will say, Aha, I have a new idea, and then they'll raise money and have an IPO and, bingo, you have a new space manufacturer--satellite manufacturer.  But it's not as obvious. When you start moving to new technologies, to anything that has to do with computers, which is just about everything we do today, and you take into account the speed with which our processing capability just increases beyond exponentially, almost, you begin to see that the industrial base itself, in theory at least, can be much wider than a classic number of companies whose names we are familiar with. So that's really the issue.  It seems to me that with procurement continuing to rise, we have a solid base both for supporting a lot of the long-standing manufacturers we have, as well as with the money that keeps going into science and technology in particular, in early stages of development, the ability to move monies to other parts of the industrial base that for one reason or another have not been part of it. So I think the question has to be much--what you might say is a much higher resolution question than just the industrial base. MR. DONNELLY:  Right behind Stan.  You can be next so we don't have to go too far. MR. MULLIGAN:  John Mulligan from the Providence Journal.  That was a great Air Force exercise there, moving from the untouchables to the last candidate.  Could you do the same for Navy shipbuilding? MR. ZAKHEIM:  Well, in the case of the Navy, again, it's clear that the Navy was able to prove to the world, I believe, that aircraft carriers are not docks.  No one would have predicted that aircraft carriers could make the kind of contribution to a landlocked war as they did in the Afghan war; and that the kind of flexibility we're seeking worldwide is perfect for the Navy and for the large carriers. I think the Navy has got it right in supporting a littoral combat ship.  The idea of a smaller ship, which, by the way, will be built in larger numbers, for these continuing Third World contingencies again makes a lot of sense.  It also makes sense in the context of the war on terror and dealing with piracy and dealing with all sorts of contingencies that were not at the top of people's lists a half a dozen years ago.  The real issue comes down to what do you want to do about submarines and what do you want to do about classic surface ships. Now, the quantities are far lower than people anticipated years ago.  I remember the very first year I was in the business, I was with the Congressional Budget Office.  This was in the mid-1970s, and I did a rather simplistic analysis of different force-level possibilities for the Navy, and the low end was 400 ships.  Well, you know, that's pushing nearly twice as many as what the Navy is looking at.  But the ships that they have are far more capable.  They are looking at--the Chief of Naval Operations is a remarkable fellow.  I mean, he's looking at deployment options for personnel, forward deployment options, say the use of Guam, that, again, we analysts used to write about but he's actually implementing. So then the question is:  Well, you know, we've always had an Atlantic fleet, we've always had a Pacific fleet.  We've always kind of treated them equally.  Does the world call for that today?  Are we, you know, preparing to convoy ships to the Netherlands in order to defeat a Soviet attack?  Well, there isn't a Soviet, much less the attack.  So maybe we ought to think about a different posture for our forces.  And once we work that out, then maybe that will lead us down somewhat different paths in terms of the composition, the mix of the fleet.  And that applies, by the way, even to submarines. So, again, if the reports are accurate, they would not be inconsistent with a very different vision of the Navy, and I would say this:  The Navy and the Marine Corps and the Air Force are our hedges against wars that we're not fighting today but that we could again fight.  If we simply go down the path of putting everything in the sandbox of, you know, the Iraqs or Afghanistans, then we'll be making the same mistake we made before when everything was going to be, you know, a two-front war, in effect.  But if we're not going to do that, then having a flexible Navy, having a viable Air Force and a flexible one, becomes critically important.  What they look like exactly I think is still going to be the subject of a lot of debate. MR. DONNELLY:  Stan, did you want to--please be brief. MR. CROCK:  Stan Crock from Business Week.  There are a lot of people who think that it's unlikely more than 120 F-22s will be built.  Do you think this is the end of cuts for the F-22, and will the Joint Strike Fighter eventually be touched as well? MR. ZAKHEIM:  Well, eventually is a long time.  I don't know what the F-22 number's going to be.  Depending on what happens with the deficit, depending on the force levels we've got in Iraq over the next few years, the number could very from what's being mooted today. I do think that touching, as you put it, the Joint Strike Fighter is an option in extremis for the reasons I've given.  We will guarantee that no one will want to be our close ally if we double-cross the allies that are involved in the Joint Strike Fighter.  It's as simple as that.  So it would have to be something done in such extremis that our allies would understand.  Right now I don't foresee that.  Things can change, but it's hard to foresee. MR. DONNELLY:  Gentlemen, I propose that we yield back our time for the purposes of allowing a couple questions from the other side of the room, and then we can kick sand on Dov's chair after he's gone.  Could we try the far side, this gentleman back there? MR. BAER:  Gordon Baer, Amy retired.  Would you address the service allocation of the defense budget, sometimes viewed, historically at least, as sacrosanct?  War on terrorism, do we need more green suit and less blue suit? MR. ZAKHEIM:  That's historically viewed as sacrosanct, but more important than that, the shift amongst the services hasn't been particularly radical.  Whether it's sacrosanct or not, that's been the reality. Clearly, there is a need to make sure that we have the wherewithal on the ground, because that's where this war is being fought, as well as the 17,000 in Afghanistan.  And it's clear, at least it certainly was clear when I was there---and I don't think it's changed any--that we will do what it takes.  And since that happens to be land force heavy, we're going to do what it takes. I don't think that it is a deliberate attempt to somehow beef up the Army.  You know, the idea that all of a sudden were biased toward the Army is as misplaced as it was in the first couple of years when I was in the administration, that we were biased against the Army.  I think what you are seeing, though, is that--and I think most of my colleagues will agree--that in the late 1990s, there was a sense that the Army was not the most forward-thinking of the services.  And when you spoke to three-stars and two-stars, you got a sense of drift.  Part of it was their drift.  Part of it was that the political leadership never really told them what it wanted.  You know, one time it was a war on drugs.  The next time it was peacekeeping in Bosnia.  It was here, it was there.  There was no real sense of direction, and that's pretty confusing. I think the Army, particularly under this Chief of Staff, has a very clear sense of what it wants to do, and he has stepped out smartly.  And it's interesting how he's done it.  The first thing he did was go after force structure, and he's trying to make changes that some people had argued for for years and that really are radical and they're being funded. His next step was to look at Army aviation.  Now, some people have said, well, you know, the Army never really liked Comanche.  But, boy, for something they didn't like, they kept it alive for 25 years.  Just imagine how long it will take to build something they do like.  So he's gone after that. Now he's looking at what does he mean by a future combat system.  Well, a lot of people are saying, well, is what was mooted really what we need?  So he's going about this very systematically, and no one is saying that the Army is the most backward-looking of services anymore. So if you take the combination of the fact that you really have an innovative Chief of Staff and you have these demands on the ground in Afghanistan and Iraq, you begin to see that the money is shifting.  But it's not because somebody picked up a piece of paper and said, Oh, my God, you know, the Army is only 26.225 percent and they really need to get back up to 27.3.  That's not how it works. MR. DONNELLY:  Let's do one more quick one, and I'll try this gentleman right here.  And please wait for the microphone. MR. ZAKHEIM:  And I've got five more minutes. MR. DONNELLY:  Okay.  Please be brief. MR. TOM:  Mark Tom (ph) with EDS.  My question is you mentioned about personnel and O&M being on the chopping block if you're not in Iraq--or, correction, that base needed for Iraq, troops on the ground, related troops on the ground.  If you are not related--if you're in O&M and personnel and not on troops on the ground, are you definite on the chopping block and going to go-- MR. ZAKHEIM:  Well, I don't recall saying that O&M not related to Iraq was on the chopping block.  I simply said that O&M--that the O&M accounts had to support what was going on in Iraq.  There's a lot of talk about, you know, contractors being cut and that's O&M money.  I mean, here you have a real dilemma.  The Pentagon has for the last few years, as you know very well, Mark, tried very hard to outsource.  Okay?  Well, if you're going to cut contractors, how are you outsourcing?  You're caught be a rock and a hard place, literally.  Just to give you one program, the whole idea of freeing up military people by outsourcing their jobs so they could then go and become, in effect, shooters as opposed to back office people, well, that clashes directly with the idea of cutting back on the outsourcing. So I think there are some real dilemmas here that need to be worked out.  Again, it points to the fact that it's very hard to go after O&M of any kind.  That doesn't mean they won't, but I think to the extent that there is some reduction in these sorts of activities, I think it's with the utmost reluctance. Do you want me to address my colleagues now? [Laughter.] MR. ZAKHEIM:  Wait until they've thrown some sand? MR. DONNELLY:  Well, have a preemptive shot before-- MR. ZAKHEIM:  No, no, no.  I'm waiting to hear what they say. MR. DONNELLY:  Guys, you got anything that, you know-- MR. THOMPSON:  I have a question.  You kind of sidestepped the industrial base issue.  There's seven production lines going today for fixed-wing military aircraft.  If all of these recommendations are sustained, there will be exactly one at the beginning of the next decade for the Joint Strike Fighter.  And even that program, as you know, has had some developmental difficulties, so it's not a foregone conclusion there will be a line even for that. Without passing on the value of any particular choice here, isn't it pretty obvious that the administration paid no attention to industrial base impact? MR. ZAKHEIM:  Oh, well, I don't know if it's obvious.  It certainly wasn't obvious to me.  I think a couple of things. First, the remark about the shifting of the industrial base itself wasn't meant to be a sidestep.  It was meant to be a direct answer. Second of all, between now and the end of the decade is one long time, and predictions about the demise of the industrial base have abounded forever.  Now, let's take shipbuilding.  I got a question earlier about that.  It's true that in the 1970s we had about 26 or 27 yards functioning building ships.  We don't have that today.  