[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                         [H.A.S.C. No. 111-19] 

                    SECURITY CHALLENGES ARISING FROM 

                      THE GLOBAL FINANCIAL CRISIS 

                               __________

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                             MARCH 11, 2009


                                     
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                   HOUSE COMMITTEE ON ARMED SERVICES
                     One Hundred Eleventh Congress

                    IKE SKELTON, Missouri, Chairman
JOHN SPRATT, South Carolina          JOHN M. McHUGH, New York
SOLOMON P. ORTIZ, Texas              ROSCOE G. BARTLETT, Maryland
GENE TAYLOR, Mississippi             HOWARD P. ``BUCK'' McKEON, 
NEIL ABERCROMBIE, Hawaii                 California
SILVESTRE REYES, Texas               MAC THORNBERRY, Texas
VIC SNYDER, Arkansas                 WALTER B. JONES, North Carolina
ADAM SMITH, Washington               W. TODD AKIN, Missouri
LORETTA SANCHEZ, California          J. RANDY FORBES, Virginia
MIKE McINTYRE, North Carolina        JEFF MILLER, Florida
ELLEN O. TAUSCHER, California        JOE WILSON, South Carolina
ROBERT A. BRADY, Pennsylvania        FRANK A. LoBIONDO, New Jersey
ROBERT ANDREWS, New Jersey           ROB BISHOP, Utah
SUSAN A. DAVIS, California           MICHAEL TURNER, Ohio
JAMES R. LANGEVIN, Rhode Island      JOHN KLINE, Minnesota
RICK LARSEN, Washington              MIKE ROGERS, Alabama
JIM COOPER, Tennessee                TRENT FRANKS, Arizona
JIM MARSHALL, Georgia                BILL SHUSTER, Pennsylvania
MADELEINE Z. BORDALLO, Guam          CATHY McMORRIS RODGERS, Washington
BRAD ELLSWORTH, Indiana              K. MICHAEL CONAWAY, Texas
PATRICK J. MURPHY, Pennsylvania      DOUG LAMBORN, Colorado
HANK JOHNSON, Georgia                ROB WITTMAN, Virginia
CAROL SHEA-PORTER, New Hampshire     MARY FALLIN, Oklahoma
JOE COURTNEY, Connecticut            DUNCAN HUNTER, California
DAVID LOEBSACK, Iowa                 JOHN C. FLEMING, Louisiana
JOE SESTAK, Pennsylvania             MIKE COFFMAN, Colorado
GABRIELLE GIFFORDS, Arizona          THOMAS J. ROONEY, Florida
NIKI TSONGAS, Massachusetts
GLENN NYE, Virginia
CHELLIE PINGREE, Maine
LARRY KISSELL, North Carolina
MARTIN HEINRICH, New Mexico
FRANK M. KRATOVIL, Jr., Maryland
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
                    Erin C. Conaton, Staff Director
                  Ann Miles, Professional Staff Member
                Roger Zakheim, Professional Staff Member
                    Caterina Dutto, Staff Assistant
























                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2009

                                                                   Page

Hearing:

Wednesday, March 11, 2009, Security Challenges Arising from the 
  Global Financial Crisis........................................     1

Appendix:

Wednesday, March 11, 2009........................................    41
                              ----------                              

                       WEDNESDAY, MARCH 11, 2009
      SECURITY CHALLENGES ARISING FROM THE GLOBAL FINANCIAL CRISIS
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

McHugh, Hon. John M., a Representative from New York, Ranking 
  Member, Committee on Armed Services............................     2
Skelton, Hon. Ike, a Representative from Missouri, Chairman, 
  Committee on Armed Services....................................     1

                               WITNESSES

Cooper, Richard N., Professor of International Economics, Harvard 
  University, and Former Chairman, National Intelligence Council 
  and the Federal Reserve Bank of Boston.........................     7
Haass, Richard N., President, Council on Foreign Relations.......     4
Rothkopf, David, Visiting Scholar, Carnegie Endowment for 
  International Peace............................................    13
Zakheim, Dov S., Former Under Secretary of Defense (Comptroller).     9

                                APPENDIX

Prepared Statements:

    Cooper, Richard N............................................    51
    Haass, Richard N.............................................    47
    McHugh, Hon. John M..........................................    45
    Rothkopf, David..............................................    67
    Zakheim, Dov S...............................................    55

Documents Submitted for the Record:

    Annual Threat Assessment of the Intelligence Community for 
      the House Permanent Select Committee on Intelligence by 
      Adm. Dennis C. Blair.......................................    87

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    [There were no Questions submitted post hearing.]

      SECURITY CHALLENGES ARISING FROM THE GLOBAL FINANCIAL CRISIS

                              ----------                              

                          House of Representatives,
                               Committee on Armed Services,
                         Washington, DC, Wednesday, March 11, 2009.
    The committee met, pursuant to call, at 10:03 a.m., in room 
2118, Rayburn House Office Building, Hon. Ike Skelton (chairman 
of the committee) presiding.

 OPENING STATEMENT OF HON. IKE SKELTON, A REPRESENTATIVE FROM 
        MISSOURI, CHAIRMAN, COMMITTEE ON ARMED SERVICES

    The Chairman. Good morning.
    Our committee meets today to hear from a very distinguished 
panel of experts about security challenges arising from the 
global financial crisis.
    November 2008, our committee initially set out to hold a 
hearing on this topic, but for a variety of reasons, we were 
not able to make the schedule work. Consider briefly what has 
happened in the intervening months.
    The U.S. financial crisis has widened into a global 
economic crisis. Our unemployment rate increased from 6.8 
percent in November to 8.1 in February. The governments of 
Iceland and Latvia have fallen as a result of the crisis and 
others are likely to follow. Three of our most important 
partners in the Muslim world--Turkey, Indonesia, Pakistan--all 
face acute balance of payment crises. And the Director of 
National Intelligence (DNI), Admiral Dennis Blair, has 
concluded that the crisis represents the single greatest threat 
to our national security.
    [The information referred to can be found in the Appendix 
on page 87.]
    The Chairman. In short, we face a world that has been 
suddenly transformed and not for the better.
    Students of history know that hyperinflation in Germany was 
a significant factor in the rise of Adolf Hitler. The economic 
decay of the Soviet Union led to the regime change across 
Eastern Europe. So we know that economic crises can have 
consequences of national security of the highest order.
    Here in the United States, our economic strength has been 
the foundation of our national power and our national security. 
It is reasonable to assume that economics play no less 
important a role in the fate of many other nations. At a 
minimum, the global financial crisis will exacerbate an already 
growing set of political and economic challenges facing the 
world.
    In country after country, the crisis is increasing citizen 
discontent and anger toward their leaders and providing an 
excuse for authoritarian regimes to consolidate their power. It 
is causing emerging nations to question the Western model of 
market capitalism. It heightens the always ongoing tug-of-war 
over budgetary resources and international assistance at a time 
when millions are being pushed into poverty. It distracts and 
strains our allies, generates conditions that could provide 
fodder for terrorism. Financial turmoil can loosen the fragile 
hold that many countries have on law and order and increase the 
number and size of ungoverned spaces.
    Perhaps most serious at a time when United States 
leadership is sorely needed, our international credibility is 
at an unprecedented low.
    In my view, our response to these challenges must be to 
restore our economy, maintain and enhance our key instruments 
of national power, including the Department of Defense, and 
take an approach with the world that reestablishes our 
credibility and claim to world leadership.
    Let me be clear, in today's world a strong national defense 
is not a luxury. It is an imperative. I will be interested to 
hear our witnesses' views on the likely demand of our national 
defense capabilities in the current environment.
    Let me pause for a moment. And I see in the audience 
friends we met yesterday, parliamentarians from the country of 
Pakistan. And we hope you get a lot out of our hearing.
    And why don't you stand so we can--would you, please? Our 
Pakistan parliamentarians.
    We welcome you and hope you have an excellent stay here in 
our Nation's capital.
    Let me briefly introduce today's witnesses before turning 
to my friend, my colleague John McHugh, for opening remarks. 
Today, we have with us Dr. Richard Haass, President of the 
Council on Foreign Relations and former Director of Policy 
Planning for the State Department; Dr. Richard Cooper, 
Professor of International Economics at Harvard University, 
former Chairman of the National Intelligence Council and former 
Chairman of the Federal Reserve Bank of Boston; Dr. Dov 
Zakheim, whom I call the real Dov Zakheim--his son is one of 
our excellent members of our staff; former Under Secretary of 
Defense and Chief Financial Officer for the Department of 
Defense--in essence, the Comptroller thereof; David Rothkopf, 
visiting scholar at the Carnegie Endowment for International 
Peace and former Acting Under Secretary of Commerce for 
International Trade.
    Gentlemen, we welcome you all. We look forward to your 
testimony and your insights on today's topic.
    So now I recognize my colleague, the gentleman from New 
York, John McHugh.

  STATEMENT OF HON. JOHN M. MCHUGH, A REPRESENTATIVE FROM NEW 
       YORK, RANKING MEMBER, COMMITTEE ON ARMED SERVICES

    Mr. McHugh. Thank you, Mr. Chairman. Pardon me.
    Let me begin by adding my words of welcome to our 
distinguished panelists--some are welcomed back, actually, 
being no stranger to this full committee. We deeply appreciate 
your contributions, that we are looking forward to hearing you 
make today.
    Also, Mr. Chairman, I want to add my words of greeting and 
deepest hellos again to our Pakistani counterparts. It was a 
pleasure, as you and I shared amongst other Members yesterday 
to have some lunch with these real champions of democracy. And 
it is inspirational for--at least for me; I will speak on my 
own behalf--to have the chance to see the struggles and the 
courage and the fight for a nation that these good folks 
represent. And we are honored by their presence.
    Mr. Chairman, I would ask that my statement be entered in 
its entirety in the record; and I would note, as always, you--
--
    The Chairman. Without objection.
    Mr. McHugh [continuing]. You covered much of the waterfront 
with respect to the comments I wanted to make. But let me just 
say that I certainly join you in your assessment of the 
seriousness of this topic today as a national security concern.
    You mentioned. As I was prepared to, the DNI, Director 
Blair's comments with respect to the importance of this 
challenge to our near-term security. And clearly, again as you 
noted, Mr. Chairman, we read the newspaper, we listen to the 
news, the data tells us--whether through unemployment insurance 
or unemployment rates and the fall of the stock market and 
other indexes--the very outward and discernible aspects of this 
challenge.
    But I would suggest the national security implications of 
this issue were far less overt, and like you, I am looking 
forward to hearing our witnesses develop further DNI Blair's 
comments. And perhaps they could discuss with us today other 
ways in which the economic crisis will impact upon our 
security.
    History has proven to us, it seems to me, time and time 
again that instability often follows financial crisis. The 
intelligence community rightly raises concerns over the 
security of our friends, our allies. And the crisis also 
invites opportunism by rogue states and terrorist 
organizations, as you noted, Mr. Chairman.
    So the question I would also like our witnesses to address 
today is, what do we do with this intelligence. In other words, 
what steps, if any, I suppose, should the Department take to 
deal with the risks of this crisis?
    My first concern, as it is so often, Mr. Chairman, is 
defense spending. Though the top line defense numbers for 
Fiscal Year 2010 show a four percent increase in spending, by 
moving war costs out of the supplemental and into the base 
budget, the reported growth is much less than that. And I would 
note, as an aside, I support the end of supplementals and the 
masking effects that they have on defense budgets. But we have 
to be, I think, very clear and sober with respect to the 
mathematical effects of that effort. And that is why I suspect, 
in part, Secretary of Defense Robert Gates greeted the budget's 
release by saying he would have to make, as he called them, 
``tough choices.''
    The story is even bleaker in future years when the real 
cost of our baseline defense requirements will no longer--
appropriately, but no longer--be masked by supplemental 
appropriations. Let's just take the growth of the military as 
one example. Supplemental funding bought the Army and Marine 
Corps over 50,000 active duty personnel from 2001 through 2008. 
The price tag for that growth was roughly $6.8 billion in 
additional basic defense costs. Future defense budgets will 
have to absorb these costs, and that is why I am concerned what 
impact flat-lining defense spending will have on national 
security policy in the midst of this global financial 
uncertainty.
    Missile defense policy offers yet another good example. 
Many are calling for deep cuts in these programs, and while I 
may understand their perspective, I would argue that strategic 
deterrence may be exactly what will be required to bolster our 
allies and friends at this time. A weakened global economy is 
unlikely to lead competitors and adversaries to increase their 
strategic capability as some may hope. In fact, I think it can 
be argued that the opposite may be more plausible.
    Faced with fiscal constraints, will Iran double down on its 
ballistic missile program? The question, it seems to me, merits 
our most careful consideration.
    In contrast to the 1990s, today we more fully understand 
where our security challenges reside: The wars in Iraq; 
Afghanistan; the fight against al Qaeda; Iranian and North 
Korean nuclear weapons programs; the return of a more 
aggressive Russia; the rise of China--all require not just 
words but resources as well. Diplomacy, soft power, to be sure, 
is a necessary condition, but that effort will ring hollow, in 
my judgment, absent a strong commitment on defense. And it 
seems to me this will be particularly true during the current 
economic crisis.
    Mr. Chairman, with that and the rest of my statement 
entered into the record, I would once again welcome our 
witnesses and say how anxious and happy I am to hear their 
comments. And I would yield back to you for the rest of the 
hearing.
    The Chairman. I thank the gentleman.
    [The prepared statement of Mr. McHugh can be found in the 
Appendix on page 45.]
    The Chairman. Let's begin. Once again, Dr. Haass, please.

