[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]






                                     

                         [H.A.S.C. No. 112-81]

 
             ECONOMIC CONSEQUENCES OF DEFENSE SEQUESTRATION

                               __________

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                            OCTOBER 26, 2011


                                     
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                   HOUSE COMMITTEE ON ARMED SERVICES
                      One Hundred Twelfth Congress

            HOWARD P. ``BUCK'' McKEON, California, Chairman
ROSCOE G. BARTLETT, Maryland         ADAM SMITH, Washington
MAC THORNBERRY, Texas                SILVESTRE REYES, Texas
WALTER B. JONES, North Carolina      LORETTA SANCHEZ, California
W. TODD AKIN, Missouri               MIKE McINTYRE, North Carolina
J. RANDY FORBES, Virginia            ROBERT A. BRADY, Pennsylvania
JEFF MILLER, Florida                 ROBERT ANDREWS, New Jersey
JOE WILSON, South Carolina           SUSAN A. DAVIS, California
FRANK A. LoBIONDO, New Jersey        JAMES R. LANGEVIN, Rhode Island
MICHAEL TURNER, Ohio                 RICK LARSEN, Washington
JOHN KLINE, Minnesota                JIM COOPER, Tennessee
MIKE ROGERS, Alabama                 MADELEINE Z. BORDALLO, Guam
TRENT FRANKS, Arizona                JOE COURTNEY, Connecticut
BILL SHUSTER, Pennsylvania           DAVE LOEBSACK, Iowa
K. MICHAEL CONAWAY, Texas            GABRIELLE GIFFORDS, Arizona
DOUG LAMBORN, Colorado               NIKI TSONGAS, Massachusetts
ROB WITTMAN, Virginia                CHELLIE PINGREE, Maine
DUNCAN HUNTER, California            LARRY KISSELL, North Carolina
JOHN C. FLEMING, M.D., Louisiana     MARTIN HEINRICH, New Mexico
MIKE COFFMAN, Colorado               BILL OWENS, New York
TOM ROONEY, Florida                  JOHN R. GARAMENDI, California
TODD RUSSELL PLATTS, Pennsylvania    MARK S. CRITZ, Pennsylvania
SCOTT RIGELL, Virginia               TIM RYAN, Ohio
CHRIS GIBSON, New York               C.A. DUTCH RUPPERSBERGER, Maryland
VICKY HARTZLER, Missouri             HANK JOHNSON, Georgia
JOE HECK, Nevada                     BETTY SUTTON, Ohio
BOBBY SCHILLING, Illinois            COLLEEN HANABUSA, Hawaii
JON RUNYAN, New Jersey               KATHLEEN C. HOCHUL, New York
AUSTIN SCOTT, Georgia
TIM GRIFFIN, Arkansas
STEVEN PALAZZO, Mississippi
ALLEN B. WEST, Florida
MARTHA ROBY, Alabama
MO BROOKS, Alabama
TODD YOUNG, Indiana
                  Robert L. Simmons II, Staff Director
               Jenness Simler, Professional Staff Member
                Michael Casey, Professional Staff Member
                    Lauren Hauhn, Research Assistant


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2011

                                                                   Page

Hearing:

Wednesday, October 26, 2011, Economic Consequences of Defense 
  Sequestration..................................................     1

Appendix:

Wednesday, October 26, 2011......................................    35
                              ----------                              

                      WEDNESDAY, OCTOBER 26, 2011
             ECONOMIC CONSEQUENCES OF DEFENSE SEQUESTRATION
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

McKeon, Hon. Howard P. ``Buck,'' a Representative from 
  California, Chairman, Committee on Armed Services..............     1
Smith, Hon. Adam, a Representative from Washington, Ranking 
  Member, Committee on Armed Services............................     2

                               WITNESSES

Feldstein, Dr. Martin, George F. Baker Professor of Economics, 
  Harvard University, President Emeritus, National Bureau of 
  Economic Research..............................................     4
Fuller, Dr. Stephen, Dwight Schar Faculty Chair and University 
  Professor, Director, Center for Regional Analysis, School of 
  Public Policy, George Mason University.........................     6
Morici, Dr. Peter, Professor of International Business, Robert H. 
  Smith School of Business, University of Maryland, Former 
  Director of Economics at the United States International Trade 
  Commission.....................................................     8