But our shipbuilding sector still produces the finest ships in the world, and I suspect that we would never allow all the shipyards to go under and leave it just to--I don't know, pick your one yard, leave it to one yard. I would be very, very surprised if we were to sit down at the end of this decade, you were to turn around to me and say to me, Aha, I was right, you were wrong, we only have one production line left.  I will bet you that will not be the case. MR. THOMPSON:  All right.  That's a fair point.  But isn't it also a fair point that that's what these proposals amount to? MR. ZAKHEIM:  Not necessarily.  As I said, things shift and things change.  I don't think that these proposals will simply be walked back.  You know, once they get out there, they are uncontrollable.  But I think concerns about the industrial base are shared by the department with the Congress, and so I would be really surprised if you would find that kind of a shrinkage because it is a national danger.  We can't take that risk.  And that is, by the way, not at all to imply that we shouldn't buy things from folks overseas.  And, of course, we now have the phenomenon we didn't have, say, 20 years ago of major overseas companies essentially becoming American companies.  Look at BAE.  What are they?  One of the top ten contractors now with the Department of Defense. So even within the classic manufacturers, you're seeing all kinds of changes and metamorphoses that make it very, very hard to predict exactly what the industrial base will look like.  But I'm certain that it will remain relatively healthy. Secretary Cohen put me on a Defense Science Board panel looking at the health of the industrial base because toward the end of the '90s, everybody was terrified it was heading south.  And then all of a sudden, shares went up.  The bubble, the technology bubble in the stock market burst, and people ran right back to the classic companies. So these things, you know, the doomsayers are always there, but in practice it just isn't the way it works. MR. DONNELLY:  Loren, it will be much easier to win the argument after Dov leaves, so let's-- MR. THOMPSON:  I'm counting on it. [Laughter.] MR. DONNELLY:  So let's usher him out with a round of thanks. MR. ZAKHEIM:  Thank you very much. [Applause.] MR. DONNELLY:  Dov, a typically straightforward presentation.  Thanks. So to continue right along, again, just to repeat, Michael, we'll just come down the row.  Do feel free to kibbitz on what Dov had to say and make whatever points are on your mind, and we'll just keep the conversation going. MR. O'HANLON:  Thanks, Tom, and to AEI and all of you here, it's a pleasure to be following Dov and be on this panel. I wanted in a sense to come to the defense of the leaked proposed plans for the Rumsfeld budget, in part because I suspect that at least one of my colleagues here won't feel quite the same way, as we already have gotten an indication.  And just in the interest of spicy exchange, also in deference to my good friend Dov, not to throw sand right away the minute he leaves, but to actually support at least some of what his former colleagues are now doing, I want to--before I get into a couple of brief points about a couple of programs that are on this supposed chopping block list, and a couple that aren't and maybe should be, I want to give a couple of broad framing thoughts. One is there are those who say we need a broad transformation strategy before we start cutting, and this looks too much like a budget drill, nicking here, nicking there, somewhat arbitrarily.  There may be some validity to that criticism, but I would also say, if you're waiting for the grand transformation strategy that's going to be the one-time be-all, end-all vision of the future U.S. military, you're going to wait forever.  That's not what transformation is or should be. In fact, in this field we've gotten away from using the term "revolution" in military affairs and started talking about transformation because we wanted to get away from the notion that we're going to have a one-time final remaking of the military.  And we wanted to acknowledge that what happens in today's U.S. defense community and what's happened really for 60 years is rapid evolution.  We're not doing a revolution and we shouldn't be trying to.  We should be doing rapid evolution. The way you do that is you selectively fund programs that are more promising and that are ushering in new concepts and new technologies, like better munitions, like unmanned vehicles, and you sometimes cut things that may still have a value but may not be as valuable as they once were before these new technologies became prominent and became available, or at least within your horizon of planning, some of the major weapons platforms that we've been planning to buy for a long time.  Still needed, still important, but maybe somewhat less so.  And so instead of cancelling them, you often scale them back.  That could be a perfectly reasonable way to interpret and respond to changes in defense technology and the way we fight.  So transformation is a gradual process, and the way you make sure you keep being able to pay for it is to cut things that you don't need quite as much as you used to. A second point is we really do need to reduce the deficit in this country, and no one is going to be able to do it on the Pentagon's back, and Dov talked about the huge magnitude of the defense budget today, well above the Cold War average in real terms.  In fact, even without counting the Iraq war supplemental, about at the Cold War average or a little bit above in real terms.  The military at least has to do its share.  By that I don't mean that we ask our troops who are in Iraq to do even more than they're already doing.  But I do mean people like us in Washington who are planners need to look hard at the programs that we've been protecting or wanting for a long time and ask if maybe some of them are less critical than they were before.  So that's a second broad point. A third broad point is today's number one concern in defense planning, apart from winning the Iraq war, which is obviously a huge challenge operationally.  The number one concern is to make sure the ground forces are not broken in the process of trying to win that war.  I feel very strongly--I won't lay out the rationale here in detail, but I feel very strongly the Army and Marine Corps are still too small.  What the Pentagon has done so far to increase their size is not yet adequate.  We need to go further.  Those of you who follow this know very well that we're either already sending back to Iraq units that have been there once before or are planning to.  And one could tick off a number of divisions in the Marine Corps and the Army that fall into that category:  the 1st Marine Division, the 3rd Infantry Division in the Army, the 4th will be going back soon, the 101st will be going back soon, the 82nd has been getting deployed in the tent all over the world, Afghanistan and parts of these units in Iraq as well.  The Army and the Marine Corps are working too hard.  People somehow are toughing it out.  The recruiting and retention numbers look better than I thought they would at this point, but we shouldn't take that as an immutable fact of life forever.  And we also should honor the sacrifice of these people by not requiring them to keep going back to Iraq every other year as far as out as the eye can see as long as the mission lasts.  We should try to get them some more help so maybe they go back--maybe they spend 40 percent of their lives in Iraq the rest of the decade instead of 50 percent.  That may be the best we can do, but we should at least try. So with those three broad points in mind, transformation is gradual and evolutionary, and the way you fund it is to be selective about which programs you keep.  We have a big deficit problem that we should get serious about.  I don't think Mr. Bush was nearly serious enough in his first term.  I still don't think he's quite serious enough, but I'm glad to see he's getting more serious and we should want to support him.  And then, third, the ground forces are being overdeployed.  These three things point me towards supporting this memo and wanting to actually sort of double the magnitude of the proposed savings. Just a couple of brief words perhaps on programs that haven't yet been thrown into the mix, and I don't want to take a lot of time now getting ideas on the table.  We can talk about that in discussion.  But here are a few other things I would add to the list. First of all, of course, Dov is right.  We should not cancel the Joint Strike Fighter.  But you don't necessarily need to buy 2,500 of these planes to keep Tony Blair happy.  Back in the 1960s, when McMillan was responding to the Skybolt weapon cancellation, it was a cancellation.  No one is talking about that for the Joint Strike Fighter.  The kind of ideas that are out there are perhaps we can get by by refurbishing some F-16s and things like that, not by a full slate of JSF for the Air Force, and maybe also anticipate that unmanned combat aerial vehicles will be able to do more bombing missions within a decade or less than we currently anticipate so we don't have to rush to buy all these manned fighters, maybe we buy a few hundred of them for the Air Force instead of 1,700.  Or maybe we buy a few hundred Marine Corps short takeoff and vertical landing airplanes and then a few hundred more for the Air Force because of our fear that future technology trends may allow the Chinas and Irans of the world to threaten our runways, so we want to be able to take off and land on shorter runways, so the Marine Corps variant is the one we should emphasize more.  And maybe you cancel the Navy version, scale back the traditional Air Force version and just buy 750 to 1,000 instead of 2,500.  These are the kinds of ideas that I think are worthy of consideration and are not necessarily going to delight the British, but they aren't necessarily going to inflame their anger either because it's going to keep the program very much alive. I would submit the nuclear forces in the United States, first of all, they're still quite large.  Secondly, even if we're going to keep 2,500 warheads, there are more economical ways to do it.  We don't need all 500 Minuteman missiles.  We can convert more of the 14 Trident submarines, in my judgment, to the conventional mission and maybe build nuclear attack submarines a little more slowly than we now anticipate as a partial response. The Osprey tilt rotor aircraft, very interesting technology.  It has speed and range that traditional helicopters don't.  But I personally do not believe that offers enough advantages for full, all-out amphibious assault that we need to buy 400 of them.  I think you should view that as a prototype program and as a special purpose, special operations sort of program, maybe buy something in the vicinity of 100 and otherwise buy modern helicopters to replenish your aging inventory of equipment, because we do need to replenish the inventory.  We can't just cancel or scale back programs and buy nothing.  And we have to be attentive to Loren's point that the industrial base needs to be sustained, but it doesn't mean you always have to buy an F-22 when an F-15 might do.  It doesn't mean you always buy a JSF when a refurbished F-16 might do, and so on.  And an Osprey may not be needed.  A Black Hawk or modified Black Hawk helicopter for most simulations that I've seen does nearly as well in most combat settings, and that's the sort of thing that may save you some money. Just one last point.  I think what Vern Clark, the CNO, is doing--and Dov mentioned this earlier--is very thoughtful and makes a lot of sense.  To, for example, change the way we conduct forward presence overseas, you don't necessarily have to have a ship over in the Western Pacific or the Persian Gulf all the time.  You can rotate them through.  You can maybe have a few months where there's nothing there.  Or maybe you have an amphibious ship instead of an aircraft carrier.  