 STATEMENT OF RICHARD N. HAASS, PRESIDENT, COUNCIL ON FOREIGN 
                           RELATIONS

    Dr. Haass. Thank you, Mr. Chairman, for the opportunity to 
testify before this committee. And let me applaud you and your 
colleagues on holding these hearings.
    Let me say at the outset, the economic crisis was not 
inevitable. It was just a result of flawed policies and poor 
decisions and questionable behavior. The problem lies with the 
practice of capitalism, not the model.
    But, nevertheless, I believe we need to face the reality 
that the perception in many places is otherwise. And that one 
consequence of the economic crisis is that market economies 
have lost much of their luster, and the United States has lost 
much of its credibility in this realm. And this only adds to 
the importance that the U.S. economy get back on track, lest 
the lasting casualty of the crisis be the perception of modern 
capitalism itself.
    The impact of this crisis will be varied and profound. Let 
me begin with the developed world. Many governments, including 
several in Central and Eastern Europe outside the Eurozone, 
will require substantial loans. The economies of Japan, much of 
Europe, the United States and Brazil are all contracting. World 
economic growth will be anemic, if it manages to be positive, 
which is increasingly unlikely. There will be fewer resources 
available for defense and foreign assistance. That is obviously 
the purview of this committee, but I would think the pressure 
on defense resources will make it even more critical that our 
priorities are determined and are clear.
    Developing states around the world may appear to be better 
off as their growth, on average, is down by roughly half from 
previous years and it is still positive. But this growth is 
measured from a low base, and the reduction in the growth in 
the developing world has, in many cases, been dramatic. Their 
exports are down as demand is down. In the developed world, aid 
flows are reduced and investment flows are much reduced. Let me 
single out a couple of countries. One is China. Absent renewed 
robust economic growth, the chances are high that the 
government will react to, among other things, the high 
unemployment by clamping down somewhat more on the population, 
lest economic frustration lead to meaningful political unrest.
    Secondly, I would single out Russia. Russia is quite 
characteristic of countries that are dependent on raw material 
exports for much of their wealth. The economy there is 
contracting sharply after a boom; and again, I believe we can 
expect a greater assertion of political control domestically, 
and I would not rule out the possibility that Russia's leaders 
will look to overseas crises to divert attention.
    Iran and Venezuela are two other countries that are heavily 
reliant on energy exports. Obviously, their foreign policies 
have been counterproductive from our perspective. The good news 
here that it is possible that one or both of these countries 
will pull in their horns at least for a while.
    Iraq, yet another energy-producing country, here the 
effects of the crisis are going to be undesirable. There is a 
real danger that disorder in Iraq will increase as unemployment 
there goes up, as prospects for sharing revenues goes down, and 
as the ability of the central government to dispense cash also 
goes down.
    We have, as you noted, visitors from Pakistan. And I would 
simply say that Pakistan's economic performance is down for 
many reasons, but one is the reduction in foreign investment 
and the reduction in Pakistan's exports. The problem is that 
Pakistan has little margin for error. The possibility that it 
could fail with all that that would mean for terrorism, for the 
future of Afghanistan, and for nuclear stability is all too 
real.
    Also North Korea is another nuclear arms state whose 
stability is worsened by the economic crisis; and I think there 
are real questions about the ability of South Korea, in 
particular, to intervene economically on a scale that will be 
required to potentially stave off collapse.
    Another serious issue of the global economic crisis affects 
every country, which is protectionism. Some 17 of the 20 
governments set to meet in London in early April have already 
increased barriers to trade. Negotiated free-trade agreements, 
as you know, with Colombia, Panama, and South Korea continue to 
languish in the Congress. The President lacks trade promotion 
authority essential to the negotiation of complex multilateral 
trade accords. Prospects for a Doha global trade pact appear 
remote. The volume of world trade is down for the first time in 
decades.
    I would simply say the costs of this are high--the economic 
cost, but also the strategic cost, the subject of today's 
hearing. Trade is a major source of political as well as 
economic integration. I would suggest that one reason China 
acts as responsibly as it does in the political realm is 
because of its need to export; and it would--without this 
economic integration--it would have less incentive, I believe, 
to act responsibly.
    Trade is also a principal engine of economic growth. A Doha 
Round alone might generate something on the order of $500 
billion in economic output to the world, one quarter of which 
would be in the United States. To use the language of the day, 
trade may be the purest form of noninflationary stimulus 
available to the United States or any other government. Exports 
are a source of millions of relatively high-paying jobs. 
Imports can be anti-inflationary and can spur innovation.
    What then should be done to limit the adverse strategic 
effects of the economic crisis? Let me quickly suggest five 
things the United States should do or consider doing.
    First, I would suggest that the United States should do all 
in its power to resist the growth in protectionism. This means 
resisting buy American provisions in stimulus legislation. On 
balance, more American jobs are likely to be sacrificed than 
preserved.
    I also believe we should resist ``lend national'' 
provisions that are springing up around the world, and instead, 
we ought to look for ways to bring countries into an expanded 
world trading system, in particular, bring them into the World 
Trade Organization (WTO).
    Secondly, we cannot allow recession to become this 
country's energy policy. We must continue to look for ways to 
decrease U.S. consumption of oil, imported or otherwise, 
despite the temporarily lower prices.
    Thirdly, the United States should work with other developed 
countries and reserve-rich countries to increase the capacity 
of the International Monetary Fund (IMF) to assist governments 
in need of temporary loans. We cannot afford to have a rash of 
essentially failed governments around the world.
    Fourth, the aid budget should be protected to the extent 
possible. It is needed on a large scale not just for 
humanitarian reasons and not simply to build human capital, but 
also to substitute for trade, to substitute for investment 
flows. Again, absent aid, we are likely to see a larger number 
of failing or failed states which will give, among other 
things, terrorist groups, drug cartels, and the like greater 
room for operation.
    Fifth, the upcoming Group of 20 (G-20) summit in London is 
an important opportunity to address some of the issues I 
mentioned. Europe and Japan, in particular, should be pushed to 
take steps to stimulate their economies, but guidelines also 
need to be adopted so that stimulus programs do not become 
mechanisms for unwarranted subsidies and ``buy national'' 
provisions that are simply protectionism by another name.
    The London summit is also an opportunity to increase IMF 
capacity to make loans, to generate commitments to making aid 
available to developing countries, and to agree on at least 
some regulatory principles for national banking and financial 
systems.
    That said, I don't think we ought to get too ambitious. We 
are not going to have the opportunity in London to remake the 
architecture of the international economy, to solve the 
problems of countries that run chronic balance-of-payments 
surpluses, or to revamp the system of exchange rates.
    Let me close, Mr. Chairman, with one final thought. Much of 
this hearing is focused on the question of the consequences of 
the economic crisis for global security. But developments in 
the political world can and will have an effect on the global 
economy. In short, things can go in the other direction as 
well.
    Just imagine for a second the economic consequences of, 
say, a Taiwan crisis; or fighting between India and Pakistan; 
or an armed confrontation between the United States and/or 
Israel and Iran over Iran's nuclear ambitions. And I would 
single out this last one. This last possibility of an Iran 
crisis is the most worrying geopolitical possibility, I would 
think, in the near term. And it underscores the importance of 
trying to negotiate limits on Iran's enrichment program lest 
the United States and the world be confronted with the unsavory 
option of either living with an Iranian near or actual nuclear 
weapons capability or mounting a preventive military strike 
that, whatever it accomplishes, would be sure to trigger a 
wider crisis that would lead to energy prices several times 
their current level.
    In short, again, it is right that you are addressing the 
economic crisis. But it is also important, I think, at the same 
time to think about developments in the traditional national 
security realm, either in their own right or, again, how they 
can affect the trajectory of our efforts to get out of this 
economic crisis and restore economic growth.
    Thank you. And I look forward to your questions and to 
hearing the testimony of my extraordinarily able colleagues.
    The Chairman. Dr. Haass, thank you.
    [The prepared statement of Dr. Haass can be found in the 
Appendix on page 47.]
    The Chairman. Now we turn to Dr. Cooper. Thank you so much 
for being with us, Doctor.

  STATEMENT OF RICHARD N. COOPER, PROFESSOR OF INTERNATIONAL 
 ECONOMICS, HARVARD UNIVERSITY, AND FORMER CHAIRMAN, NATIONAL 
  INTELLIGENCE COUNCIL AND THE FEDERAL RESERVE BANK OF BOSTON

    Dr. Cooper. Thank you, Mr. Chairman, for having me here.
    I would like to start by noting that during the----
    The Chairman. Doctor, you will have to speak very closely 
into that microphone. The acoustics in here are not very good 
on this end. So as close as you can get, we would appreciate 
it.
    Dr. Cooper. I would just like to recall that the period 
2002 to 2007 was an extraordinary period for the world economy, 
arguably the best half-decade in history. Growth was high and 
widespread, inflation was low in most countries, and this 
exceptional performance before the recent crisis may have 
created unsustainable expectations about the future, 
particularly in young adults who do not recall earlier, less 
buoyant periods of economic activity.
    Now, the impact of the current global recession on U.S. 
national security--I interpret it broadly--is extremely 
complex. There are pluses and minuses. Let me start with a few 
of the pluses.
    It will be easier to recruit and retain desired persons for 
the U.S. armed services at unemployment rates of 8 to 10 
percent than at unemployment rates of 4 to 5 percent, with 
lower signing bonuses.
    Second, one year ago, a major source of anxiety in many 
countries around the world was the rapid rise and continuing 
rise of food prices and of oil prices insofar as it affects 
ordinary urban dwellers. With the slowdown in the world 
economy, food prices are now way down, not compared with six 
years ago, but compared with one, two, and three years ago; and 
this is a source of major relief to many countries in the world 
who will benefit. The World Bank estimates that over half of 
developing countries will benefit from the lower food prices.
    Third, the oil revenues of all oil exporting countries, 
again, while higher than they were a decade ago, have declined 
sharply from the elevated levels of 2007 and early 2008. And 
this includes, in particular, the revenues of Russia, Iran, and 
Venezuela, each of which in different ways has posed problems 
for the United States. All three countries have become fiscally 
undisciplined, and all will have to cut their expenditures 
sharply in view of their declines in revenue unless they are 
willing to countenance a sharp increase in domestic inflation, 
which would increase domestic disaffection with their 
respective governments.
    The decline in oil prices is directly linked to the 
slowdown of world economic activity. So in this respect, the 
slowdown can be said to benefit U.S. national security. 
Concretely, Iran will have to balance more carefully its 
financial and material support for outfits like Hezbollah 
against pressing requirements for domestic expenditure. So 
there are some pluses, but there are also some serious 
negatives.
    The recession implies a decline in demand and particularly 
a demand for labor-intensive products made in many developing 
countries. World trade is likely to fall for the first time in 
a quarter century this year and more deeply than it fell since 
the 1930s. And this contrasts with an annual growth in trade 
volume in excess of seven percent over the last several years.
    Thus, a major source of new jobs, pulling people from the 
countryside into urban areas in many countries will disappear 
and perhaps go into reverse. There will be disappointed 
migrants and millions of workers laid off.
    For example, it is said that in China already 20 million 
migrants have lost their jobs. These are internal migrants 
mainly in low-skilled manufacturing and in construction, both 
of which have declined sharply. And, in addition, several 
million newly graduated students will have difficulty finding 
jobs in the current economic environment.
    The Chinese authorities are greatly concerned about the 
eruption of social unrest and have already taken a number of 
steps to head it off, for example, by providing loans for self-
employment by new college students and by improving life in the 
rural areas.
    It is worth noting that in the oil exporting countries of 
the Persian Gulf, the impact of the decline in new jobs will 
fall mainly on foreigners, rather than on residents, since most 
of the work in the private sector in those countries and much 
of it in the public sector is performed by temporary migrants 
from other countries.
    Now the recruiting ground for terrorists and for criminal 
gangs is typically among idled, disaffected, alienated young 
men. They are not typically from among the poorest people of 
the world, but from people that, by world standards, would be 
considered ``lower middle class,'' if one can use that 
categorization. The recession will increase the numbers of such 
people, but probably not massively unless the recession becomes 
much worse than is now generally expected.
    Some countries are more vulnerable than others. Pakistan 
has already been mentioned. Large numbers of Pakistanis work in 
the Gulf Area. Some may lose their jobs, returning to Pakistan 
and depriving that country of their extensive remittances.
    The most important effect of the financial crisis and the 
subsequent recession may be the least tangible: a serious, 
worldwide erosion of confidence in American competence, a 
confidence that was previously carried, almost a sense of 
invincibility. The rest of the world typically placed more 
confidence in American competence than Americans deserved, as 
most Americans knew better. But the events of the last six 
years have brought American competence under severe doubt, 
starting with the post-combat phase of the war in Iraq, which 
the United States is generally, around the world, viewed as 
having bungled.
    This, was reinforced by the perceived debacle over the 
handling of Hurricane Katrina; and now the subprime mortgage 
crisis at the heart of the seemingly invincible American 
financial system has led to a wider financial crisis and, now, 
a global recession, and that further undermines confidence in 
American competence. This crisis clearly started in the United 
States, not in some emerging market or, as in 1992, in Europe.
    This loss of a perception of invincibility may embolden 
existing hostile groups to try, through some dramatic act, to 
bring the system of American capitalism, now vulnerable, 
crashing down for good. And I think that is probably the most 
serious immediate threat to come out of the current financial 
crisis.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    [The prepared statement of Dr. Cooper can be found in the 
Appendix on page 51.]
    The Chairman. Now our old friend, Dr. Dov Zakheim.
    Dr. Zakheim.