                                APPENDIX

Prepared Statements:

    Feldstein, Dr. Martin........................................    43
    Fuller, Dr. Stephen..........................................    52
    McKeon, Hon. Howard P. ``Buck''..............................    39
    Morici, Dr. Peter............................................    63
    Smith, Hon. Adam.............................................    41

Documents Submitted for the Record:

    The Economic and Fiscal Impacts of DOD Spending on the 
      Commonwealth of Virginia in FY 2008, by Dr. Stephen Fuller.    77
    The U.S. Economic Impact of Approved and Projected DOD 
      Spending Reductions on Equipment in 2013, by Dr. Stephen 
      Fuller.....................................................    97

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.]

             ECONOMIC CONSEQUENCES OF DEFENSE SEQUESTRATION

                              ----------                              

                          House of Representatives,
                               Committee on Armed Services,
                       Washington, DC, Wednesday, October 26, 2011.
    The committee met, pursuant to call, at 10:03 a.m. in room 
2118, Rayburn House Office Building, Hon. Howard P. ``Buck'' 
McKeon (chairman of the committee) presiding.

    OPENING STATEMENT OF HON. HOWARD P. ``BUCK'' MCKEON, A 
 REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED 
                            SERVICES

    The Chairman. The committee will come to order. Good 
morning.
    The House Armed Services Committee meets to receive 
testimony on economic consequences of defense sequestration. We 
are joined by a panel of top economists, who will share three 
distinctive perspectives with the committee, the macroeconomic 
impacts within the United States of further cuts to defense, 
the regional economic effects, which may vary from state to 
state, and the global dynamics of further cuts to our military.
    The committee has held a series of five hearings to 
evaluate lessons learned since 9/11 and to apply those lessons 
to decisions we will soon be making about the future of our 
force. These hearings also focus on the national security risks 
posed by sequestration. We received perspectives of former 
military leaders from each of the Services and the Joint Staff, 
former chairmen of the Armed Services Committees, outside 
experts, and Secretary Panetta and Chairman of the Joint Chiefs 
of Staff, General Dempsey.
    Today we will change direction and focus on the other side 
of the coin, the relationship between the U.S. military and the 
economy. As a fiscal conservative, I tend to oppose increasing 
Government spending for the purpose of job creation. But I 
think we must understand that the defense industry is unique, 
in that it relies entirely on Federal Government dollars. We 
don't spend money on defense to create jobs.
    But defense cuts are certainly a path to job loss, 
especially among our high-skilled workforces. There is no 
private sector alternative to compensate for the Government's 
investment. Secretary of Defense Panetta has said the cuts on 
the scale of sequestration will result in a 1-percent hike to 
unemployment and 1.5 million jobs lost.
    The Aerospace Industries Association released a report 
yesterday based on the analysis of Dr. Fuller, one of our 
witnesses today, that estimated just over one million industry 
jobs would be lost based on cuts to procurement and R&D 
[Research and Development] alone. When one factors in the 
separation of Active Duty service members and DOD [Department 
of Defense] civilians, the number is quite close to the DOD's.
    The impact is not proportional across all 50 states. Dr. 
Fuller's testimony suggests that nearly 60 percent of the jobs 
lost would come from just 10 states. One-third of the jobs lost 
would fall in three states: California, Texas and Virginia. How 
does this translate to the larger economy? In 2013 alone, 
growth in GDP [Gross Domestic Product] would fall by 25 
percent.
    But the economy could be affected further, as the U.S. 
military might no longer be seen as the modern era's pillar of 
American strength and values. There is risk that some within 
the international community would try to take advantage of the 
fragile American economy and the perceived limitations on our 
military's ability to promote global stability.
    In these difficult economic times we recognize the struggle 
to bring fiscal discipline to our nation. But it is imperative 
that we focus our fiscal restraint on the driver of the debt, 
instead of the protector of our prosperity. With that in mind, 
I look forward to hearing from our witnesses today.
    Ranking Member Smith.
    [The prepared statement of Mr. McKeon can be found in the 
Appendix on page 39.]