Then you surge two aircraft carriers -- [tape ends]. -- crews by airplane, leave the ship, forward deploy for a longer period of time, waste less of the time in transit from the forward theater back to the United States.  A lot of innovative ideas that I'm just touching on very fast, and my apologies if I'm being confusing, but the point here is simply there are ways to maintain very vigorous forward presence with a somewhat reduced fleet.  And I think what the Navy is trying to do in this regard is sensible and perhaps can even be pushed a little bit further. So, with that additional set of programs at least on the table, I'll stop and look forward to my colleagues' comments and then your comments and questions later. MR. DONNELLY:  Thanks, Mike. Steve? MR. KOSIAK:  Well, first, Tom, thanks for inviting me here today, and AEI.  I think it's obviously an important issue to look at what's going to happen to defense, what are the implications of this memo in particular for defense.  I'm going to try to do two things today.  One is to talk about the overarching issue of where defense is headed, and another one is to look more particularly about what are the implications of this particular memo, or what does this memo tell us about where things are headed. I'm going to start out with a bit of a reality check in terms of the Defense Department's programs.  We have a situation now where even if you were to move ahead with the Defense Department's program as planned, as projected in the last full budget document, the last full future years defense program, which was released last February, even if you were to move ahead with that and spend the amount of money that was included in that plan, you couldn't actually afford everything the Pentagon wanted to buy.  And this is just exclusive of the war.  Forget about the war for a minute.  Forget about those costs. Under that plan, defense spending was supposed to increase by about 2 or 3 percent a year beyond the rate of inflation, so that means that it's about--the Defense Department budget today is about $400 billion in those same dollars, today's dollars.  It would have gone up to something like $450 billion by 2009.  That's the plan as of February of last year. But to actually implement the Defense Department's plans, to actually buy everything they have in their plan to buy all the ships and aircraft, all the new technologies, and maintain the force structure they have in that plan and maintain current levels of readiness, you'd probably have to bring defense spending up to something like $500 billion a year.  And, again, this is forgetting the costs of the war and the special problems that that creates. The reason it would likely cost so much more is because it's likely that these weapons systems that are currently on the drawing board are--in some cases in production, in other cases soon to enter production, it's likely that these things are going to cost more than the Pentagon is assuming.  Typically new weapons systems cost about 20 percent more than the Pentagon estimates they're going to cost.  That's likely to continue.  We've seen that in some programs, like the F-22.  That certainly has continued. Also, and perhaps even more importantly, operations and support costs, especially people-related costs, are likely to go up more than anticipated in the Pentagon's plans because of additional pay raises, additional benefits, higher health care costs, higher operations and support costs related to maintaining equipment, maintaining facilities.  So all of these trends suggest that to actually implement the current plan you'd have to spend substantially more than the Pentagon was assuming in their last plan. I think it's probably not possible, I think the administration recognizes that it's not possible to actually sustain defense budgets of $500 billion a year or more over the long term.  And I think their decisions to make these cuts reflect that fact.  I think they realize they can't buy everything that it's in the current plan and they have to make some reductions.  And I think these are--I mean, I think I would tend to agree with Dov that I think these are to a large extent, even though a lot of them are out-year savings or out-year cuts, they are in a sense real cuts.  I mean, I think a lot of these cuts will end up--in 2009 or 2011 when we're looking back on this, I think a lot of these cuts will have been made.  The F-22, for example, I think those cuts are likely to stand.  The Virginia class submarine, another example where I think it's just unrealistic to think you're going to get the two submarines a year, which has been the projection for many years.  But these are $2 billion-plus ships apiece, and it's unlikely you're going to get to that level. So I think in that sense, a lot of these cuts are real.  And, again, I don't think they're going to reach--I think the administration realizes they're not going to reach $500 billion a year, given concerns about the deficit and given concerns about--given the fact that they have to pay for a war on top of all of this. That said, I think the--and I would also point out that I think these cuts reflect an interest on the administration's part to demonstrate that defense is taking its share of cuts or is taking some cuts.  This is a year in which the administration clearly is trying to make some reductions in spending and address the deficit.  And we have discussions, obviously, of cutting Social Security or reforming Social Security, also cutting some other entitlements, Medicare, holding to no growth in domestic discretionary spending.  So this is supposed to be a tight fiscal year.  So I think the administration wants to present an image that it is, in fact--this is something that defense is also sharing.  It is sharing some of that pain. I think there are a number of things, though, that this PBD 753 does not show, and I think it's important to recognize that as well.  One is that it doesn't show that the administration is actually planning to significantly cut spending on defense over the coming five years or so.  It shows that it may slow the growth somewhat from what the current plan is, but it doesn't show that it's going to actually cut defense spending.  In fact, there's no reason to believe it won't continue to increase under that plan.  The plan that is released in a few weeks I suspect will still show some real increase in defense spending over the next five or six years.  And it certainly isn't suggesting that we will actually cut defense spending this year, that we'll actually spend less in 2006 than we spent in 2005, or that we'll spend less in 2011, which will be the last year of the plan, than we're spending today.  Under the plan I'm very certain we will be spending more. The other thing that I think makes the issue of what the PBD 753 means a little more complicated is the whole issue of the supplemental that we've requested over the past few years and are going to request in--the administration is going to request for 2005 and will certainly request for 2006.  Most expected the administration to ask for something like $70 billion for military operations in 2005.  You remember that we already--the Congress already provided about $25 billion for operations in Iraq and Afghanistan as part of the fiscal year 2005 defense appropriations bill.  So if you add that together, it suggests that in 2005 there will be something like $95 billion available for covering the costs of military operations, and maybe more than that, because the estimates range from that being sort of the low point to somewhat higher than that. I think that's probably significantly more than we actually need to cover the cost of military operations in 2005.  If you look at the Congressional Budget Office's own estimates, which I think are the best estimates we have out there independent of the Pentagon, they estimated that 2005 costs for military operations in Afghanistan and Iraq--mostly Iraq, being about 80 percent of the cost--would amount to something like $55 to $60 billion in 2005. Now, it turns out that we have more troops there and the tempo of operations is higher than it was at the time CBO made these estimates.  But even if you adjust for that, I think you're talking about something on the order of $60 to $70 billion. In addition to that, some additional money may be needed for buying new equipment.  In doing these estimates, it's generally assumed that we'll have wear and tear on equipment in these military operations, but it won't be such great wear and tear that you actually have to buy new equipment.  You'll have to do more overhauls and things like that, but you won't substantially--unless the equipment is destroyed in military action, you won't actually have to buy a lot of new equipment.  That may turn out not to be true because the tempo is very much more intense there than I think was anticipated and we're simply going to be there substantially longer than I think people anticipated.  So some additional money may be needed to replace equipment, but even that, it's hard to imagine that being more than the $5 to $10 billion range, something like that.  A set of equipment for a division costs roughly $5 or $6 billion on average, so if you want to replace everything in a single division, you're talking $5 to $6 billion.  So it seems to me $5 or $10 billion would go very far towards addressing this problem, if it is a real problem. So that still leaves you, if you get $95 billion total, that still leaves you with $15 or $20 billion, something like that, for other things.  So my suspicion is that if you get--if we do indeed get a $70 billion supplemental, or anything larger than that, request from the administration, there's going to be some money available there for other things, perhaps for Army modularity programs, perhaps for acquisition programs, especially Army acquisition programs, but maybe acquisition programs for the other services, that are not directly tied to the war in Iraq. In addition, there are areas where there are cuts in PBD 753, such as contractor support, where clearly Congress and the administration can provide money for those things in the supplemental.  So I think all of these things lead me to believe that at least for 2006, the situation for defense doesn't look that bad.  It could well be a year--2005 and 2006 could well be years when we actually spend quite a lot on procurement.  So for the next couple of years, at least, I don't think there's anything in this memorandum that suggests that defense is in for some great cuts, great reductions. On the other hand, I think over the longer term the situation for defense and for defense spending is different than that and less rosy.  I think if the administration and Congress decide they really want to make some serious reductions in the deficit over the coming five or six years, I think there will be more serious cuts in the defense budget.  Defense is a very--you know, I think it's a popular program right now in the sense that we realize we're at war, we have to be spending money on defense.  There's still some residual support, I think, related to the attacks of 9/11.  And, in any event, defense money isn't enough to solve the deficit by simply going after the defense budget.  It's not remotely--I mean, the deficit is about the size of the defense budget, so you'd have to eliminate it if you were really going to go about it that way.  So, clearly, you have to cut elsewhere.  But it's hard, I think, to imagine a politically supportable, sustainable, long-term deficit reduction package that doesn't include some real significant restraint on the defense budget.  As popular as defense is, you know, you have to compare that to raising taxes or cutting Social Security or cutting Medicare, which I think are, if anything, even more popular. If we decide we're really going to address the deficit and really going to take a share of that out of defense, then I think procurement in general is likely to be hit quite hard over the long term.  