STATEMENT OF DOV S. ZAKHEIM, FORMER UNDER SECRETARY OF DEFENSE 
                         (COMPTROLLER)

    Dr. Zakheim. Chairman, I hope I am not that old. But thank 
you. And thank you, Mr. McHugh. It is so good to be back in 
front of this committee and actually appear with such 
distinguished colleagues.
    The Chairman. Excuse me, the witness is going to have to 
really just talk right into it.
    Dr. Zakheim. Can you hear me better now, sir?
    The Chairman. That is a lot better. Thank you.
    Dr. Zakheim. All right. I will start the clock over. It is 
a pleasure to be here.
    Thank you, Mr. Chairman, and thank you for your kind words.
    And, Mr. McHugh, it is good to be back again before the 
committee, especially with such a distinguished panel of 
experts.
    Like you, I am deeply concerned that the financial and 
economic crisis that has affected our country in particular and 
the international community generally poses a major threat to 
American national security interests. That threat is likely to 
manifest itself in a number of distinct ways.
    First, it is going to create major pressures, already has, 
on the defense budget, most notably the acquisition--that is 
procurement in Research and Development (R&D) accounts;
    Second, it is likely to result in a further contraction of 
defense spending and, therefore, operations, as well, and 
modernization, on the part of key allies and friends;
    Third, it could prompt nations that are ambivalent about 
their relationship with America, most notably China and Russia, 
to act in a way that is deleterious to our own American 
interests;
    Fourth, it could prompt even more hostile behavior on the 
part of nations such as Iran that already don't really like us 
at all; and
    Fifth, it could further destabilize states that are already 
vulnerable to internal unrest.
    Finally, it could spur further international criminal 
behavior that could undermine internal American stability. I 
have addressed each of my--each of these concerns--in my 
written testimony, which I request be inserted in the record.
    For now, I want to concentrate on the impact of the 
economic crisis on the defense budget and, as time permits, to 
add a few remarks about the implications of the crisis for 
other states.
    The defense budget is already under pressure as a result of 
this crisis. Real growth in defense spending, if the 
supplemental is included, is about 1.4 percent because next 
year's supplemental is lower than the plan total of 
supplemental expenditures in fiscal year 2009. These figures 
represent a sharp drop in the growth of annual defense spending 
over the past eight years, which averaged 4.3 percent in real 
terms.
    The lower rate of defense budget growth will manifest 
itself most sharply in the acquisition accounts--procurement 
and R&D. It has been by means of spending funds from these 
accounts that America has been able to assure itself of long-
term military superiority regardless of the capabilities of a 
potential foe. When these accounts were assaulted, as they were 
in the late 1970s, not only did our leading adversary, the 
Soviet Union, become far more reckless, invading Afghanistan; 
but others, like Iran, also exploited what they perceived to be 
American weakness and introversion. If we go through another 
such reduction, can we say with confidence that in one or two 
decades' time no powerful adversary will act upon the 
perception of American weakness and threaten one of our vital 
interests?
    It is a truism that since World War II virtually every war 
we have fought was unforeseen. It is equally true that we have 
consistently structured our future force posture on the basis 
of a war that we had recently fought or were still fighting.
    I worry that we are falling into the same trap now. The 
result could well be, as in Korea or Iraq, many years of 
bloodshed and lost treasure until we righted ourselves; or as 
in Vietnam, outright failure. The opportunity cost of 
reductions in planned acquisition budgets are, therefore, 
exceedingly high and, if not reversed, will far outweigh any 
supposed short-term benefits from budget savings.
    Cuts in procurement, in particular, will have more 
immediate repercussions as well. They are going to result in 
the loss of jobs, in particular for skilled blue collar 
workers, engineers, and physicists--the very people who earn 
far less than $250,000 a year, and at whom the Administration 
is targeting its recovery plan.
    Moreover, it is most likely that as jobs dry up, firms will 
apply the traditional ``last in, first out'' principle; in 
other words, those who have benefited from the most up-to-date 
education and training will be lost to the nation's vital 
defense industrial base. And it is ironic that even as our 
young engineers will find themselves unable to contribute to 
our national security, the United States will continue to train 
foreign students, such as those from China, in the engineering 
and hard sciences, enabling them to go back to their countries 
and help their countries modernize their military.
    Members of the committee might also consider that the 
impact of a flattening of acquisition spending will be unevenly 
distributed around this country. Those states with major 
defense industrial activities, including hard-hit areas in 
Michigan, the Northeast and the South will suffer more than 
other parts of the country. This couldn't be what the 
Administration intends as it pours hundreds of billions of 
dollars into job creation programs.
    Finally, because the Administration is ratcheting up the 
national debt so severely, once the economic turnaround does 
occur and there is a growing demand for dollars and a resulting 
rise in interest rates on government paper, the cost of 
servicing that debt will rise dramatically. Budget deficits 
will increase sharply as a result, and the government will be 
forced to cut back on discretionary programs.
    Well defense accounts for more than half of the entire U.S. 
discretionary budget and has been increasing its percentage of 
discretionary spending in the past eight years. It is going to 
be the most likely target for real cuts, which is not merely a 
flattening of the growth rate in order to manage the ballooning 
deficit, but actual cuts. The impact on our national security 
spending will be profound and negative.
    In her testimony before the House Budget Committee on 
January 27th, Alice Rivlin, my former boss when I was at the 
Congressional Budget Office (CBO), underlined the difference 
between a short-term stimulus and what she called--and I am 
quoting here--``a more permanent shift of resources into public 
investment and future growth.'' She also said, again a quote, 
``The first priority is an anti-recession package that can be 
both enacted and spent quickly to create and preserve jobs in 
the near-term and not add significantly to long-run deficits.''
    The defense budget offers several ways to meet her 
prescription. Vast spending, job-creating programs include: 
reducing deferred maintenance; accelerating ship overhauls and 
aircraft and ground vehicle rework; advanced procurement of 
subsystems to make units like warships--such procurement would 
preserve the second and third tier industrial base, which is 
most vulnerable in the current downturn--and finally; expanding 
and accelerating military construction (MILCON) and family 
housing programs. Of these three elements, only the third is 
part of the $787 billion stimulus package.
    There is considerable merit in the $7.4 billion for 
military construction and operations and maintenance (O&M) in 
military facilities for family housing, military hospitals, and 
the homeowner assistance program.
    But the stimulus should and could go further. Additional 
plans to support both rework and overhauls, as well as advanced 
procurement, will create and sustain critical jobs in hard-hit 
areas.
    I don't want to overrun my time.
    You have heard from my colleagues some of the difficulties 
that apply to the allies who, for many years, have not spent as 
much as they could and now are not in a position to spend as 
much as even they would like. From countries that we clearly 
have ambivalent relationships with--Russia, by the way, has 
just announced, its deputy defense minister announced, that 
regardless of the economic crisis, they are going to modernize 
their strategic nuclear program and their anti-satellite 
program.
    Historically, we have seen you can have a basket-case 
economy and still be a military threat. North Korea is an 
example. And, by the way, when we talk about adversaries like 
North Korea, remember that it doesn't really cost Iran that 
much to support Hezbollah or to support Hamas, and for that 
matter, its economy has been unbalanced since 1979 and it still 
has developed a nuclear program.
    So the restrictions that are imposed on us, given our goal, 
are not the same as the constraints on potential adversaries--
and real adversaries--because their objectives are different 
and because their approach is far more asymmetrical.
    Let me finally say a word about unstable states or--Dr. 
Richard Haass mentioned some of that. Remember also, Mexico may 
be in that category, as well, and we need to worry very much 
about what goes on there. Again, our contingencies have rarely 
been foreseen, and there are a lot of unstable countries in 
this world about which we have to worry.
    So let me conclude by saying, the national security 
implications of this crisis are both broad and profound. They 
will affect our alliance relationships, our interactions with 
major states whose intentions towards us remain unclear. They 
will affect the behavior of unfriendly states and the stability 
of weak and failing states. Most importantly, the economic 
crisis could have a major and deleterious impact on our 
national defense budgets and, therefore, our national security 
posture, which would complicate and, in fact, exacerbate 
relationships we have worldwide.
    Nevertheless, the ultimate impact of the crisis on our 
national security posture remains in our own hands. We can 
forge ahead with defense modernization, we can protect the jobs 
of our young engineers and skilled blue collar workers, we can 
continue to signal our determination to fight for our values 
and freedom.
    The budget is policy and the policy choice is ours. Thank 
you.
    The Chairman. Thank you, Dr. Zakheim.
    [The prepared statement of Dr. Zakheim can be found in the 
Appendix on page 55.]
    The Chairman. Mr. Rothkopf, please.