That's because if you--even if all you do is freeze defense spending, don't actually cut it but just freeze it in real terms so it just goes up with the rate of inflation, even if that's all you do, it's going to be tough on procurement because that's not a must-pay bill in most people's minds.  The must-pay bills are for people, for operations and support, and those areas are likely to grow in costs in terms of--especially in terms of health care costs and other benefits.  So if you're facing a period, a sustained period of essentially no growth in the defense budget, let alone cuts, but even just no growth, the money is likely to come out of procurement.  So procurement is likely to, as I say, take a much bigger hit. In the case of the Navy and the Air Force, I think one important way of addressing that or dealing with that is to cut the size of the force structure.  That's really how we--that's one of the ways we've scaled--I think they can also scale back modernization in some significant ways, as Michael pointed out.  But also, I think they have to look at the idea of cutting force structure and cutting personnel.  That is a way over the long term we've really managed our Defense Department.  We've become a progressively smaller military overall, but much more technologically capable military. In the case of the Army, that option really doesn't exist right now, and it won't exist until we get out of Iraq, if it exists then.  And when that will happen I would not hazard to guess. So as I say, I think if serious--if we decide we are seriously going to address the deficit, then I think that will mean something substantially more serious in terms of cuts for defense than we've see in this particular document over the long term. I think another or an important question is, you know, are we at that point yet where we--is this the beginning of what--this particular memorandum in this new fiscal year, is this the beginning of some serious deficit reduction efforts and implying some serious cuts for defense?  I think it's too early to tell.  I'm not convinced that we're really there yet.  The administration is certainly talking about the deficit a lot more.  I think Members of Congress are talking about the deficit a lot more.  There's certainly a lot of discussion about different cuts, you know, being fiscally disciplined this year.  But if you look back at the last four years and really even going back farther than that, I think, this administration and Congress have not really been asked to make any hard decisions for the last four years.  And, again, I think you could go back even farther than that.  I mean, we haven't--you know, we've cut taxes, we've increased entitlement programs, with the drug benefit program in particular.  Homeland security spending has gone way up.  Defense spending has gone way up.  Domestic nondefense has been held roughly flat, but that's not much of--hasn't made much of a dent. So there's no real evidence here, I think, that we're at a point where we have a consensus formed that we are really going to address the deficit.  So I'm not sure whether these cuts that I've laid out will actually happen in the next few years.  I think it will ultimately happen because I think we will ultimately have to address the deficit.  And I think the key is when will the political leadership in this country recognize that there's some immediate political cost to be paid to not addressing the deficit, and that probably means that if it looks like the size of the deficit has some immediate economic impact, like a spike in interest rates or something like that, I think there will be some--that would be a real trigger for making serious deficit reduction efforts.  But as I say, I'm not sure we're there yet. MR. DONNELLY:  Steve, thanks. Loren, you've gotten a big build-up through our proceedings thus far, and so I count on you to fulfill your assigned role as the advocate of air power and--I'll stop there and let you speak for yourself. MR. THOMPSON:  Well, I'll try to say something outrageous early in my remarks. As you know, the Pentagon's proposals to cut $30 billion out of their spending plans over the next six years has provoked a good deal of controversy.  Now, most of the media coverage, most of the public commentary has been about the budgetary pressures.  It's been about the federal deficit, the cost of an unexpectedly prolonged campaign in Iraq.  It's been about the rising costs of military benefits. I think that a big part of the explanation for these specific cuts has not really been discussed very much in the media, and that has to do with the role of ideology.  And I'm using "ideology" in the sense that Webster's Dictionary uses it, as visionary theorizing--in other words, big ideas that are strongly believed but that can't really be validated on the basis of empirical observation. Those kinds of ideas have played a central role in shaping Secretary Rumsfeld's agenda for transforming the military from an industrial age organization into a posture that is supposedly better suited to the challenges of the information age.  They're the reason why Rumsfeld's associates sought to reduce the size of the Army early in his tenure.  They're the reason why the same policymakers have greatly increased funding for wireless networks and for orbital sensors.  And they're the reason why a lot of these cuts that we're now hearing about were framed as they were. As has been noted earlier, $30 billion is not a big hit in a defense budget that is denominated in the trillions of dollars over the next six years.  There are plenty of places Pentagon budgeteers could have gone to find savings, so why did they choose these programs? I think the answer lies largely in their ideological beliefs about the future conflict and about the best ways to prepare for emerging challenges.  What I'd like to do, therefore, is to look at the areas where the most contentious changes have been made to weapons programs and ask what role ideology might have played in the choices they made.  So I want to look at the fighters.  Then I want to look at warships.  And, finally, I want to look at space. But, first, a little bit of historical background.  You know, in America it's history if it happened anytime before the previous fiscal quarter.  So, you know, Rumsfeld's first year in office is kind of like the late pleistocene period. When Donald Rumsfeld returned to the Pentagon for a second tour as Defense Secretary in 2001, he did so with a mandate from President Bush to transform the military.  Bush had expressed dissatisfaction on the campaign trail about the pace at which the military was changing.  He was concerned that there were new threats emerging and the military simply wasn't preparing adequately or fast enough. Bush wasn't all that knowledgeable about defense and foreign affairs, and so his selection of a strong-willed senior statesman, Donald Rumsfeld, to be the Secretary of Defense kind of implied that Rumsfeld was going to have a lot of discretion in defining what transformation meant and determining how to implement it. Rumsfeld soon set about building what he called "a capabilities-based defense posture," a posture based not on some particular threat like the fascism or the communism of the past, but instead on a series of assumptions about what capabilities would be most useful for the future. The assumptions he made were reflections of the intellectual fashions and the strategic circumstances of the time at which they were framed.  The United States had not been seriously challenged overseas since the collapse of communism, and so there was a tendency to believe that we were in what was then called a strategic pause. The United States had just defeated Serbia using air power, no ground forces, and so even traditional skeptics of military technology like John Keegan were saying, well, maybe new technology, smart bombs and so on, is making a revolution in warfare possible.  And also, when Rumsfeld came in, the nation was awash in trendy speculation about how the Internet was going to change everything from sex to warfighting. So, as a consequence, a lot of people, including defense reformers, got caught up in this fashionable thinking about how networks and how information technologies might be used by the military to get some great boost in their capabilities. Well, Rumsfeld combined these ideas with some older beliefs among military reformers about the need for more teamwork and less redundancy among the military and produced the outlines of a new post-Cold War defense posture--as I said, a capabilities-based posture.  That's the phrase he used. Well, unfortunately, we now know that he skipped a step.  Because his posture was capabilities based, he didn't put a lot of effort in defining what kinds of threats the military might face in the near term.  As a result, the Pentagon was dreadfully unprepared for the biggest terrorist attack in history on 9/11, and it was not much better prepared for fighting insurgents in Iraq when that threat unexpectedly arose. When the surprises came, they led to major revisions in Rumsfeld's transformation plan.  Clearly, the nation was not in a strategic pause.  Ground forces still had great military value.  And as it turned out, America was not the only country that was benefiting from new information technologies. My favorite example of this is when the Pakistani secret police broke into a penthouse apartment in Rawalpindi and found an al Qaeda operative sitting on the floor with two satellite phones and three Internet-connected laptops around him, which I guess proved that network-centric warfare is a real thing. Nonetheless, many of the biases that Rumsfeld's team harbored about military transformation remained intact.  In fact, even as his team struggled to adjust to the surprises of 9/11 and of the Iraqi insurgency, they still thought they found some confirmation for their biases in these new threats.  And I believe that the durability of their ideology is clearly reflected in the choices that they've made in Program Budget Decision 753, the document that is the proximate cause of today's meeting. So, with that by way of introduction, let me now turn to the fighters, the warships, and the space programs, which are the major areas of contention, and the changes they've made. Let's begin by talking about the fighters, specifically Rumsfeld's proposal to terminate the F-22 Raptor and 180 airframes rather than the Air Force's stated requirement for 381 planes.  Although the F-22 Raptor is the Air Force's top modernization priority, I guess it won't come as a surprise to you if I say that it is the most controversial military aircraft since the President's father terminated the B-2 a decade ago.  Critics complain that the plane is too costly and that it isn't really relevant to emerging military needs. Nonetheless, it seems to me that the actual analytic, the objective rigorous case for ending the program isn't all that strong.  First of all, the program has been sustained through five administrations.  We spent $40 billion on it to get it to a point where it is now finally ready to enter high-rate production. Secondly, the plane works quite well, providing new capabilities like Stealth and like low-fuel consumption at high speed that almost certainly will be useful against future adversaries. Thirdly, something that never gets discussed is that our existing top-of-the-line fighters, our F-15s, are falling apart.  When we do training with them, they're on restriction because of metal fatigue.  A good friend of mine, General David Dettula (ph), was flying in operation Northern Watch when his cockpit shorted out because his F-15 was so old that the insulation is rotted and, as a result, the electronics was short-circuiting. The Air Force says it can't preserve global air dominance in the future without an adequate number of Raptors to sustain force rotations.  And when you do the math, that's 381 to have one squadron in each of its ten air fleets. And then, finally, the Air Force actually offered an alternative for saving money in its 2006 Program Objective Memorandum.  It proposed, when it sent that to the Office of the Secretary of Defense on August 2nd, to cut the number of Joint Strike Fighters that it, the Air Force, intended to buy from 1,763 to approximately 1,200.  That's what the plan was.  And right up until December 14th, when the Chief of Staff of the Air Force General Jumper was meeting with the defense writers groups, he thought that's what was going to happen.  Yet only nine days later, Deputy Secretary Wolfowitz signs out PBD 753 reversing his priorities, not protecting the F-22 but protecting the Joint Strike Fighter. Now, since much of the funding for the F-22 has already been expended and, therefore, isn't recoverable, why would policymakers choose to cut it instead of a fighter where 90 percent of the costs still lie in the future?  Why would they do that?  I think the answer lies partly in ideology. First, they believe that the era of aerial dogfighting is over and that anti-air weapons on the ground, surface-to-air missiles, can be better suppressed using other types of new technology, presumably cheaper types. Second, because they believe that air dominance is assured, they prefer fighters like the F-35 that are optimized not for air-to-air combat but for attacking ground targets. Third, they're determined to force more sharing of technology onto the services. And, fourthly, because of that and because the F-35 is a joint aircraft, a multi-service aircraft rather than a single-service aircraft, they don't like what the consequences of an Air Force cut in its part of the program would be for the other services.  Actually, the Navy's estimate is that if the Air Force had taken its 600-airframe cut out of F-35, all of the remaining aircraft would have seen a unit cost increase of $10 million each.  Well, OSD didn't like that.  So even though they would only be saving about $10 billion on an F-35---on an F-22 program in which they'd already expended $40 billion and lose a big portion of the production run in the process, Rumsfeld's team prefers to cut the Raptor. Now, whatever you may think of this choice, it's important to recognize that it originates in a series of assumptions about future warfare, assumptions that really can't be proven.  There are assumptions about what the threat looks like and what our requirements are going to be that are quite beyond our ability to anticipate with any degree of certainty, coming from an administration which has gotten it wrong a number of big times already. Let me turn next to the Navy's shipbuilding program.  The program changes proposed by the Pentagon would reduce spending for every category of warship.  An oil-powered aircraft carrier would be retired, and the next generation nuclear aircraft carrier, the so-called CBN 21, would be delayed.  An increase in the production of the Virginia class attack submarine from one boat per year to two would be deferred beyond the six-year planning horizon.  It was supposed to start in '07 and it was supposed to begin in '09.  Now it's going to start sometime way off, if ever. The number of next-generation DDX destroyers to be built at the end of the decade would be reduced, and the number of LPD 17 amphibious vessels for the Marine Corps, originally supposed to be 12, would be cut to nine. These cuts, not surprisingly, have come as a big surprise to people in the shipbuilding community and in the states that host major shipyards because the Navy's fleet has already fallen from a Reagan era peak of nearly 600 vessels to less than 300.  But there's good reason to believe that the current proposals are just the tip of a budgetary iceberg that is headed for the Navy's force structure. First of all, the Deputy Chief of Naval Operations for Requirements is of right now circulating charts inside the Pentagon that would provide justification for reducing the number of carriers from 12 to nine or ten. Second, the continuous deferral of an increase in submarine production virtually guarantees that the fleet is going to fall well below 40 submarines worldwide for the simple reason that all the old Cold War Los Angeles class attack submarines begin going obsolescent at a rapid rate in the next decade. Third, there is discussion among Rumsfeld's associates right now about simply terminating the DDX destroyer, not building fewer but simply terminating it, and moving on to a missile defense vessel called the CGX that would use the same hull. And, finally, the Chief of Naval Operations has recently approved a planning document for the future sizing of the fleet that would reduce it to as few as 260 vessels, a further 10-percent reduction from today's levels. Rumsfeld's proposed program changes thus reflect a broader trend in which sea power, like air power, is a smaller and smaller part of the Pentagon's investment agenda.  Now, it's worth noting that they could have gotten very similar levels of acquisition savings by simply altering the way in which Congress appropriates money for ship construction, but they didn't do that.  They chose to take money out of programs, and that implies to me that sea power just isn't a very big priority with them, that, in fact, they would like to see the force structure for the Navy cut even more because then you don't just save acquisition money, you save manpower costs, you save operating costs. Anyway, bottom line on warships is it's pretty hard to conclude that this administration really regards sea power as a big part of U.S. future military capabilities. But, you know, these ideological preferences don't just cut against weapons systems.  They also lead us to increased money for some things, and with that let me turn to my third category, national security space. When Rumsfeld's team sees a technology initiative that it likes, that fits its future framework, well, then, it's quite ready to plus that up handsomely.  The biggest example of that in PBD 753 is $25 billion set aside for Army modularity.  That's a lot of money.  But there are other examples of it favoring those systems that it finds ideologically appealing, and perhaps the biggest example of that is space-based radar. They have provided nearly $1 billion for the space-based radar program, which seems a little counterintuitive in the current environment.  Why?  Well, first of all, congressional appropriators took most of the money out of the program in the most recent review and removed it from the procurement cycle. Second, that is the third time in a little over a decade that the appropriators have told them that they don't want to initiate such a program. Third, cost increases in other space programs are so extensive at the Pentagon that the chairman of the Defense Science Board has said that national security space is Chapter 11--in other words, it's bankrupt. And, fourth, changes in the character of the threat have put a premium on positioning reconnaissance closer to potential adversaries than in the past. Nonetheless, Rumsfeld's team is adding money to space-based radar even as it is cutting funding for next-generation radar aircraft, another high priority for the Air Force, called the E-10 that would have provided more precise imagery and targeting information.  It is also maintaining funding for a host of other high-cost satellite constellations:  the future imagery architecture, the advanced EHF communications satellite that replaces Milstar, and a next-generation early warning satellite. Now, there are sound physics-based reasons for why you would want an early warning or a communications satellite in orbit.  But the main reason why we have intelligence-gathering satellites in orbit is because during the Cold War we were afraid if we got any lower, the Soviets would shoot us down.  So if we no longer fear enemy air power, which is the presumable underpinning for cutting the F-22, then why is Rumsfeld's team pushing so hard for a new reconnaissance satellite instead of pursuing airborne solutions for intelligence gathering, like E-10 or Global Hawk, that can get much closer to these telltale adversaries?  Well, the answer, at least partly, is ideology.  They just like space, and they're going to fund it. Now, don't get me wrong.  I could think of some good operational reasons for why you would want to have an orbital sensor that can track moving ground targets.  A lot of the people in the military think it's a good idea.  But when you put all the various program recommendations from Rumsfeld together, it's hard to believe that they're the outcome of nothing more than rigorous analysis.  Something else is going on here, and it's something that I would call ideology. MR. DONNELLY:  Loren, thank you very much. MR. THOMPSON:  Was that outrageous enough? MR. DONNELLY:  You never fail to fulfill your obligations. MR. THOMPSON:  Core competency. [Laughter.] MR. DONNELLY:  Fellows, we've got some time, and I would like to structure a bit of a rebuttal round, picking out three of my pet rocks from the presentations that you made.  And I'll enumerate them now, but I'd like to toss it open for further comment by you guys. First of all, I was very struck by Michael's conclusion, which is near to my very green heart, that the pendulum probably hasn't swung far enough in the direction of rebuilding ground forces. I was struck in Dov's presentation that he still regards the Marine Corps, like the Navy and the Air Force, as hedges against other than Iraq or other than Middle East conflicts, which would probably be news to Marines who find themselves on the same conveyor belt to the region that soldiers do. And, again, despite the hoopla about the programmatic weapons cuts, it still does seem to me that the assumption underlying the budgetary memorandum and Dov's sort of quasi-defense of it was that Iraq may not be over tomorrow, but someday, thank God, it will be over and we can get back and that this is really not the new baseline but, still, an exception to our view of the wars that we'd like to fight.  And, again, the numbers associated with the increase in ground strength still don't begin to close or, you know, meet or alleviate or ameliorate the stress that's placed upon the reserve components.  Thirty thousand more doesn't begin to cover the 150,000 to 200,000 level of call-up that we've been at for a couple of years.  So I'd like to toss that out for further comment on everybody's part. Secondly, I'm very glad that Steve addressed the notion of supplemental spending.  When supplemental spending begins to be 20 to 25 percent of baseline spending, it doesn't seem like it's really an emergency, an unforeseen event to me.  And, again, there are probably sort of good political reasons and green-eyeshade reasons for trying to jam as much in the supplemental, but it is a real constraint to long-range defense planning.  If your horizon is only one year, you know, as the old Vietnam joke goes, you fight the same one-year war 12 times over. And, finally, I'm intrigued by Loren's discussion about capabilities-based planning.  It has been a fashion for a long period of time, but what has always struck me about it is that it's a pretty self-referential guide to defense planning.  And certainly our experience of the last couple years ought to suggest that, you know, the enemy gets a vote, not simply in day-to-day combat, but ought to be the primary--or ought to be taken into account when you create a defense program.  And, again, the gap between the reality of day-to-day fighting in the Middle East, you know, what seems like the more likely conflict, and, you know, the wars that we would like to fight and the way that we would like to fight still does seem to me to be an underlying theme of certainly the defense budget documents that we have seen, and possibly this was a symptoms of past QDRs and looks like it might be a symptom of the QDR we're about to embark upon. So those are three issues I'd toss out for further comment, and, again, we'll just sort of go down the batting order before we toss it open to the audience. MR. O'HANLON:  Thanks, Tom.  