    STATEMENT OF DAVID ROTHKOPF, VISITING SCHOLAR, CARNEGIE 
               ENDOWMENT FOR INTERNATIONAL PEACE

    Mr. Rothkopf. Thank you, Mr. Chairman, Mr. McHugh.
    The Chairman. Again, get very, very close. And turn it on.
    Mr. Rothkopf. I will do both those things.
    Thank you, Mr. Chairman, Mr. McHugh and members of the 
committee, for inviting me here today.
    It is worth looking, as we consider this issue, as we do 
with many issues nowadays, back to September 11, 2001, and 
remember that the reason that we were attacked on Wall Street 
was that terrorist enemies considered that to be a symbol of 
our national strength. Naturally, we followed after the 
terrorists and we took our eye off of the source of that 
natural strength in this country.
    The damage has not just been done to our markets or our 
401(k)s, but to our national security for many of the reasons 
that we have outlined here today. We have been weakened, we 
have been distracted, and at the same time, a host of new 
problems have been created as a result of the damage done here.
    I would argue that there are two kinds of core challenges 
that we face from a national security perspective. The first of 
these is what I might characterize as a great hollowing out of 
the forces upon which we depend to stabilize. In other words, 
we have heard about the forces that are likely to have us 
spending less money on defense in the United States. Related to 
those are forces that will distract us from attending to issues 
associated with security. But our allies are going through the 
same thing.
    At the same time, there has been enormous crisis of 
confidence with regard to the international institutions which 
have been such a stabilizing force. Whether those institutions 
are the European Union (EU), the International Monetary Fund 
(IMF), the World Bank, the United Nations (UN) system, all of 
those institutions are now being weakened for economic reasons 
and being doubted because of this sweeping crisis of confidence 
in our institutions.
    At the same time, there is a rise of new threats, threats 
that are associated with this crisis and come in a variety of 
flavors. Let me very briefly outline some of those and then 
come to a set of priorities and recommendations.
    The first set of threats that we are going to face are what 
might be characterized as the destabilizing internal effects of 
the crisis in countries around the world. This is, countries 
have rising unemployment, and the International Labor 
Organization (ILO) estimates that in 2009 unemployment as a 
result of this crisis worldwide may hit 50 million or may 
exceed that.
    This causes unrest. Dwindling budgets reduce the ability of 
governments to deal with that unrest and then you have a kind 
of domino effect as viable states become weak states, and weak 
states become failed states; and we know what the creation of 
failed states leads to both in terms of the creation of new 
threats and in the creation of regions to harbor threatening 
nonstate actors like terrorists.
    Another set of issues are associated with destabilizing 
bilateral or regional effects of the crisis. One--which Dr. 
Zakheim touched upon a minute ago--which is a serious one for 
us, is, if Mexico loses control of a number of states to narco 
cartels, as it seems to be doing, and that creates further 
unrest in the country, we have an immigration crisis in the 
United States. This holds true elsewhere in the world as well.
    Also, historically, opportunistic politicians have sought 
to lash out at favored enemies across borders to distract from 
domestic issues. We have seen that in Russia, whether it is in 
the context of Georgia or in the context of the recent baiting 
of Ukraine, which could grow much more dangerous.
    And then there are, as I mentioned earlier, the 
destabilizing global effects of the crisis. Richard Haass made 
this point well, first, and it was repeated several times. 
Protectionism is corrosive and undercuts the kind of 
international relationships upon which we have historically 
depended and, I might add, the kind of interrelationships upon 
which we need to depend going forward simply because our 
resources are going to be limited. We are going to need to find 
ways to improve burden sharing if we have less capability 
internally.
    In terms of individual cases, in terms of the destabilizing 
group, or countries about which we should be specifically 
concerned, some have been mentioned here. Pakistan, Ukraine, 
Turkey, Egypt, Iran, Russia, Venezuela, Argentina, Indonesia, 
the Philippines, China, and North Korea are all countries where 
internal forces associated with this crisis could produce 
either a backlash internally, political crisis internally, or 
crises that spill across borders.
    In the issues between nations, I mentioned Russia; and in 
the interest of time I will skip forward, and we can come back 
to that or you can review it in the remarks that are in the 
record.
    On the risks on a global scale, I would say that we are at 
a moment where virtually every international institution we 
have either is facing renovation or requiring reinvention. The 
IMF, the World Bank, the WTO, the nuclear nonproliferation 
regime, we are going to have to create a new institution with 
regard to global climate issues; and the United Nations (UN) 
also comes into question. This could be a moment for 
reimagining the international system, and I agree with Richard, 
it is not all going to be fixed on April 2nd. But over the 
course of the next several years, one of the legacies of this 
Congress and this Administration could be to reinvent that 
system.
    At the same time, there is a very real threat that concerns 
about budgets, an inward turn on the part of political leaders, 
and tensions across borders as a result of these things could 
lead to further weakening of those institutions, which will 
take away the ability that we might have to share burdens and 
to resolve problems before they become crises. This is a 
legitimate threat.
    Now, very quickly, let me go to a prioritization of how you 
might see these threats and the response to them because 
clearly one of the big issues that you face as a committee and 
that the government faces is a series of asset allocation 
decisions because we have limited assets.
    The number one issue here, if we are going to address the 
national security issues caused by this crisis, is to address 
the economic and political constraints placed on the United 
States of America, to address our economic crisis here and also 
to maintain a forward-looking and -leaning political stance 
internationally.
    Another of the threats--the remaining set of threats that I 
think need to be prioritized would include the economic and 
political constraints placed on the European Union (EU), China, 
and other potentially stabilizing actors; the crisis of 
confidence in institutions worldwide and the threats to the 
international system; the exacerbation of critical threats 
associated with proliferation of weapons of mass destruction--
failed states become conduits for networks of nonstate actors; 
this can make that problem a lot more difficult to deal with--
the consequences of protracted crisis for the world's weakest 
states and the threats to weaken weakened states directly, 
impacting U.S. national interests--of which Mexico, I think, is 
a good example. Haiti is another example in this neighborhood.
    As a consequence of this system--or this series of 
challenges that we face, we might want to prioritize our 
recommendations for response as follows:
    We need to be strategic about marshaling and maintaining 
U.S. resources. This includes fiscal restraint and restoring 
thought to fiscal restraint. Being indebted to overseas nations 
weakens us; we lose leverage internationally. We are going in 
the wrong direction on that.
    We also need to rethink defense budgeting. Dr. Zakheim has 
talked about this, and I will not.
    Maximizing the means of leveraging U.S. power, which means 
maintaining critical institutions and alliances is going to be 
key, given the restraints on us.
    Leading a coordinated proactive global effort to reduce or 
eliminate or contain threats, beginning with economic threats, 
is going to be another priority.
    Maintaining a credible deterrent against bad actors. We are 
going to be tested. We are already being tested. You have this 
incident with the U.S. ship off the coast of China. You have 
had statements by Iran about their nuclear program. You have 
had statements by the Russian Government that are somewhat 
provocative. This continues around the world.
    If we seem to be back on our heels, if we seem to be 
reluctant to engage, if people perceive weakness as a 
consequence of this crisis, they will take advantage of that 
weakness.
    We need to recognize the likelihood of crises emerging 
beyond the Iraq and Afghanistan and Pakistan conflicts. That is 
where our focus is now, but as has been indicated here, whether 
it is in Mexico or whether it is in the Ukraine or whether it 
is the central part of Africa in battles over vital resources, 
we are going to have serious problems in other regions to which 
we have not devoted attention, planning, or sufficient 
resources.
    Finally, we need to fight the temptation to turn inward, 
and we need to remain focused on issues abroad. That is hard to 
do, and there are mixed signals right now about how the United 
States is going to deal with those impulses to turn inward and 
balance them with the requirement that we stay focused on a 
world that has grown considerably more dangerous as a 
consequence of this crisis, which is nowhere near ending.
    There are very likely to be another set of downturns later 
this year, whether it is related to the consumer credit crisis 
in the United States or the collapse of a number of emerging 
economies around the world, that will destabilize markets 
further.
    I know that the stock market going up 378 points yesterday 
left everybody here a little cheerier, but I wouldn't read too 
much into that. The stock market is not linked to events in the 
real world, as we have learned over the course of the past 
several years.
    So I am happy to answer your questions and get into any of 
the issues over which I have skimmed. Thank you very much.
    Mr. Ortiz. [presiding.] Thank you so much.
    [The prepared statement of Mr. Rothkopf can be found in the 
Appendix on page 67.]
    Mr. Ortiz. This has been an eye opener to many of us. This 
has been very, very interesting testimony; and it just goes to 
prove that the world is in a hell of a shape right now, 
economically.
    But, you know, maybe from each of you could answer this 
question. Do you believe the crisis will increase or reduce 
security threats to the United States in the short term? And 
what about when we look at the long-term aspects of it, maybe 
you can touch a little bit on that.
    Anybody that wants to go first, no problem.
    Dr. Haass. It was that famous strategist, Yogi Berra, who 
said that predictions are always difficult, particularly about 
the future.
    This is no exception, but I would suggest, on balance, 
there is more downside than upside here. Yes, there are some 
pockets of upside: the fact that the Iranians and the 
Venezuelans are paying a price, given their budgeting and their 
expectations of high oil prices and so forth.
    So, yes, there are pockets of upside: the fact that certain 
poor countries which are dependent upon imports of fuel and 
food and other commodities, their import bills are reduced--
yes, another upside.
    But, on balance, this will hurt us and others more than it 
will help us.
    It will increase the number of challenges in several ways. 
One is, just objectively, it is going to create a larger number 
of weaker and potentially failing and failed states. And as has 
been pointed out, those are the potential places where 
terrorists, criminals, those involved in the drug trade tend to 
congregate. In a global world, what happens anywhere does not 
stay there. So we can expect greater problems, if you will, a 
messier--a messier world.
    Second of all, we ourselves are likely to have fewer 
resources to bring to bear. And by ``we,'' I mean not just the 
United States, but the developed world. We are going to be 
concerned with our own situations; but investment flows will go 
down; there will be pressure on the resources available for 
foreign assistance programs; there will be pressures on the 
resources available for defense programs.
    So if you add up a situation where challenges are likely to 
increase and available resources are likely to be pressured, 
again it reinforces, to me, the likely future of a somewhat 
more disorderly world, overall.
    Dr. Zakheim. I am inclined to agree. Problems are going to 
be very much of a kind that are not really the sorts we are 
used to. This always tends to be the problem in the end.
    Let me give you an example of what I mean. The last couple 
of years, China has been buying up American firms--spent over 
$6 billion in 2008 doing that. Now the Chinese have moved their 
holdings of U.S. Treasuries from longer-term to shorter-term. 
It gives them a lot of flexibility. It allows them to hedge.
    They are not going to bring the economy crashing down. 
There is a much better way to do it: Keep buying up companies.
    What does that mean when you have a country that is 
ambivalent about us and that just announced it--at its Party 
Congress--that it absolutely rejects moving to the kind of 
system we have. It thinks our system is a failing system.
    Buying up our companies, it is that sort of problem that we 
have not fully thought through.
    We have heard about a bunch of failing states. And nine 
times out of ten, it is the one state that we didn't think 
about that we wind up sending our troops into. How many people 
thought about Somalia? How many people thought about 
Afghanistan, for that matter?
    So if we are not prepared and we are restraining our own 
defense capabilities; and other countries will have new and 
different strategies to cope with their problems, as we will 
with ours--I suspect Western Europe will see coping with their 
problems as cutting back even more on defense.
    And how many of our major allies--I am not talking about 
the minor ones--but how many of the major ones spend three 
percent of their Gross Domestic Product (GDP) on defense? Not 
very many at all. How many do you expect to spend as much as 
they are spending now in the next 10 years? I wouldn't bet on 
it. That puts a greater burden on us at the very time that we 
are going to have to contract our capabilities somehow.
    So the ramifications--the second-, the third-, the fourth-
order ramifications are such that we can't really predict 
except to say, it doesn't look good.
    I agree with Richard Haass.
    Mr. Rothkopf. I think Richard has said that it is dangerous 
to predict and that it doesn't look good, and Dov has said it 
doesn't look good and it is dangerous to predict; and from that 
I am going to derive a prediction, which is that it doesn't 
look good.
    You know, things are going to get worse before they get 
better. And we have only seen the economic tsunami emerge. It 
is going to hit political villages. And, you know, it takes a 
lot of different ways--with deference to the delegation here 
from Pakistan, you know, there is a saying in Pakistan that no 
government in Pakistan has ever survived an IMF bailout.
    You know, sometimes the solutions that we bring to 
countries create political tensions that themselves create 
problems.
    So over the short term, we are going to have to deal with 
the fact that governments in Eastern Europe and Central Europe 
are insolvent; that the Government of Mexico is losing control 
over key states within that country; that Africa which, you 
know, was desperately poor and fighting for its survival 
before, is going to get worse, and this is going to happen even 
as we identify resources within that continent that are 
important to us and are important to the Chinese. And it is 
going to be linked, and other growing economies, and it is 
going to be linked to resource conflict.
    And I think that we also ought to consider, because your 
question addressed the longer-term consequences of this, that 
one of the great sources of American strength for as long as 
any of us can remember was the easy availability of capital on 
Wall Street--our ability, when we had an idea, to turn it into 
an action. If the changes on Wall Street, which are 
structural--they will be regulatory, but they will also be 
attitudinal and cultural--produce a contraction there and less 
of a willingness to lend for a protracted period of time, that 
is going to weaken us in a fairly substantial way.
    At the same time, when we come out on the other side of 
this, it is quite likely that emerging economies will recover 
faster than we do. Because of this crisis, less money is going 
right now into oil production, which was a bottleneck before. 
So what happens when demand goes up? The price of oil goes 
right back up on the other side of this crisis, and oil-
producing nations start building up big reserves of cash that 
they can use to buy political influence around the world.
    And so there may be a shift in sort of geoeconomic power 
that has got longer-term consequences to this and that we need 
to be very aware of because that kind of economic power is the 
foundation of our national strength.
    Dr. Cooper. I also agree with Richard Haass's able summary. 
It is hard to believe that with 50 million more unemployed 
people in the world than last year that is good for U.S. 
security.
    I would suggest, however, that the main threats to U.S. 
security will come via greater instability in other countries, 
rather than through willful actions by the governments of other 
countries. I think that is the main thing that we have to be 
concerned about.
    I do want to put a nuance on what Dov Zakheim said about 
China, at least the report that I read did not say that the 
Chinese rejected the American system. It said that the Chinese 
rejected the American systems of contested elections and 
democracy. The fact that they are investing in our companies 
is, in a sense, a vote of confidence in our system. And I have 
to say this is the wrong--I don't have to tell this group--
anyone who looks at campaign financing in this country has got 
to think that there is something not quite right with the 
American electoral system.
    Zhu Rongji, no longer an official of China, was very clear 
that he thought the financing of contested elections was at the 
core of difficulty of the American political system. But that 
is a much narrower statement than rejecting the American 
system. The Chinese do not reject the American system. In fact, 
they have been shaken by the financial crisis. But the fact 
that they invest so much in the United States is a vote of 
confidence.
    Mr. Ortiz. Mr. Chairman, if I could just have a follow-up 
question.
    The Chairman. The gentleman is recognized for a follow-up.
    Mr. Ortiz. You mentioned and this is a trend that we are 
beginning to see, foreign countries coming in, buying 
companies, doing joint ventures, what can we do to be prepared 
in the long term. I mean, what are the security problems that 
we might have, if any? Maybe you all can touch a little bit on 
that?
    Dr. Cooper. My general stance is one that is supportive of 
foreigners buying American companies. By the way it is 
completely reciprocal; Americans buy a lot of foreign 
companies. One the trends in the last quarter century has been 
tremendous amount of cross border investment, both ways, 
Mexicans in the United States, American firms in Mexico, et 
cetera, et cetera, et cetera. And I don't exclude the Chinese 
in this process.
    We do have legitimate concerns, I think, about two 
dimensions, one is militarily sensitive technology. And we have 
a process which is designed to screen out foreign investments 
that might represent a source of leakage of that technology. 
And as far as I can tell, the process works reasonably well.
    The other concern I think is that foreign governments where 
they own firms at least have the possibility of engaging in 
non-commercial activity, leave aside the military as a separate 
area, in non-commercial activity. We actually have not seen 
anything of that, but it is a potential that I think we have to 
keep our eye on because it is a possibility. This of course 
goes particularly to state-owned firms of which there are many 
in China, but I will remind you there are many state-owned 
firms still in Europe also. So I think we have to have our 
antennae out and from time to time make noises about the 
illegitimacy of using commercial channels for political 
objectives. Of course, the main guilty party on that score is 
actually the United States worldwide. We use American firms to 
execute American foreign policy.
    Dr. Zakheim. I agree with Dick Cooper about foreign direct 
investment, and the key really is how you protect against it 
being exploited. By the way, China's investments haven't always 
been good. They invested in Bear Stearns, the one year 
anniversary of Bear Stearns' collapse. There are some holes in 
the CFIUS system which is what we are talking about, the 
Committee on Foreign Investment in the United States that we 
need to all think about. One is, how do you handle joint 
ventures? Second of all, you have got issues and I have only 
heard about this anecdotally, but it is something perhaps this 
committee might want to look at. If someone is affiliated with 
some criminal organization and the criminal organization has 
connections to a government, and we know that there are quite a 
few places like that. The impact on a company is stultifying. 
And after all is said and done, no chief executive officer 
(CEO) wants to have somebody who is a member of his board who 
is packing a pistol and they are terrified of this, and there 
are ways to get around CFIUS rules and still be able to get 
people into companies like that. And by definition, criminals 
don't play fair. So there are some issues to really consider 
about this.
    I agree by the way that China has invested in our economic 
system, and when I was speaking about our system, I meant our 
political system, not our economic system. But we do have to 
watch this carefully. And I think that there are some areas 
where right now hedge funds, by the way, were another one, but 
they are less of a problem right now. They could reemerge where 
the system we now have doesn't cover every eventuality.
    Mr. Rothkopf. We also need to be careful here of the risks 
of that an overreaction to this can create. We have seen 
examples in the past few years, whether it was the China 
National Offshore Oil Corporation (CNOOC)/UNOCAL example, or 
the Dubai Ports example, where it became politically expedient 
to react against something which was not actually dangerous. 
And you know over the course of the past few months, we have 
seen the United States systematically abandon a whole set of 
the market principles which we have been preaching to the world 
for a number of decades. And the result has been that 
opportunistic politicians around the world have started to say, 
look, they threw it out the window, we don't have to play by 
these rules.
    If we start being protectionists on this front, we will 
engender precisely the same kind of reaction overseas. It will 
limit the ability of our companies to grow, it will limit our 
ability to create jobs, it will limit our influence 
internationally.
    Mr. Ortiz. Thank you, Mr. Chairman.
    The Chairman. Mr. McHugh.
    Mr. McHugh. Mr. Chairman, I don't know if I have said this 
in 17 years on this committee but I would commend all of the 
written testimony to my colleagues, it is a fascinating 
collection of very interesting and I think timely and, 
important thoughts. I thank all four of you gentleman for 
putting the time into compiling them.
    Dr. Cooper, you said on the very last line of your written 
as well as your spoken testimony, ``This loss of invincibility 
may embolden existing hostile groups to try through some 
dramatic act to bring the system of American capitalism now 
vulnerable crashing down for good.''
    That is a very profound and dramatic statement. And I 
didn't want the politicians of Washington, D.C. filling out 
your thoughts. Could you perhaps expand a bit on what type of 
hostile groups you may be thinking about and what kind of 
dramatic act you may have had in mind?
    Dr. Cooper. Well, one need not speculate in this area, one 
can just think of history. 9/11 was a dramatic act designed to 
hit the heart of American capitalism. They also tried to hit 
the White House, but the heart was the towers in New York. And 
I can well imagine folks sitting in probably Pakistan now or 
Somalia thinking the system is much more fragile than I, for 
example, think it is, and one more dramatic act like that is 
enough to bring it crashing to its knees.
    And I think our intelligence system needs to have its 
sensors doubly out to pick up any tendency of that. My own view 
is that while the financial system has proven itself to be much 
more fragile than most people thought a couple of years ago, 
the fundamental economic system is actually very robust and we 
are just going through a bad patch which we have been talking 
about. But that optimistic view of mine may not be shared 
universally around the world.
    Mr. McHugh. So obviously, then, you see a potential link 
between this crisis and particularly the world's view of the 
United States role in this crisis and increased national 
security challenges?
    Dr. Cooper. That is correct, yes.
    Mr. McHugh. Which brings me over to Dr. Zakheim's testimony 
and he spoke of this, but it is also in his written testimony 
when he talked about the 1970s when the acquisition accounts, 
procurement and research and development accounts, of the armed 
services were somewhat put into suspension. And he makes the 
conclusion that as that happened, not only did our leading 
adversary the Soviet Union become far more reckless, invading 
Afghanistan, but others like Iran also exploited what they 
perceived to be American weakness and introversion.
    The question I have extrapolating both from Dr. Cooper's 
statement and Dr. Zakheim's observation is that as I theorized 
in my opening comments there is at least a calculation we need 
to do as to the adventurism of others vis-a-vis our national 
security as we consider our defense accounts. Is that a fair 
statement?
    Dr. Zakheim. I certainly would agree, on the question of 
the impact of the acquisition in the 1970s, I was actually 
chatting with a friend of mine who reminded me that in the 
1970s, after the Vietnam war there were an awful lot of 
engineers running around without jobs because they had been 
laid off in the cutbacks.
    And one of the sort of statements that a lot of people made 
in those years was well, they can convert to the civilian 
sector. And you may recall it didn't really happen. People 
stopped taking engineering courses. People dropped out of 
engineering and we felt the impact of that for a long time. In 
fact, we may still be feeling the impact of that, look at our 
math and science scores and look at the value of math and 
science in this country. So it seems to me that if we move 
ahead without taking this into account, there is almost like a 
double-whammy. We hurt ourselves, the world sees we are hurting 
ourselves. It then takes advantage of the fact that they 
perceive that we are weaker and it becomes a very, very vicious 
cycle.
    Mr. McHugh. Any other comments from the other panelists?
    No. Let me, if I may, Mr. Chairman, you know what, we have 
taken a lot of time. Let me yield back and we have got a lot of 
other very interesting colleagues here, and I look forward to 
their comments as well. Thank you gentlemen.
    The Chairman. Thank you very much. Let's turn to the 
history books for a minute. What lessons can we derive from 
past economic crises that we can apply now? Of course, the 
immediate answer is Weimar Republic, open the door to a fellow 
named Adolf Hitler and his followers.
    Are there other lessons of history where crises brought on 
authoritarian rule or severe problems akin thereto? Who is the 
historian with you all?
    Dr. Haass. We are probably all amateur historians here. I 
would think when it comes to looking at history and its 
relevance, we have to make sure we choose the right history. I 
am not particularly concerned, sir, for the foreseeable future 
about the rise of challenges to the United States on the scale 
of Nazi Germany or imperial Japan. Another way of putting it, I 
am not particularly concerned for the foreseeable future that 
the economic crisis we are seeing will have that destabilizing 
effect on great powers, or that sort of hyperaggressive, 
hypernationalist foreign policy.
    I would think that the historical parallels are much more 
in the direction of middle-size and weaker states. And the 
sorts of scenarios that I would think about that are relevant 
we have seen in recent years are, say, the Somalias and the 
Balkans where periods of extensive and deep economic hardship 
wore down societies, created weak or failing states, massive 
internal and then external refugee flows, led governments to 
more populist approaches and so forth.
    So it is less, again, that the United States is going to 
face a China or Russia or anyone else on a massive scale akin 
to the 20th century. But instead, it is much more consistent 
with the disorderly future of medium- and small-size states, 
either breaking down internally, which in a global era can 
create all sorts of challenges to us given the nature of 
globalization as a giant conveyer belt; or medium-size states 
which given their access to weapons of mass destruction could 
cause terrible local or even global possibilities.
    And here, the most worrisome scenarios, again, I would 
think, are breakdowns of authority in a place like Pakistan, an 
Indo-Pakistani relationship that gets seriously off track. And 
obviously, the challenges that are posed by countries such as 
Iran and North Korea. North Korea can be a breakdown of 
authority. Iran which is not a single, simple government; I can 
imagine scenarios where its nuclear program could lead to a 
conflict which again could lead to disruption of energy 
supplies or conceivably even a situation where Iran would hand 
off materials. So I think the parallels, if you will, are less 
great-power 20th century parallels, more so some recent 
parallels or even going back farther in time, 19th, 18th 
century to situations where you had local pockets of 
instability.
    Mr. Rothkopf. Let me, if I may, just build on what Richard 
said because I think the right way to look at this in the 
context of history is also to note how it is different from 
what has happened in the context of history. And what we have 
got here is the first global economic crisis of the global era, 
requiring a global response. And the jury is out about how well 
we respond to that globally, combining with Richard's point 
that we live in an era in which the threats are more likely to 
come in weak states, and this is a crisis that is likely to 
lead to a proliferation of weaker or failed states and those 
two things taken together have a fairly profound consequence 
that makes this different from the past.
    The third is that while I agree with Richard's point that 
this is not likely to produce the kind of immediate great power 
conflict that you saw coming out of your Weimar analogy, you 
are likely to see coming out of this a fairly significant shift 
in the powers that we consider to be major powers in the world. 
And we have already seen this as in this crisis we have moved 
from deliberations from the G8 to G20. You have seen it in the 
past 12 months as the BRIC countries, Brazil, Russia, India and 
China, have actually gotten together on a regular basis 
politically at the head of state level and at the foreign 
minister level to coordinate their policies and try to assert 
themselves as key players.
    It is very likely that the world that emerges on the other 
side of this will be a world that has a different array of 
leading powers in it than the one we are accustomed to.
    Dr. Zakheim. I take a slightly different tack. First of 
all, I think it is fair to say that the crisis in the 1930s was 
global. You had a lot of colonies in those days, but otherwise 
it was global. But there are two medium-sized countries that I 
think ought to make us pause and think. One is Mexico, medium-
size country, but of course, it is next door and that changes 
everything.
    So if oil prices turn around and go all the way up, that 
might help, but I don't know what the relationship is between 
when they go up and the problems they are having right now with 
drug lords and the killings, Ciudad Juarez and everywhere else. 
They have had a decline in manufacturing. People had started to 
come back to Mexico which affects remittances. So that country 
is in a very difficult situation, plus it is very sensitive 
about us. We cannot just go in there and tell them what to do. 
So this is a major challenge for us.
    The other middle-sized country, and this goes to your 
question about history, there was a country that went through a 
revolution on the slogan of peace, land and bread. It was 
called Russia in 1917. It was a middle-sized country, it was 
not the world's leading power by any stretch of the 
imagination. It was getting clobbered by the Germans actually 
in World War I. And it did not become a threat to the United 
States for 28 years. Between 1917 and 1945 they were no threat 
to us, we recognized them in 1933 and we fought alongside them 
for 4 years. So what might be a middle-size power today might 
not be a middle-sized problem, it might be a major league 
problem in 25 years' time. And which country that might be, 
heaven only knows.
    The Chairman. Thank you, any further comments?
    Dr. Cooper. Mr. Chairman I don't know how serious you are 
about historical analogies, and as Richard says, we are all 
amateur historians, but I thought somebody, at least in the 
historical context, should mention the French revolution. 
France was in a serious economic crisis in the 1780s. It had a 
revolution which started out being entirely domestic, but it 
was very, very dramatic, and it very rapidly became a world 
war. We don't call it a world war, but it actually was focused 
in Europe, but there were battles all around the world between 
France, Napoleonic France, and the other countries. But I would 
emphasize the very strong differences today between our 
situation and our understanding about how to manage 
macroeconomic crises. Certainly then in the 18th century, but 
even in the first half of the 20th century. Macroeconomics as a 
subject did not exist in 1931. It was invented as a result of 
the Great Depression. Our understanding is not perfect, but it 
is much, much better than it was in former times.
    The Chairman. I thank the gentleman. Mr. Bartlett.
    Mr. Bartlett. Thank you very much.
    Dr. Haass, our chairman's opening comment caused me to look 
again at the caution that you give in your closing paragraph of 
your written testimony. Enormous stimulus measures here at home 
coupled with equally unprecedented increases in the current 
account deficit and national debt make it all but certain that 
down the road the United States will confront not just renewed 
inflation, but quite possibly a dollar crisis as well.
    I have been concerned, sir, that our profligate spending 
will not be satisfied with borrowing, because the money just 
won't be there to borrow. And so the Fed will simply print the 