Very challenging thoughts and questions.  I guess the way I'll respond in general is to say that, of course, as we all know, in defense planning you have two sets of thoughts in your head at any time:  your most plausible projection of what you think you'll do and then your reasonable worst case, your plausible worst case.  And as defense planners, we have to focus on the latter.  As strategists, we often think more about the former, and those of us who'd like to try to do both--I think all of us on this panel and many others in this room--have to be able to put on both kinds of thinking caps. So, for example--and I'll just mention Iraq, Pakistan, Taiwan, what that means for those three cases.  Taiwan, let me start with something we haven't talked about much, although I think Dov mentioned it briefly.  I don't think we're going to fight China over Taiwan.  I think China's evolution is in a positive and remarkable direction.  I'm, on the whole, optimistic about this part of the world, and yet as a defense planner, I have to say, What if I'm wrong?  And it would be irresponsible not to.  This is a big, plausible scenario that we have to think about, and we haven't done enough of it in the American defense planning debate.  So we've got to figure out what kinds of capabilities are needed, and this puts a premium on some of the things that Secretary Cohen did well in the '97 QDR, which were mine warfare kinds of capabilities, puts a premium on Cruise missile defense, on short takeoff and vertical landing aircraft.  I'm not going to try to itemize in detail that scenario here, but we shouldn't forget it in this QDR just because we're thinking most about Iraq right now. And, thankfully, Vern Clark and the Navy in general, their uptempo is actually now lower than it was prior to some of the conflicts we faced in recent years.  And, therefore, institutionally, they, plus Admiral Giambastiani, who's acting as a joint commander but still is of Navy heritage, they to some extent are pushing this issue, and we should keep listening to them because it's easy to forget that part of the discussion.  I'm not saying we need a bigger Navy as a result.  I actually think we can probably handle this scenario with the present size or even slightly smaller.  But I'm prepared to be proven wrong and talked out of that, and we've got to keep thinking about it On Iraq, I actually think we're going to have a very serious debate in this country in the next few months, not about getting out of Iraq but about thinking about an exit strategy that would have us pull more than half of our forces out by sometime next year, which I actually think may be productive as a way to deal with the insurgency.  Anyway, I'm not going to get into that now, but the point is simply I think we may go in that direction, but as a defense planner I have to imagine the possibility of keeping more than 100,000 American forces in Iraq for the rest of the decade.  So even though I may be a proponent of thinking of ways to cut half of our forces in Iraq within 18 months, as a defense planner you've got to think about what if that's wrong.  And it could be wrong, and that's why I think we need a larger ground force.  And let's stop having the--let's stop waiting for the final resolution of this debate.  I mean, are we going to wait for the point where the recruiting statistics are horrible for a given quarter or two before we decide it's time to rebuild?  In other words, wait for the very moment when it becomes very hard to rebuild because nobody wants to join the military to decide we really have to?  Are we going to wait for the realization that we're going to stay in Iraq for six years instead of just four? I mean, it's getting silly.  We've been in this thing for two years, and we still can't come to the conclusion as a country that we better take it seriously for force planning.  We're setting our people back way too much.  I think it is disrespectful of their service.  Even if they're prepared to stay in the military, their patriotism is remarkable, I think we are disrespecting the men and women of the armed forces to, as defense planners, have a ground force capability that requires them to go back every other year, as far out as the eye can see, when this mission may last the rest of the decade. Then, finally, on Pakistan, I'll just make a quick aside here.  Let's not lose sight of other possible ground force scenarios in the future, ground force heavy scenarios in the future, and there are some things in South Asia that could be a very serious concern.  And one is clearly a splintering of Pakistan, and another is India and Pakistan that come to war over Kashmir and ultimately decide even though India has been against it for a long time, we better invite in an international peacekeeping force and essentially allow a trusteeship of Kashmir for a certain period of time to de-escalate the conflict. Those sorts of scenarios are unlikely, but they're plausible.  And as defense planners we've got to think about the plausible worst case. MR. DONNELLY:  [inaudible] your illustrative scenarios.  Steve, any thoughts on any of those three topics? MR. KOSIAK:  Well, I'll address briefly the first two questions I think you raised. One is in terms of the Army, whether we should increase the end strength, permanently increase the end strength.  I tend to agree with Michael that we've been there long enough now that if you think it's going to be a long-term problem, whatever you would like to see happen, maybe you need to start preparing for a worst-case assumption, and so we would need to increase the end strength. I would point out, though, that it's likely to cost--over the long term likely to cost something like $4 or $5 billion a year to maintain an extra 30,000 troops, for example.  And, you know, one of the concerns, from a budget standpoint at least, is that, you know, you will get these additions sort of stood up just at the time when you no longer need them, and then it will be hard to get rid of them.  And so I think, you know, that is a concern. A lot of it turns--essentially it turns on do you think we're going to be in Iraq with substantial forces for the next year or the next five years.  And people obviously differ on that, and we obviously as a country don't really know. In terms of the supplemental, I would certainly agree with Tom that we really--it's not just the size of the supplementals.  Supplementals are really supposed to be used--you know, we pass a regular bill for the Department of Defense every year, the annual appropriations bill for defense, like we do for most government agencies.  And supplementals are really only meant for surprises that happen during the year, some emergency that happens that you didn't anticipate and you have to add money for.  So in the middle of the year sometime you go to Congress and ask for more money.  And that was certainly legitimate when we went into Iraq and when we went into Afghanistan to ask for money for those operations because they weren't fully anticipated.  But at this point we've been there for several years.  We know we're going to be there--we certainly know we're going to be there in 2006.  It should be part of the administration's request.  When they come to Congress in early February with their request for 2006, they should include a chunk of money in there for operations in Iraq and Afghanistan.  I don't expect they will do that, but I think from a budgeteering standpoint there's really no excuse not to do that. It's not enough certainly to say that, well, we don't know what the costs are going to be.  There's all kinds of government programs that we don't know what the costs are going to be, but we don't assume they will be zero for planning purposes. So I think that is an area--and it's also an area where this administration came in saying that they were going to be really straight, especially in the case of the Defense Department, with money and with supplementals.  And I think this is--we're headed in the wrong direction there. MR. DONNELLY:  Loren? MR. THOMPSON:  Well, you know, try as they might to be visionaries, this Pentagon team just can't seem to rise above the trendy and the perishable.  When they first got there, they wanted to cut the military.  In particular, they wanted to cut the Army.  Now that we've got a problem in Iraq with an insurgency, they want to increase the size of the Army.  But they're just responding to external events and passing fashion.  Everybody wants to increase the size of the Army today. I'm 53 years old.  I remember Vietnam.  The Army got everything it wanted.  We still lost.  In fact, we do this about once a decade.  We lost in Vietnam in the '70s, and then we did it in Lebanon in the '80s.  Then we did it in Somalia in the '90s.  And now we're in Iraq. Now, I'm not saying the Army doesn't deserve a bigger budget share, doesn't need modularity in a future combat system.  But there are some things that even with the world's biggest military you can't do. Iraqi civilization first emerged 10,000 years ago.  Samarians and Babylonians and the Syrians and Mongols have come and gone.  They've given the world alphabetical writing.  They given the world Hammurabi's Code.  But there's one thing they haven't given us in 10,000 years.  They haven't given us democracy.  That kind of tells me that they're probably not going to be a democracy.  In a lot of ways, they kind of look like former Yugoslavia in a different place. Now, it's nice to believe that these borders that the British drew around part of the Ottoman Empire in the 1920s have some meaning.  But, in fact, they unfortunately drew the borders around a place that for a thousand years had been a battleground between Sunnis and Shi'ites.  For some reason, our political leadership understands it so badly that even now they haven't asked themselves, well, how is the rest of the Arab world going to like it if we put the first predominantly Shi'ite Arab government in power?  How are they going to react to this?  They haven't even asked themselves the question, and we're years into this operation. So my point is this:  Although there's lots of good reasons for wanting a more modern, more capable ground force, it's not going to give you victory in Iraq.  If that's the reason you think this is necessary, forget it. MR. DONNELLY:  Well, if you have a 10,000-year planning horizon, then-- [Laughter.] MR. DONNELLY:  Then you have no job in the Pentagon, obviously. We're now open for question business, and just to be perverse, let's go all the way to the back and stress as I always do the three rules:  Ask a question, tell us who you are, and wait for the microphone. MR. WHITE:  Richard White, Institute of Foreign Policy Analysis.  The question is for Mike O'Hanlon.  You've put out your ideas already recently in op-ed pages and so on.  I wasn't sure if you've gotten any feedback, any positive response on the Hill or elsewhere to your proposals, which are, as you pointed out, much more radical than are being already put forth by the administration. MR. O'HANLON:  I think I won Loren over today, don't you? [Laughter.] MR. O'HANLON:  No, I can't say that I've had a lot of strong support.  I think it will be fascinating to see how this plays.  The big question obviously is not whether they like my op-ed but whether Mr. Rumsfeld and the Bush administration, who have campaigned on being very strong on national security, can now credibly make this part of their budget one of the areas that contributes to deficit reduction, when, of course, big things like revenue increases are still off the table.  