money. My wife and I went through Europe in 1973 and I seem to 
remember that in Italy, the new Lire was worth 1,000 old Lire. 
That means your $10 bill today is a penny in our new currency. 
I would like each of you to tell us what you think the 
possibility is that this kind of thing could happen in our 
country. And if it does, what are the positives, and I can 
think of one. The national debt as monetized will just 
disappear, there may be no others. And what are the negatives? 
What would this do?
    Dr. Haass. I will say one of two things since you mentioned 
my statement and then I will quickly defer to Richard Cooper, 
who is one of this countries most distinguished economists. I 
am not particularly worried about hyperinflation on the 
historical scales you have mentioned. What I am worried about 
is a situation where doubts gradually grow around the world 
about the wisdom of continuing to accumulate massive holdings 
of dollars.
    And the United States obviously has and will continue to 
have for decades a need to import large numbers of dollars in 
order to finance our various deficits and our debt. At some 
point, we may find ourselves with the need to raise interest 
rates in order to persuade those who were holding dollars to 
continue to send them our way.
    The need to raise interest rates before we were fully out 
of a recession would be a disastrous choice for the Fed or the 
U.S. Government to have to make. Ideally, this would be 
sequenced. We would find ourselves well on the road to 
recovery, some inflation would kick in, and then we could 
exercise the tools to deal with inflation that we are fairly 
familiar with. Again, the nightmare is that we would have to 
consider raising interest rates before recovery is underway, 
and that is a truly unattractive choice which we want to avoid. 
It is one of the reasons that I think we need to look very hard 
at the content of stimulus packages to make sure what we are 
doing is essential and gives us the stimulus we would like to 
think that we obviously need. But secondly we need to look at 
parts of our economy to openly reign in spending. I do not 
believe there is any sustainable policy answer to avoid the 
sort of situation you have been talking about without a serious 
restructuring of our approach to entitlements. If we are going 
to be serious about containing Federal spending, if we are 
going to be serious about getting this budget of ours back on 
track, regardless of what we feel we need to spend in the way 
of stimulus, it has to involve above all Medicare and, to a 
lesser extent, Social Security reform.
    Dr. Zakheim. Again, I find myself in agreement with 
Richard. I think one of the keys, and this goes to what Dick 
Cooper just said about macroeconomics, is that everybody plays 
the same game around the world. One of the great threats and 
worries is that they won't. We won't play the game if people 
don't listen to Dick and we close our trade doors. Everybody's 
going to retaliate. It goes against everything that we set up 
in 1945. That does not, in any way, conflict with watching how 
people invest in us. On the contrary, it means if you have the 
right safeguards, you can actually foster more investment. But 
if we don't trade or don't foster investment, if the European 
Union (EU) starts to crack up and there is talk about that, 
then it becomes much more difficult to manage this globally, 
and then you really start running into problems.
    We are still the world's reserve currency, we are still the 
most powerful economy. What we do is going to influence what 
others do.
    Dr. Cooper. I think, Mr. Bartlett, I don't know exactly 
what you had in mind, but I think that the prospects of very 
high inflation in the United States are remote. It is 
absolutely true that the liability side of the Federal Reserve 
System has gone up, more than doubled in the last six months. 
And by traditional standards that might be thought to be 
potentially very inflationary, but of course it went up because 
we are not living in a traditional period of time. The demand 
for highly reliable assets on the part of public has just 
shifted way to the right. I mean it has gone way, way up. And 
the Fed, I think, properly responded to that by increasing the 
money supply. The Fed needs an exit strategy, I know the staff 
of the Fed is working on an exit strategy as we return to 
normal, the Fed has to work that back down again, but the 
staffs of the Fed are thinking about that already. Although 
unhappily we are not anywhere near close to that at the present 
time.
    So I think the prospect of, you mentioned Italy, of sort of 
a 1,000 to 1 conversion for the United States any time in my 
lifetime is remote in the extreme.
    Now, on the question of global imbalances, I have written a 
paper on that which is not especially for this committee, but 
if you are interested, I can give it to the staff. But the 
bottom line of that paper is I think these global imbalances 
are entirely explicable in terms of two factors, one is 
globalization of financial markets and the other is demographic 
developments.
    We are living through a demographic revolution. We don't 
notice it because demography always moves slowly from year to 
year. But Europe and East Asia both are in serious demographic 
decline. And among the rich countries, the United States stands 
out as an outlier. Our birth rates have declined but they 
remain markedly higher than in other rich countries. And in 
addition, we have immigration which we are still, I think, very 
good at bringing people in and making their kids Americans.
    On both counts, the U.S. stands out on demographic grounds. 
When you work through the economics of those two things, what 
do you get? Large surpluses in the rapidly aging societies, 
Germany, Japan, China. And you get large deficits in the 
secure, robust economies like the United States. Now, this was 
all, of course, before September of 2008. Our deficit is going 
to go way, way down this year. But my forecast is that it will 
come back as the recovery takes place for these basic long-term 
demographic reasons. By long-term, I don't mean forever, but 
for another decade or so.
    Mr. Rothkopf. We tend to be concerned about sudden dramatic 
shifts because they make headlines and they make people 
nervous. But I think long, slow shifts are also worth noting. 
And it is almost impossible to imagine a circumstance in which 
a country like the United States building debt at the rate that 
the United States is building debt has a strong currency any 
time soon. And I think that some inflation seems highly likely. 
I think a weaker dollar for the foreseeable future seems highly 
likely. And that then leads to a question, because this debate 
or this question has come up in the press over the course of 
the past couple months. And one of the common retorts is well, 
we are the only reserve currency in the world, we are the only 
port in the storm. Look at how people have come in here now. 
That will always be the case.
    Well, we have all lived long enough to know that things 
that we have assumed would always be the case, whether it is 
the gold standard, or that there would never be a common 
currency in Europe, or that there would always be a Soviet 
Union don't always remain the case. That doesn't mean that 
suddenly the new, new Lire will become the reserve currency of 
the world. In fact, I think the odds of that are pretty close 
to zero. But it does mean that it is quite possible that the 
dollar's traditional place in the vaults of central banks 
around the world is likely to decline. And that is likely to 
have quite an impact on our influence internationally.
    The Chairman. I thank the gentleman. Dr. Snyder.
    Dr. Snyder. Thank you, Mr. Chairman. All your written 
testimony today and your statements I was reminded of, I 
believe it was in November 2007, when Secretary Gates made his 
speech at Kansas State in which our Secretary of Defense called 
for dramatic increases in both numbers of personnel and in 
dollars for the State Department and U.S. Agency for 
International Development (USAID). His point being that we have 
gotten too lopsided in the instruments of national power to 
achieve the policy objectives that we want to.
    Several of you discussed in your statements our defense 
budget. It seems to me it would be it would more appropriate to 
be discussing this in terms of a national security budget. 
During this time of belt tightening, in which we all recognize 
it is a time of figuring out where our priorities are, we need 
to be sure that we are not going to continue the problems that 
Dr. Gates was talking about which was to shortchange USAID and 
the State Department to our detriment as a national power. So 
any comments you might have on that aspect of looking at an 
overall national security budget, not just a defense budget.
    Separately, I met yesterday with our friends from Pakistan. 
And one of the concerns they had was in their view some three 
years ago or so there had been some promises made from this 
country by the Bush Administration in terms of some development 
dollars. They feel like those monies have not been forthcoming. 
It seems like the world is pretty good about making promises at 
national aid conferences and then not following through. Given 
what is going on, it seems like this is even a better time for 
us to make sure that we as a nation and we as a world community 
do indeed follow through on what we say we are going to do with 
regard to foreign aid and development.
    Any comments you have on anything I said there until my 
time runs out. I note the clock is not on, Mr. Chairman. I hate 
to point that out, but it might be a good time to--thank you, 
go ahead.
    Dr. Haass. Let me just say one thing, protecting aid levels 
is obviously going to be difficult given that it is 
discretionary and those aspects of budgets are going to come 
under pressure, though obviously where we can, particularly for 
humanitarian reasons, I believe we should and to help some of 
these states get through these difficult times. But I don't 
believe we should or can have an aid-centric foreign policy, 
either when it comes to the United States or others.
    Far more valuable than aid flows is trade, if you really 
want to help poor countries in Africa, allow them to export 
into the United States. It creates more jobs and is much less 
prone to corruption and far more efficient than any amount of 
aid flows.
    If you want to think about national security spending, I 
agree we need to increase capacity particularly on the civilian 
side for nation-building or state-building. Again, we should 
not lose sight that probably the single most important thing we 
can do to improve national security would be to reduce our 
dependence on import oil and our use of oil. That would have a 
tremendous--we don't think of it as the national security 
budget, but if you take a national security writ-large point of 
view--we have to get beyond, I think, spending levels, be it 
Defense, State Department, foreign aid, what have you.
    Trade and energy issues, again, we don't think of as 
narrowly national security, but a greater openness on trade and 
a reduced use of oil would probably be two things that, if you 
will, are off-budget, that would probably do more to contribute 
to national security over the next decade than any amount of 
dollar to dollar spending we would do on aid or anything else.
    Dr. Snyder. I will make a comment and move to other people. 
Dr. Gates' comments in November 2007 remember was in the 
context that we had been expanding trade and trade agreements 
and things were going well economically. I think his point was 
we still even in the face of robust, positive trade policy and 
I have been a supporter, he still thinks it was important to 
dramatically increase funding for USAID and the State 
Department.
    Dr. Zakheim. I certainly agree with what Mr. Gates said. I 
think the Administration has made a good start by reorganizing 
the National Security Council (NSC) to recognize that Treasury 
and Energy and Commerce are all part of our national security 
approach. And I think that is right. There is a huge imbalance 
and it starts actually on Capitol Hill, not in any 
Administration. The State Department has loads of authority and 
Defense has loads of dollars. And when I was coordinator for 
Afghanistan, I felt that restriction severely. There were all 
kinds of things I wanted to do, I had the money to do it but I 
had no authority to do it. This was back in 2003 and 2004, I 
was the defense coordinator and Richard was the overall 
coordinator. And as a result of that, things did not get done 
at all, and I think we are paying the price right now.
    There is another question though, and Richard mentioned it, 
and that is state-building. And we really need to ask 
ourselves, even with these capacities which we clearly have to 
get in terms of the civilian side, how much of state-building 
do we really want to do? It is not a matter of being 
isolationists, it is a matter of looking at the record. Our 
regard at state-building isn't exactly great. There are times 
when we are forced to do it, I think in Afghanistan we were 
absolutely forced to do it. But the record: Somalia; Haiti; you 
can go back Haiti in the 1930s; Nicaragua; over and over again. 
We flatten countries and then we rebuild them, that is fine, 
but that is only Germany and Japan. And so we need to think 
carefully about that before we commit resources, which, by the 
way, right now on the civilian side, we don't have, and I agree 
with you and Mr. Gates on that.
    Mr. Rothkopf. I was the Haiti economic recovery coordinator 
in the Clinton Administration, you can hold your applause. And 
as a consequence of that experience I agree with Dov's 
assessment that we don't have capability here yet. Most 
frequently, the mission that the United States has been asked 
to do since the Second World War has had an emergency economic 
intervention component. Nobody wants to do it in the United 
States Government. We don't have the ability to do that. And 
there are a host of issues on the economic side that would 
benefit from a look at whether we can do them better, whether 
that is a Goldwater-Nichols on the civilian side of the U.S. 
Government, which I think is a good idea, or other kinds of 
restructuring.
    But to go very briefly back to the response that Richard 
offered, I agree with what he said. I think there is one area 
that we have got to look at very, very closely in the very near 
term, and that has to do with the replenishment or 
recapitalization of international financial institutions. Given 
our limited resources we are going to have to find ways to 
leverage our investments up, while the IMF and World Bank and 
the regional development banks are ill-constructed in some 
respects and will need some possible reshuffling in terms of 
their ownership structures, they are the only available 
mechanisms to leverage up.
    There are estimates right now that if things go bad $138 
billion will be needed by the 49 poorest countries in the world 
as a consequence of this, and it could go as high as a trillion 
dollars. The World Bank is having a hard time raising $10 
billion right now. So if we don't support that, we are inviting 
deterioration.
    Dr. Snyder. Thank you.
    The Chairman. I thank the gentleman. Mr. Jones.
    Mr. Jones. Thank you very much, I want to thank you and Mr. 
McHugh and the gentlemen for being here today. This has been 
very, very educational and also very helpful. I represent the 
third district of North Carolina, home of Camp Lejeune Marine 
base, the Outer Banks some of you might be familiar with.
    The income of the people in my district, I think I am close 
to it, the average income of a family of 3 or 4 is somewhere 
around $38,000-$40,000, gross, not net. Frequently I get the 
question of the fact that we are, and you touched on this many 
times, this is a debtor Nation. We are a Nation that owes China 
$800 billion and they buy financial notes and certainly they 
don't want to see us fail. But when you look at history of the 
great nations of the past, that this is just one example, 
England, at one time, thought it could go into Iraq and make it 
some type of a nation. They decided that wasn't worth the 
effort.
    Mr. Obama, and I wish him well, I am one of the Republicans 
who wish him well, unlike some that feel the other way that are 
on the radio, I wish him well because we need to rebuild 
America. I understand he is saying that we are going to send 
17,000 troops to Afghanistan. I know as a fact, most members of 
this committee know as a fact that our military is worn out. I 
won't say the military is broken, but it is worn out.
    Does there come a time for a country, not to become an 
isolationist but for a country to just say within itself, so to 
speak, it wouldn't be within itself, but let me use that as a 
word, that we cannot continue to police the world. We are 
borrowing money every day, we are wearing out our military. And 
yet I think some of these countries like NATO, they have not 
stepped up as of today to help us in Afghanistan. They have not 
done that.
    Is it to the detriment for the future for a nation to say 
within itself, its leadership, that we have got to have a 
period of time to rebuild our self. Because every day that we 
continue to borrow money from foreign governments to help other 
countries, and I don't think we can become an isolationist, I 
really do not. But there has to come a time that the percentage 
of investment, in my humble opinion, has to be reduced because 
we can't even fix our own streets. And the money that Mr. 
Obama, the stimulus package, I hope it works, I didn't vote for 
it, but I hope it works, but I will tell you that what I see 
happening to this country concerns me more than what is 
happening in other countries. Again, I don't want to be an 
isolationist, but we need a time-out to fix America and stop 
trying to police the world.
    Mr. Chairman, that is my question.
    Dr. Haass. Can I respectfully disagree with you, sir? We 
may want to have a time-out from the world, but the world 
doesn't grant times out. We can blow the whistle, but the world 
won't stop playing to push the metaphor.
    Mr. Jones. Mr. Haass, real quick. I want you to finish on 
that. Why in the world won't North American Treaty Organization 
(NATO) send its fair share? Why doesn't England, why don't 
these other countries just join us in all these fights and in 
taking care of the world?
    Dr. Haass. I'll come back to the NATO issue in the second.
    When we get involved in the world we do it not just as a 
favor to them, but as a favor to ourselves. The reason that we 
care about say Afghanistan's achieving some level of stability 
is not necessarily as a favor to them or out of simply 
humanitarian concerns, but we learned the hard way in 9/11 that 
a lack of stability and a lack of central control in 
Afghanistan could have repercussions for us here in the United 
States that to me is a fact of globalization.
    I think though where I don't disagree with you, we have to 
set limits on what we do. We can't necessarily define success 
in places like Afghanistan or Pakistan or Iraq as creating what 
Bob Gates called a Valhalla or others would call a shining city 
on a hill. Sometimes success has to be defined quite modestly 
as simply the avoidance of failure or state collapse. We may 
have to content ourselves with simply propping up to some 
extent weak states to avoid state failure rather than trying to 
create strong states which I think would take too much in the 
way of resources.
    It does argue for policies based upon training, state-
building and all of that so we don't have to do it all 
ourselves. The question of what allies and others are willing 
to do for us, I share your frustration, but my reading of 
history and my sense of where these other countries are is we 
are going to continue to be frustrated, that they are not going 
to do all that they can and should. That is the nature of their 
economy, it is more important. It is nature of their will and 
their domestic politics. So at times we will have do more than 
our share simply because it is in our interest to get it done.
    Dr. Cooper. Mr. Chairman, once again, I agree with what 
Richard has said. But what I want to add is it doesn't have to 
be either or. We can do both and. We are a fabulously rich 
country, both by our own historical standards, the standards of 
my parents and my grandparents, for example, and by 
international standards. And what most Americans don't 
appreciate is, we have company in Japan, of all the rich 
countries we are the most lightly taxed, by a long margin. 
Switzerland which is hardly a country by normal standards, the 
Swiss tax themselves more than we do. If we decide we want to 
do something domestically, for heaven's sakes, let us do it and 
let us pay for it through higher taxes. And that is where this 
body becomes very important. We can do both.
    Mr. Jones. Thank you, Mr. Chairman.
    The Chairman. Thank you. Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman. I would like to thank 
the panel for making a very persuasive case that we have to 
strike a balance between reducing the possibility of strife in 
the world by encouraging global growth, I think that point has 
been made very, very well, and making sure that we are in 
possession of adequate resources to make sure that when strife 
occurs we can handle it. I think those are complementary, not 
conflicting goals. I agree with Dr. Haass on that.
    Dr. Zakheim, I want to explore with you the resource side 
of the equation. And on page three of your testimony, you talk 
about the defense budget being under pressure. I want to read 
what you say. Real growth in defense spending excluding the 
wartime supplemental is but 1.7 percent. If the supplemental is 
included in the growth, the spending is some 1.4 percent. And 
then you compare that to the 4.3 percent real growth of the 
last eight years.
    I am going to ask you in a bit about how you are accounting 
for supplementals and whatnot. But if my back of the envelope 
calculations is correct the annual difference between 1.4 
percent real growth and 4.3 is just shy of 3 percent, 2.9 
percent, which in terms of our present top line is about $15 
billion a year. You are worried about that $15 billion delta 
and so am I.
    Isn't one of the places we should look to deal with that 
delta, the waste in the procurement system, there is very 
authoritative information that indicates that of the major 
weapon systems recently acquired, they had $295 billion in cost 
overruns. By my calculation that would buy us, what, 20 years' 
worth of the delta that is there had we done that correctly. I 
mean, what would you suggest to someone who has occupied the 
Comptroller's position during that time. What would you suggest 
as ways that we could fund that difference between what you 
evidently think we need and what has been proposed by making 
these procurement reforms?
    Dr. Zakheim. Well, I agree with you that there is a lot of 
spending in the acquisition accounts that probably could be 
done a lot better. There are all sorts of panels, the Defense 
Science Board has a panel right now that I am on that is 
looking at that. Jack Gansler, who chairs that one, just 
chaired a major one for the Army.
    One of the difficulties we have is that any fixes we make 
are not going to have real short-term impact. Part of problem, 
and this comes out of the Gansler Commission Report is that our 
acquisition corps, the people who actually do the contracting, 
do the buying, are not as well trained as they used to be. And 
the ones who really know what they are doing are older and 
retiring. And the younger ones don't have the right experience 
and the right training.
    Mr. Andrews. I read that report and I understand it is made 
very persuasively. And I don't mean my question at all to be 
combative, but I would like you to answer it. Why didn't we 
spend some of that 4.3 percent annual real growth on training 
the acquisition corps so they would have the tools to make 
these purchases better? What did we do with the money in the 
last eight years?
    Dr. Zakheim. For a start, the money that doesn't include 
supplementals went to fight the wars, number one. If you look 
at what we actually bought, we are buying less per unit than we 
did years ago, that is why the Navy has shrunk to 200 some odd 
ships. Whereas 20 years ago when I was at the Pentagon, it was 
at 600.
    Mr. Andrews. In your comparison between the 4.3 and 1.4 do 
you take into account policy change where we are disengaging 
from a combat role in Iraq?
    Dr. Zakheim. Oh, sure, that brings you down to 1.4 because 
your supplementals are going to decline. Therefore relative to 
previous years, you would see a decline.
    My concern though, is that we know very well that the 
supplementals did two things, one that people didn't like and 
one that people didn't know about. The part that they didn't 
like was there was a lot of procurement in the supplementals, 
and it didn't, therefore, cover real programs of record and 
every year you had to keep the procurement going, that is just 
not a good way to procure. The part people didn't know about is 
they didn't really cover all the operations and maintenance. So 
you had a lot of O&M money moving around inside the defense 
budget to cover the operations themselves. You can't predict 
what is going to happen in an operation. We do a budget today 
for something that we are going to be spending in 21-months' 
time.
    Mr. Andrews. I hear you. I guess my only point would be in 
sort of challenging your hypothesis about the 2.9 percent 
spread, I am much more confident that the difference in policy 
in Iraq and aggressive procurement reform effort could close 
that delta rather sooner than you think, and your hypotheses 
that we are somehow underbuying resources is not true.
    Dr. Zakheim. Again, the supplementals do take account of 
what is going to happen in Iraq. And we all hope that we will 
only need 50,000 or less, I am not arguing with you there. But 
if you are going have real procurement reform and you are 
dealing with the personnel side of it, you can't do it quickly.
    Mr. Andrews. I hear you. Thank you very much.
    The Chairman. The gentleman from South Carolina, Mr. 
Wilson.
    Mr. Wilson. Thank you, Mr. Chairman. And thank all of you 
for being here today, this is such a serious issue and one that 
affects so many different countries. I am particularly happy to 
see Secretary Zakheim here. I appreciate your service, I 
appreciate your family's service to our country. Additionally, 
I appreciate your efforts in Afghanistan and Iraq.
    I am particularly interested as a cold warrior in the 
success of the countries of Central and Eastern Europe. It has 
been so inspiring to me to see countries that were frozen in 
time, that now have dynamic economies, functioning democracies, 
but I am concerned as to the financial crisis and how this 
could affect their ability to continue to grow. In particular, 
last August I visited in Bulgaria, I am the co-chair founder of 
the Bulgaria Caucus. And I was there 20 years ago to see the 
phenomenal advance economically of that country and 
additionally, I visited Romania several times to see what a 
dynamic country that is, too. For any of you, what is the 
consequence from Poland to--or from the Baltic states to the 
Black Sea?
    Dr. Zakheim. I'll start, first of all, thank you so much 
for your kind words, I really appreciate it, and there is 
someone else in this room who does too I think. These economies 
are clearly vulnerable, they are not all alike. And they are 
all different--to different extents--vulnerable not only to 
their internal issues, but also to how Russia deals with them, 
whether we are talking about gas or other things like the 
Estonians faced.
    In the first instance, I suspect it is the EU that will try 
to do whatever it can, and there are tensions within the EU 
itself. So this goes back to Richard Haass' point and Dick 
Cooper's point, that we really need to work together with the 
EU on this. I don't see how the kind of issue that concerns 
you, which is a very legitimate issue because these are new 
NATO allies and it goes to the heart of what NATO is about as 
well. I don't know how that gets dealt with unless we and the 
EU have some common plan to work together. Most of the big 
economies outside obviously Japan and Canada and one or two 
others--and China, are in the EU. So it is very, very important 
that we work together.
    Dr. Cooper. I would just echo that these countries are very 
vulnerable at the present time. They have grown very, very well 
during the last decade. And a lot of that growth has been on 
the strength of private capital inflows from all over the 
world, mainly from western Europe, but including American 
firms, including Japanese and Korean firms. In today's 
circumstances that capital flow will diminish very sharply. 
They all have current account deficits. Hungary has already 
gone to the International Monetary Fund, Latvia, I guess, has 
applied to the International Monetary Fund. And I agree very 
strongly with Dov that we can rely on the international 
community but it needs to have the full support both of Europe 
and of the United States to make sure that these countries do 
not falter seriously. They are quite vulnerable. I have the 
current account deficits of the major ones, they are all above 
three percent, Czech Republic, Hungary, Poland. And the smaller 
ones have bigger current account deficits so there is an issue.
    Dr. Haass. Congressman, we had a meeting the other day at 
the Council on Foreign Relations about this. And I would say 
there was not quite consensus, but a lot of people thought the 
single most concrete outcome and important outcome of the April 
2nd G-20 meeting in London could be a commitment to 
significantly increase the scale of resources available to the 
IMF to tide countries over to deal with the balances of 
payments shortfalls to basically replenish the IMF 
significantly.
    The Chairman. I thank the gentleman, Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman. I don't mean to bait 
and switch here, but the topic is appropriate to the longer-
term problems that are facing the United States. It seems to me 
and to many others that the long-term budget deficits that we 
have been running now for decades present a real threat to our 
future security simply because they present a threat to our 
economy and our economy drives our ability to adequately defend 
ourselves and assist the rest of the world in defending itself 
from threats. I would like your comments about this long-term 
systemic issue that we face, and particularly about the 
proposed budget that you all have read about from the 
Administration, and whether the Administration's budget 
appropriately takes into account how we are going to address 
the long-term budget shortfalls, the long-term deficits, the 
long-term increase in debt of the country, as that constitutes, 
it seems to me, a very substantial long-term security threat to 
the country, and it is a financial threat, so I am pretty close 
to the subject matter of this particular panel. And you are all 
experts, and you all thought about this, and I would like your 
opinions about the proposed budget.
    Mr. Rothkopf. If it is all right, I will start out with 
that. You put your finger on a critical issue, and it was 
really the issue I started off with here, which is that the 
wellspring of our strength is a functioning, healthy U.S. 
economy. And that if we don't get our fiscal house in order, it 
will weaken our dollar and it will weaken our economy. We need 
to address that. We have had a hard time this year balancing 
the short-term needs of stimulus with the longer-term needs of 
dealing with 11, 12, 13, you count it, trillion dollars of debt 
in this country. And I don't, to be honest, think that any U.S. 
budget of the recent past has dealt with this problem 
sufficiently, has focused on balance.
    Richard Cooper made the excellent point that we are going 
to need to tax in order to address this problem, even as we 
need to cut spending. And Richard Haass earlier put his finger 
on the point that until we deal with health care expenses in 
the United States, which is the elephant in the room on this 
thing, we are not going to be able to deal with that. There are 
projections that have been done that show that if you simply 
take entitlement spending, and defense spending at pre-war 
levels and carry them out to 2017, and you take our revenue, 
there is not money left for anything else. And we can't wait 
until 2017 in order to resolve that issue.
    Mr. Marshall. And I am familiar with all that. By the way, 
I have read all of your testimony, heard your testimony and 
found it very helpful. It is consistent with what we have been 
hearing from other experts. Those are the immediate threats. 
The longer-term security issue that is presented by the economy 
is what I would like you to address. And then specifically the 
President's proposed budget, which is a budget that projects 10 
years' worth of spending and revenues.
    Mr. Rothkopf. Well, in terms of the longer-term threats, I 
mean, it is inevitable that you guys are going to sit in this 
room over the course of the next four years and you are going 
to grapple with your obligation to cut the defense budget of 
the United States, because it is the one big moving part in 
this budget. And once we get to the other side of this crisis, 
there is going to be pressure to do that in a way that no one 
in this room has experienced before. So cutting the defense 
budget is going to have that kind of a consequence on our 
ability to address issues overseas. And similarly, the 
contraction of our resources for soft power pursuits, whether 
it is aid or to fund international institutions, is going to 
have a similar effect in the United States' role----
    Mr. Marshall. I appreciate it. I am going to run out of 
time here. I want to, if it is possible, to get comments on the 
proposed Administration budget from the other panelists.
    Dr. Cooper. I am not going to comment on the budget because 
I am not familiar enough with it. Let me just say that I think 
the fundamentals of the U.S. economy--I know it is funny to say 
that in the spring of 2009--are very, very sound. We can handle 
lots of debt. We can handle growing debt. We have one huge 
unsolved political problem, the one Richard Haass mentioned, 
which is medical expenses. Medical science is advancing so 
rapidly, Americans think that they have a right to anything 
once it exists and that somebody else should pay for it. We 
need to have a serious discussion in this country, and no 
politician and most of the public don't want it, about death, 
because death is becoming an option, but it is very expensive 
to prolong life in the older years. That is a huge unsolved 
problem. If we solve that problem, the rest of the problems are 
all manageable. They are all manageable, and our economy is 
strong enough to handle it.
    Dr. Zakheim. I'd agree that the fundamentals are sound. I 
am not going to get into life and death issues, but I do think 
that precisely because the economy is sound, we need to think 
about investing today in the defense area in order to be 
stronger over the long term. This isn't either/or. But, for 
instance, when I was just asked about acquisition. If we don't 
train our people, if somebody can join the civil service with a 
masters degree and not take another course in physics or 
mathematics or systems analysis or anything for 40 years before 
they retire, there is something fundamentally wrong, and that 