That's where I would say ideology really kicks in, if you want me to invoke the term.  That's where my greatest concern is about their prospects for balancing the budget.  I don't think they can do it, having cut tax rates and now being unwilling to rethink -- [tape ends]. -- whole huge lot of money compared to the magnitude of the deficit or even the defense budget itself, a point Steve also made.  And so, you know, especially if they back away from any kind of reduction in the increase in Social Security benefits, if they back away from any other feel of belt-tightening in other parts of the budget, I personally am dubious that these proposed cuts will really see the light of day. MR. DONNELLY:  Let's see if--I owe this gentleman because I passed him over a couple times in Dov's section.  So let's do a couple people here in the front, and then we'll go [inaudible]. MR.           :  Hi, Bill  (?)   from Defense News.  A question for Loren Thompson.  You said $30 billion is not a big hit, and you said, if I got it right, that they could have done this from elsewhere, but they chose not to do that.  So I was wondering if you could point out areas where they might have gotten this $30 billion from. MR. THOMPSON:  Well, I mean, within a budget that will probably, with the supplemental, approach half a trillion dollars in the coming fiscal year 2006, they're proposing to cut in this particular exercise $6 billion.  Potentially you could take the cuts from anywhere.  It all depended on what you thought the future required. If, for example, you thought, geez, you know, this entire Iraq campaign was a mistake, we misjudged the situation, maybe we can't win, they didn't have weapons of mass destruction, we're turning it into a terrorist nest rather than cleaning it out, then that would lead you to all sorts of different priorities. I think to some degree we make these choices not based upon what we need for the future or based on rigorous analysis, but based in part upon not wanting to acknowledge the mistakes we've made in the past. I don't have a list of cuts.  But when you cut these particular programs and leave dozens of network-centric programs intact, you can't help thinking, well, why these programs and not those. MR. DONNELLY:  Loren, remind me to not invite you to our next Iraq panel. [Laughter.] MR. DONNELLY:  I want to go here to this gentleman.  I think that's number one on your list of [inaudible]. MR.           :  Greg  (?)  , Florida Times Union.  One carrier out of the 12-carrier force, I'd like to get your opinion, from all three of you, on what's the right size for the carrier force, and by reducing that carrier force, what--how will this affect the national defense? MR. DONNELLY:  We'll just go down the line and you can comment or pass as you will. MR. O'HANLON:  I'll start.  I'd go with about ten.  I would keep one in Florida but not the Kennedy.  I think there's actually a benefit to diversifying.  Even though it's somewhat less efficient, there's a benefit to diversifying where we keep carriers for national security reasons, and I'm worried about a surprise attack against military assets on our homeland.  And the reason I think you can cut even more is that, for example, the Mediterranean I think is no longer a region we really need to have a carrier.  We don't have it there as much as we used to, but we still keep a carrier presence in the Med, according to the latest information I've seen, anywhere from a third to half the time, which I think is excessive.  And also I think that even though it's a very difficult proposition to fly crews from the United States overseas to relieve 5,000 people who are on the carrier that way, and the carrier is the last ship you would do this concept with, I still think there may be some longer-term hope for that or, more practically perhaps, home-porting forward so that perhaps we could consider having a carrier either in Hawaii or Guam or somewhere else in the western Pacific. So I think ten is the right number.  I'm not saying I would do that in this year's budget, but I might do that in this year's Quadrennial Defense Review as a medium-term planning goal. MR. KOSIAK:  Well, I would, again, I guess tend to agree with Michael that some reductions in the carrier force make sense.  I think in general--and this is not just true of the Navy, but it's certainly true of the Navy and the Air Force and maybe the Army at some point.  I think if you're going to be--and I think we have to recognize it.  If we're going to buy weapons systems that cost two or three times more than the systems they're replacing, they are presumably much more effective, and you can't buy as many as you had.  I mean, you have to cut force structure.  And if the Navy really wants to stick with a 300-ship Navy, then it's not going to be able to buy the ships it's got in the plans right now. So I think part of the way we address our problems in defense and in terms of trying to address the deficit in an efficient way is to make some at least modest cuts in the size of the--as I say, in the size of the Air Force and the Navy at least in the short term.  And so I think carrier reduction is probably a prudent part of that. MR. THOMPSON:  I think it depends on what you mean by a carrier.  You know, the size of a carrier air wing has diminished considerably, and the new design for the carriers is going to save a lot of personnel, probably carry fewer vessels.  We're also approaching a decision for an amphibious vessel that would be more capable as a carrier fixed wing and rotorcraft aircraft without having quite the cost, the price tag in terms of operations as a flat top. But, you know, Greg, it does seem to me that when you ask yourself about the validity of choices and programs, you ought to start by saying are these realistic assumptions.  If you notice, in all these discussions of force structure for how many aircraft, for how many aircraft carriers we need, nobody ever mentions the word "wartime attrition."  How come this never comes up?  I mean, isn't that what happens in wartime?  Don't people take losses on both sides?  So how come we're planning a carrier force structure on the assumption that we're never going to lose one?  That seems a little improbable, doesn't it? That would tend to drive me to the conclusion that maybe we need a different configuration of carrier, like a CVN-21, but not only should we not go down to nine, but we may one day regret that we only have a dozen. MR. DONNELLY:  In the spirit of consensus, I'd like to disagree radically with Loren and even go farther than maybe Mike and Steve would.  One of the things that really struck me in Dov's presentation, which I think is worth pushing a heck of a lot more, is the idea of getting the Navy into the theater where it brings things to the table that other forces can't, and getting it out of those theaters, and particularly in the Middle East, where if we can't base land forces and land-based aircraft, we can't win the war, either the short war or the long war that we're involved in. The amazing thing to me when I--you know, when the story about the carrier came out, the return of the Kennedy, is what the heck was it doing in the Persian Gulf right now anyway?  I mean, again, if we're not using land-based tactical aircraft to do those missions a lot more effectively in terms of the capabilities of the plane and a lot more inexpensively in terms of the way they're based, we're really misallocating our resources. Conversely, in the Pacific, where, according to my maps, there's an awful lot of blue, you know, it's very difficult to base land forces or particularly after our withdrawal from the western Pacific bases like in the Philippines, to be sure that we'll have access for land-based aircraft.  And it doesn't have to be a Taiwan Strait scenario, but just the distances are big and, again, there's a lot of blue on the map. Conversely, the role of the Navy in global war on terrorism missions, more like the piracy and lower level missions for which the little combat ship does seem to me to be something like a correct answer--maybe it didn't have a very good justification when it was dreamed up, but now it's got a better one.  You know, so you need--there is a numbers question in other regions.  So, you know, to me the question is not so much the size of the Navy but the posture and the shape of the Navy. I would commend to you a number of papers by Steve's colleague at CSBA--I don't usually advertise for other people's papers, but Bob's work is really good--on kind of having a high-low mix Navy, which I think is a quite sensible posture for going forward.  You know, so that's my thought. Who next?  Let's try in the back over there. MR. POMPER:  Hi, Miles Pomper from Arms Control Today.  One of the areas that no one really touched on in their presentation, including Mr. Zakheim, was missile defense, which there has been some talk of, I guess, some cuts in that area, mainly, I guess, through restructuring.  I don't know if you had any more details on what kind of talks are being--what kind of cuts are being talked about and any suggestions on further cuts that might be in order given the limited success of the program. MR. THOMPSON:  I have an answer on that.  As you know, there's about $5 billion in cuts apportioned to the Missile Defense Agency across the six-year period covered by PBD 753.  There's essentially two options that MDA could have undertaken in order to absorb those cuts.  One possibility would have been to kill a major program, such as Airborne Laser, and another possibility would have been to sort of salami slice, to apportion the cuts more or less in a pro-rated fashion across a range of programs. They've elected to do the latter, which is creating some heartburn for them because they have already run into budgetary problems with the higher than expected costs in bringing the Alaska system, the mid-course system to operational status, not quite there, almost there, but very expensive proposition.  And additional cuts will probably diminish the effectiveness of that system and other things that are under way.  But they are not willing at this point to cut one major program, and so the only alternative is to assign some incremental cuts to all the programs. MR. DONNELLY:  Actually, I would like to follow up with a question because it struck me, Loren, when you were talking about some of the programs that you weren't real fond of--space-based radar, CGX, for example--these seemed to have a missile defense theme to them, not an immediate one but if you're talking about next steps in missile defense.  Again, you seem to place higher priorities on restoring cuts for tactical conventional warfighting capabilities as opposed to the next iteration of missile defense. MR. THOMPSON:  Well, Tom, I guess what I'd say is that I favor defense investment priorities that support obtainable objectives.  I think we can defend ourselves against ballistic missile attacks, at least if they're coming from North Korea.  I also think we could defend ourselves against Cruise missile attacks, something that Michael has written about in the past. I'm not sure no matter how much money we spend we can convince people who are not Democrats to be Democrats.  That's just the way it is. MR. DONNELLY:  Loren never talks about Iraq at AEI.  Okay.  We've established that, I think, beyond doubt. [Laughter.] MR. THOMPSON:  I think the President is spending a reasonable amount of money on missile defense.  We could differ about the particular program emphases.  I would not terminate Airborne Laser.  In some ways, it's the most appealing system, and yet it's the one that they would be most likely to go after.  I would do pretty much what they've done in that area and start looking at Cruise missile threats also. MR. DONNELLY:  Okay.  We've got time for one or two more.  Yes, sir, right here. MR. BLACK:  Cecil Black from Boeing Company.  I was listening with great interest to your comments this afternoon, and I'm wondering if you would take this as perhaps the opening salvo of the next Quadrennial Defense Review.  And given your impressions of this salvo, what would be your recommendations or advice to the QDR as to the core themes or the main thrust that that QDR should pursue? MR. DONNELLY:  Anybody not want-- MR.           :  I'll make sort of a tangential comment in a way, Cecil, because it strikes me in a funny way that this QDR is less relevant than most.  Here we are we're making these big decisions--as I've already said, I agree with many of them, but still we're making them before the QDR.  We've been trying to deal with a post-9/11 world for three and a half years, trying to deal with a post-Saddam Hussein world for almost two.  These are the big strategic events we've had to respond to.  In a way, we couldn't afford to wait until next fall, or whenever, when the QDR is done. So I actually have tended to like the QDR process since the Cold War ended, but I have to acknowledge this one feels a little irrelevant compared to the past ones.  And that's my overriding comment to the way you couched your question at least. MR. DONNELLY:  Steve? MR. KOSIAK:  [inaudible]. MR.           :  I have a simple answer.  I think instead of focusing on what the big issues are, we ought to focus on the methodology this time.  You know, the last time around they were still arguing about how many B-2 Stealth bombers they really wanted when the World Trade Center was hit, which kind of implies that they weren't focusing on what they should have been focusing on.  Right?  And it does seem to me this happens partly because political appointees insist on driving the process rather than listening to their intelligence analysts and listening to their warfighters. Maybe this time around, instead of starting out by saying here's the important questions, we ought to start out by saying here's a methodology that can identify the important questions. MR. DONNELLY:  Okay.  I can't pass up a chance to kibbitz on this one.  I guess I would kind of agree with Michael but lament that this time around that's a really tragic fact.  I continue to believe that there's a fundamental, an increasing sort of strategic ends, military means gap that the experience of--our experience since September 11th has been to raise our strategic grasp, so to speak, or expand our strategic grasp, but not fundamentally to respond by expanding our military means.  So, you know, while I'd differ with Loren over Iraq policy, I'm very concerned that we will end up in a situation where our forces are simply incapable of executing all the missions that we ask them to do.  And one of the unfortunate things about this budget memorandum is that it suggests that we're not really willing to face reality fully just yet.  And if we can't do that during the QDR, you know, this time it's not just wasted effort. One more question and then we'll call a halt.  Is there?  Okay, good.  The gentleman with the obstructed view. MR. SCHROEDER:  Wayne Schroeder with Lockheed Martin, formerly of the Office of the Secretary of Defense.  Two observations and then one question, if I could, for the panel.  The observations are on the supplemental issue and on the deficit issue. With respect to the supplemental, two or three years ago the department did attempt to put a contingency fund, a $10 billion contingency fund into the general budget to pay for costs of OEF, I believe it was at the time.  That was zeroed out by the Congress. Throughout the Vietnam War, supplementals paid for the Vietnam War.  I think that's still the appropriate approach in order to pay for military operations.  We have a better sense of what the operations are going to cost when we get toward the middle of a fiscal year as opposed to having done it actually almost two fiscal years previous. With respect to the deficit, it's intriguing to look at the numbers in the PBD.  The vast majority of the cuts are in OA-211, and the procurement cuts, of course, and we're talking here primarily about the implications of procurement cuts.  Those will have no impact immediately on the deficit.  Those cuts that do come to procurement will have a very low spendout--outlay/spendout rate.  They won't have any measurable impact in 8, 9, 10, and 11.  Maybe perhaps it will start to kick in by 10 and 11. So it seems to me that the issues with respect to the deficit and how this particular $30 billion cut impact the deficit really need to be somewhat readdressed. Then, finally, I'd like to ask the panel to answer the question:  Should not the industrial base issues implied by some of the decisions made in this PBD be looked at in the QDR?  I think Mr. Thompson quite aptly surveyed the implications for the shipbuilding industry.  I think we just touched the surface on aircraft.  If you look at what's going to happen in tactical aviation in the Air Force, tactical airlift, tactical--certainly tac fighters, the C-17 line is going to close, there's no bomber production, the whole tanker issue is iffy.  We could end up having almost every production line closed as we get toward the end of this program.  We're crossing our fingers that the Joint Strike Fighter, of course, will stay on track, and we hope it does. MR. DONNELLY:  All right.  That's a very rich menu of issues.  You can do it all or cherrypick them as you wish. MR.           :  Well, I will just address the first two, I think. First of all, I think on the issue of the supplementals, back when they did the contingency fund, I think that was perceived to be a slush fund, basically, by some members of Congress because it wasn't clear what that money was going to be used for, what kind of operations it was going to be used for.  I think that's very different from where we are today In the case of the Vietnam War, we actually did use--it was not just in supplementals.  The initial parts were in supplementals, and some of the additional was in supplementals later on.  But, in fact, large parts of that war were funded in the regular defense budget, not supplementals. In any event, whatever the history has been, I think clearly we know we're going to be there.  We should put in some plug for what we think it's going to cost.  We don't have to be quite right.  If it turns out to be a little bit more that we need, we can go for a supplemental for that.  If it turns out it's a little less, you know, no harm there.  But I think it should clearly be in the President's budget proposals.  I mean, after all, we're making decisions about entitlement changes, taxes, a whole range of important policy issues, and you just simply don't have an accurate projection of what deficits are likely to be when you don't have that plug in there.  So I think the case for doing this at this point simply through supplementals is pretty weak. In terms of the deficit, what impact these kinds of cuts are going to have on the deficit, I think that's true.  I mean, this is $30 billion over six years.  This is not going to have a huge impact on the deficit.  These are acquisition programs which have fairly slow spendout rates, so it's going to--you're going to have less of an impact. That said, this deficit is not a two-, three-, four-, five-year problem.  This is a decades problem.  So in some ways, it doesn't really matter if it takes five or six years to have an impact, it's still important to--it can still be important to play at least some small role in addressing the deficit. You know, I think also it's probably over the longer term--you know, clearly cutting defense alone is not going to do this.  It's going to have to be part of a broader effort.  But as I said earlier, I think, ultimately I think defense is going to probably play a more--there are going to be deeper cuts in defense so it's going to have some more impact on the deficit. MR. DONNELLY:  Michael? MR. O'HANLON:  I'd just make one point, which is I have enough concern about the defense industrial base myself, as you, sir, mentioned and Loren also earlier.  This is one of the reasons why I would like to support continued production of things like F-16s and Black Hawk helicopters where appropriate, because these things you can keep building now.  You get them into the hands of the warfighter.  It may not always be the top choice of American industry.  It may not always be the top choice of the military services.  But in many cases, this is a way to keep industrial lines running, and it's a way to make sure our equipment inventories don't get too old and decrepit; whereas if you always hope for the next system to come in on cost and on schedule and to have the defense budget keep growing to fund it, often that's the way to cause more problems for your defense industrial base and also for your warfighter. I'm not suggesting it's either/or, but I think we can have a mix, a high/low mix across much of the force. MR.           :  Well, all I would say about that is that, you know, the F-15, our current top-of-the-line fighter, was designed in the Nixon era, designed during the Vietnam War.  The F-16 was designed not much later.  I don't think you can maintain your industrial and tech base by continuing to build systems that in technological terms have become sort of archaic.  If you want to maintain a world-class industrial base, you've got to build products that are world class by today's standards.  In the case of transports, that means the C-17.  In the case of fighters, it means either the Joint Strike Fighter or it means the F-22. I think Michael's right.  We don't need all these Air Force JSFs.  We don't need as many as they wanted to buy.  But 381 F-22s is the Air Force's minimum requirement, and as chance would have it, it's the more capable, technologically impressive of the two aircraft.  So I think that program should stay on track, mostly for threats, but also because of the industrial base. MR. DONNELLY:  I will conclude with one brief comment about the supplementals.  To me it's more what you're buying with the supplemental that's the worry.  There's nothing wrong with buying gas, beans, and bullets on a one-year basis because those are fairly fungible and replaceable.  But if you're constantly buying 200,000 worth of manpower with such a short-term horizon, then you're going to be in trouble.  So it's not the supplemental per se, but whether that's improperly shaping particularly manpower policy. As to the industrial base, it just may be the case that we still have some overcapacity.  We may have stopped in the sort of rationalization process, if you can really call it that, of the 1990s short of what a realistic answer was for our defense industrial base.  It's very difficult, I think, as Steve said, to foresee a circumstance under which it makes fiscal sense to, say, keep two submarine yards open.  It may make strategic sense, but there's going to be a premium associated with that, and that's, you know, just a political decision that has to be made.  You know, again, this may be the forcing mechanism for decisions that might more prudently have been better made five or ten years ago.  But, again, it won't get any better for kicking the can down the road, and you may not want to end up in a situation where you have sole suppliers for, you know, certain major combat systems or certain capacities.  Conversely, you may have no real choice about it either, and keeping multiple companies and yards and other industries alive when there's not likely to be really business to support it doesn't strike me as, you know, being the right policy either. So, with that rather glum and unhappy note, I will gavel the proceedings to conclusion.  Please join me in a round of thanks for our panelists. [Applause.] MR. DONNELLY:  I'm quite sure this is an issue we'll return to, and if we're not going to invite Loren to speak on Iraq, there are plenty of other issues we'll bring him back for. Thanks, everybody, very much.</body></html>