is why you have some senior civil servants who don't know how 
to use computers as well as their grandchildren. That is a 
problem. That is an investment. That is something we need to do 
now. We couldn't do those kinds of things or some of the things 
I wrote about in my testimony if we didn't have sound 
fundamentals. But we do. And so, therefore, I think we can do 
it.
    Dr. Haass. We have essentially reached a point where we 
have exercised all of our monetary instruments. We can't lower 
interest rates any more effectively. We are going to have to 
continue to spend. So we are going to, in the short run, have 
to increase stimulus. For all I know, there will have to be 
another package. In that sense things are going to get worse as 
a necessary price of getting out of the deep recession we are 
in.
    The challenge, though, is that while we do that--and 30 
more seconds of that. Part of what makes it so complicated is 
it is impossible to know in advance exactly what will be the 
consequences of certain kinds of spending, and we are 
literally, as I watch it, in the position of throwing a lot of 
things against the wall and hoping some things stick and have 
the impact that we want.
    But at the same time, while we experiment with stimulus 
packages, there is no reason we can't address some other 
things, whether it is Medicare reform or things that would 
reduce our need to use energy or whether we can get growth out 
of other things other than stimulus like trade. So we have got 
to address other policy things.
    But I think, in the short run, the requirement of getting 
out of the economic situation we are in requires probably the 
running enormous deficits and increasing the Federal debt for 
the next couple of years. I don't know any way to avoid that. 
But, again, we could do everything else at the same time, in 
terms of, you know, we could start introducing regulatory 
reform, entitlement reform, energy and security reforms and so 
forth which, in the long run, I think will address your 
concerns.
    The Chairman. I thank the gentleman.
    Mr. Coffman.
    Mr. Coffman. Thank you, Mr. Chairman.
    Dr. Haass, you had mentioned something about North Korea 
and that you were concerned due to the current global economic 
climate that North Korea might, in fact, be further 
destabilized. But isn't North Korea a fairly insular nation? It 
certainly doesn't have a market-based economy. Is it the aid 
flows you are concerned about it? What is it that might 
destabilize North Korea?
    Dr. Haass. I am not necessarily known for my modesty. But 
when it comes to North Korea, I begin with it simply because it 
is arguably the most opaque country in the world. And any 
analyst looking at North Korea is constrained by that reality. 
But it seems to be clear that something is going on that is 
different there, that there is something going on with the 
political leadership that has increased the odds of instability 
and various forms of transition from the current leadership. 
Parallel to that, we are seeing the North Koreans getting 
somewhat more bellicose even by their fairly bellicose 
standards. The big governor, if you will, on the trajectory of 
North Korea has been two things. One has been China, its 
willingness to stay engaged sufficiently so North Korea does 
not collapse. The Chinese do not want to have the refugee flows 
and I think the uncertainties on the peninsula and don't 
necessarily want to see a united Korea that looks a lot more 
like Seoul than Pyongyang. And the other part of it is the 
South Koreans, that they have been, to a lesser extent the 
Japanese but mainly the South Koreans have been a source of 
resources again to stave off collapse. Because as much as they 
would like unification in the abstract and in the future, they 
are worried about something that is convulsive and what that 
would mean in terms of refugee flows and simply the strains it 
would place upon their economy.
    All I am suggesting is, in particular, the South Korean 
ability to pump resources in is, I believe, is going to be 
constrained given their economic contraction. If it is not in 
double digits already on an annualized basis, it likely soon 
will be. And I think it just adds to the dynamic of uncertainty 
in North Korea. That is my only point.
    Mr. Coffman. Thank you.
    I was having, in our relationship with the issues of the 
People's Republic of China, I was having a meeting several 
years ago with a senior diplomatic official from Taiwan. And I 
asked him what his greatest concern was in their difficulties 
that they were having with mainland China, and his response 
was, I am concerned that if they have an economic downturn, 
that that will create greater friction between our two 
countries. Could any of you comment on your view of his 
assessment, if given, if in fact--and this was three years 
ago--that an economic downturn in China would in fact maybe 
raise the specter of conflict with Taiwan?
    Dr. Haass. I for one don't think it would appreciably. It 
is a little bit from the Chinese point of view--I know there 
are analysts who think that. It is a bit of the wag the dog 
theory, that in times of economic hardship, governments often 
look to foreign ventures to divert attention. But I would 
simply argue that China is too economically integrated with the 
world and needs the ability to export, needs the ability to 
import funds and so forth to keep its unemployment levels down. 
I do not believe that absent the major--that the Chinese would 
perceive as a provocation or a change of status on the part of 
Taiwan--I do not believe they would risk increasing their 
economic isolation dramatically. So, on my short list of crises 
that keep me up at night, given the economic situation we are 
in, that is not high on my list to be honest.
    Dr. Zakheim. I agree with that. China right now is the 
source of a lot of Taiwanese investment. They have moved closer 
to each other. This is a politically driven conflict, and I am 
not even sure that China sees Taiwan as an overseas adventure 
anyway. They have argued the whole time that they are not; they 
are part of China. The trends actually look pretty good right 
now, and I would agree that that is not the one that keeps me 
up at night.
    Mr. Coffman. Thank you.
    Mr. Chairman, if I could, one more question.
    And that is, what would be the net impact if America were 
to much more aggressively move towards energy independence, and 
energy independence as being defined as no longer importing 
foreign oil, what is the impact in terms of the economic and 
national security of this country?
    Dr. Haass. Well, you will forgive me, but the phrase energy 
independence is a nonstarter. The United States is not going to 
be energy independent in our lifetimes, and short of a major 
technological breakthrough. It need not be energy independent.
    What it needs to be is energy secure. What that means is 
considerably reduce use of oil. What energy security, though, 
would do for us would it would throw--it would reduce the flow 
of funds to unsavory regimes, particularly Iran and Venezuela. 
It would dramatically reduce the balance of payment pressures. 
It would ease some of the problems we talked about here on the 
dollar. Reduced use of energy would obviously contribute to 
progress towards climate change issues and so forth. So it is 
one of those issues that would help us in multiple domains 
simultaneously.
    But independence can't become the yardstick because it 
really is beyond reach, and it ought not to discourage all the 
things we can and should do that are within reach.
    Mr. Coffman. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    We have three votes. I respectfully ask that the gentlemen 
stay for a few additional questions and those that are here and 
have not asked questions, please return. Someone else will be 
presiding. I understand I have to manage a bill on the floor. 
So as soon as the three votes are over, and Mrs. Davis, if you 
are in a position to return and preside for me, I would 
appreciate it.
    Mr. Coffman, I appreciate your being ranking again.
    We have a few minutes, and we can ask you to ask your 
questions now. But my request is, when I have to preside or 
handle a bill on the floor, would you be in a position to 
preside for me?
    We will get someone else then. Go ahead with your 
questions, please.
    Mrs. Davis. Thank you, Mr. Chairman. And just quickly, 
following up on the issue of oil, we know that Iraq's revenues 
are going down considerably. I mean, it is more than half what 
it was. Do we believe that they will have the ability to really 
provide the services for their people that are required with 
that reduction in revenue, and how are we factoring that into 
our work in Iraq?
    Dr. Zakheim. Well, you know, part of the problem in Iraq 
for quite some time was that the money was actually flowing out 
of Iraq into the wrong places. As long as there appears to be 
some decent management of Iraq's revenues, they are going to be 
able to provide services. And remember, the oil, the oil 
production itself still is nowhere near its capacity.
    So you have really two ways of dealing with this. One is to 
increase production, which would obviously recover some of the 
losses. Secondly, it is to be more efficient about how their 
resources are used and less corrupt about it. And finally, one 
other thing, it very much depends on what they were assuming in 
terms of their budgets. We know Russia assumed $70 a barrel. So 
they are being hit. No one, as far as I can make out, assumed 
$80 or $90 a barrel. So it may not be as bad as you think.
    Dr. Haass. But it will be bad. It is going to be 
extraordinarily hard with oil in the mid $40s to get the 
investment to increase production. And even if you got the 
investment, it would take years before it kicked in. You still 
don't have the arrangements for revenue-sharing in Iraq. And 
what it will do is decrease the ability of the central 
government to essentially use money, quite honestly, to 
purchase loyalties. So when you add up the plusses and minuses 
in Iraq, I would put this on the negative side of the ledger. 
As happy as we are that energy prices are going down, this is 
actually one of the places where there is a price to be paid 
for that.
    Mrs. Davis. Thank you.
    And also quickly, you all mentioned Mexico in one way or 
another. And I am wondering how you see, then, the impact of 
the government of the growing war with the cartels and what 
role, if any--you mentioned, you know, there are obviously a 
limited amount of help and assistance that we can provide, and 
yet it is a growing threat, and those of us who live very close 
to Mexico, of course, are concerned about that reality.
    Dr. Zakheim. Well, the government made one major decision 
in Mexico, which was to use the Army, which is far less corrupt 
than the police were and actually less vulnerable than the 
police are. We have all heard the horror stories about police 
being killed and police chiefs not wanting to take jobs and so 
on. So that is a major factor.
    Beyond that, how much we can do is really a function of how 
much Mexico wants to let us help them. We cannot, I don't 
think, just go to them and say, here is what we think you ought 
to do. It is just much too sensitive a relationship. On the 
other hand, if it is done right, if we cooperate closely with 
the Mexicans pretty much on their terms, I think that would be 
a different story precisely because they did make that decision 
to use the Army and that was a huge decision to make.
    Mr. Rothkopf. I think what you are going to see is some 
effort towards some Merida 2.0 where we are going to be asked 
and will end up spending considerably more money assisting them 
because they will ask for some kind of assistance. You will 
also see a lot more activity on our own border. I mean, you did 
see the Governor of Texas send 1,000 National Guard troops to 
the border of Texas last week to address this issue, and you 
are going to see more like that.
    But one other thing that you should expect, and I have 
started to hear this rumbling out of Mexico, is an argument 
from them that this is due to the demand in the United States, 
and to the degree to which, you know, we want to help this 
problem, we are going to have to reinvest in controlling demand 
for drugs from Mexico in this country.
    Mrs. Davis. In addition to arms as well.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much. We have one additional 
member, and maybe we can wrap this up before we go vote.
    Mr. Sestak.
    Mr. Sestak. Thanks, Mr. Chairman.
    When I heard the DCI [DNI] speak about instability in other 
nations being the nearest near threat to us, for the Armed 
Services Committee, what brought me to mind was Tajikistan, for 
example, and all the 'stans where hundreds of thousands of 
young Muslim men work in Russia, and now Russia is having a 
challenge, so they are coming home. They are young. They can't 
afford to get married. They are Muslim. They are right next to 
Afghanistan. Things are a little amok there.
    So as I hear that $25 billion is needed for nations if a 
number of the developing nations aren't going to go into 
default, and I understand that $270 billion to $800 billion, 
depending upon who you want to read, is going to be the 
government shortfalls of developing nations, what is it, sir, 
if I might ask you, because I have three quick questions, that 
the U.S. Government cannot do now or is not doing now to 
address that security issue? Not the giving the money, like 0.7 
percent that the World Bank is talking. But what can we do as 
an example of that one example, of what I gave? Because that to 
me is what Blair was really talking about, Admiral Blair.
    Mr. Rothkopf. Well, I think it is a central issue, and I 
think that it is going to end up being development assistance 
primarily from international financial institutions, and, you 
know, if I were going to pick one place in the world for the 
incident that Dov was talking about, that we don't expect it 
and we are not terribly well prepared for, it would be 
somewhere in Central Asia for precisely the reason you are 
talking about. So maintaining relationships there, maintaining 
base capacity there is also related to that because I think 
this is where the----
    Mr. Sestak. How about USAID? Does it--developmental 
assistance, Vietnam days had 15,000 Foreign Service officers, 
5,000 in Vietnam. Today it has less than a 1,000. Is that 
something we need to look at, or do we just continue to 
contract out to RTI International, or what are those--I am 
asking, what can we do to address this developmental 
assistance? Because I honestly think that is what we can do in 
this government of ours.
    Mr. Rothkopf. I think we can expand it a lot. Before the 
crisis hit, there was a lot of discussion in the transition 
about, should there even be a new agency there? We are not 
going to have that.
    Mr. Sestak. Should it be Cabinet level?
    Mr. Rothkopf. I think that there--I actually think that the 
better approach is some kind of Goldwater-Nichols on the 
civilian side that creates the ability to mobilize people in 
all the relevant agencies, including trade agencies, Overseas 
Private Investment Corporation (OPIC), U.S. Export-Import Bank 
(Ex-Im Bank), Commerce, USAID, Treasury, across the board 
because I think all of these places have a role to play.
    Mr. Sestak. Let me move over, if I could, on the defense 
budget to the question that was asked. To some degree, I have 
looked at the supplementals like crack. I mean, when we had in 
those supplementals, helicopters that hunt submarines and a 
Joint Strike Fighter (JSF) aircraft that is not going to be 
online until 2013, we have got a real problem weaning ourselves 
off of that. But when I look at the defense budget, it has 
risen from 7 percent in 2001 to 21 percent at the end of 2006. 
So it is probably about 26 percent of Overseas Development 
Assistance (ODA) funding overseas. So that is probably $9 
billion to $10 billion. Why don't we just kind of--we kind of 
gave that to you for some of Iraq's money, didn't we? Why don't 
we just take that over and move it on over to USAID?
    Dr. Zakheim. Well, first of all--actually, when I was 
Comptroller, I moved some money over there. I had to do it via 
the Office of Management and Budget (OMB). Part of it, again, 
is the authorities. We don't have the authorities. And----
    Mr. Sestak. Should we effect that--is that a good move to 
move that--I mean, Congress can do that.
    Dr. Zakheim. I think, Congressman, that there is a lot of 
sense in looking at this as a comprehensive whole. I think that 
is what Mr. Gates was talking about. Frankly, we could avoid 
sending our troops to lots of places if we had people in our 
civilian agencies that got to them first. So--I don't know the 
numbers though.
    Mr. Sestak. My take is, I hear what Mr. Gates has said and 
the chairman, but words are words. It is not what is the 
defining coin of the realm here, resources. If it is to be a 
comprehensive whole, and I am not looking at fixing our 
financial system, the experts will do that in Finance and Ways 
and Means; should we really look at, not because it used to be 
4.5 percent increase in Department of Defense (DOD), but can we 
prevent our men and women from going overseas in a better 
investment of moving moneys over to USAID?
    Dr. Zakheim. I agree, but it is an issue of authorities.
    Mr. Sestak. Which we can legislate.
    The Chairman. Gentlemen, thank you very much.
    Mr. Sestak, I suppose that was it.
    Gentlemen, we appreciate it very, very much. It has been 
excellent, one of the best hearings we have had in this 
committee. And we will adjourn and proceed to the floor to 
vote. Thank you.
    [Whereupon, at 12:20 p.m., the committee was adjourned.]
      
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