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM WASHINGTON, 
          RANKING MEMBER, COMMITTEE ON ARMED SERVICES

    Mr. Smith. Thank you, Mr. Chairman. I appreciate you 
holding this hearing and this series of hearings that we have 
had to discuss the impact of defense cuts, and I think it is 
particularly appropriate that we have a hearing today that will 
focus on the economic impact of these cuts. I think there are 
critical issues to consider in that regard. The industrial base 
of this country is critical to our economy and obviously 
defense spending is part of maintaining that industrial base.
    So any cuts could potentially impact that. There is also 
the challenge going forward to our national security of losing 
key capabilities. There are certain things that the defense 
budget requires in terms of technological and business 
capabilities that, if we are not doing it, those capabilities 
go away. We have already seen that to a large degree in the 
satellite industry.
    We were I think roughly 70 percent of the international 
market for satellites. We are now down to about 25 percent and 
there are certain key capabilities in developing satellites 
where simply in the United States, you cannot find that. And 
that has a national security implication. We can always, as a 
country, rely more on domestic U.S. production than we can rely 
on foreign partners producing us those key capabilities for our 
defense.
    So I think those are key issues. I also believe that the 
innovation that is generated from much of the manufacturing 
that comes as a result of our defense industrial base has 
impacts on the broader commercial economy. I certainly see that 
in my own district. There are a lot of businesses that grew out 
of Boeing engineers, folks who were working on defense industry 
who had ideas that then spread out to the larger economy.
    The improvements that we have made in manufacturing to meet 
defense needs have implications for the private sector economy. 
But at the same time, the debt and the deficit are also key 
limitations on our economy. I don't think anyone can argue 
that. The size of our debt now and the size of our deficit and 
its projections out into the future are a definite threat to 
our economic health.
    And we have seen that. Investors are nervous about 
investing in our economy, unsure how we are going to handle our 
debt and deficit problems going forward. And we need to be 
mindful of that. And we need to be mindful of the fact that 
defense is 20 percent of the overall budget. You cannot look at 
a budget that is almost 40 percent out of whack in terms of our 
deficit and say that 20 percent of the budget has absolutely 
nothing to do with that. It does.
    You also have to look at other parts of the budget that are 
important to our economy; infrastructure is the one that leaps 
to mind; education, workforce development. These are all things 
that are also key to our economic development, and devastating 
cuts in those areas I believe would have just as big an impact 
to our economy as devastating cuts in our defense budget. So we 
have to be aware of that.
    Personally, as this committee knows, I believe that 
increasing the amount of revenue that we have available is 
critical to this effort. If you are concerned about the size of 
the impacts of the defense cuts, then you have to be prepared 
to make sure that there is enough money available to make sure 
that you don't do that. So I believe that balance needs to be 
struck.
    I also believe that it is a very, very difficult balance to 
strike. Let us face it, we are in a deep hole. None of these 
options are palatable. These are things that none of us would 
like to have to do, but when you are running a deficit of 
nearly 40 percent of what you spend, you have to face some very 
difficult choices. So I hope that the gentlemen before us will 
analyze those choices.
    Honestly, look at the budget deficit that we are in and not 
simply look at one piece of it and say, ``Well we can't do 
that.'' Okay, well if we can't do that, what do we do in order 
to deal both our national security needs and with the deficit 
and debt challenges that threaten our economy as well? So I 
look forward to the testimony.
    Again I thank the Chairman for holding this hearing, and I 
yield back.
    [The prepared statement of Mr. Smith can be found in the 
Appendix on page 41.]
    The Chairman. Thank you. Now please let me welcome our 
witnesses this morning. We have Mr. Martin Feldstein from the 
George F. Baker Professor of Economics, Howard University, 
President Emeritus, the National Bureau of Economic Research.
    What did I say? Howard? That is different than Harvard 
isn't it? Thank you. They both start with an H.
    And we have Dr. Stephen Fuller, Faculty Chair and 
University Professor at George Mason University; Director, 
Center for Regional Analysis at the School of Public Policy. 
Actually all three of these gentlemen have very long bios--they 
are all very influential people. We are happy to have them 
here. Dr. Peter Morici, Professor of International Business, 
the Robert H. Smith School of Business, University of Maryland, 
former Director of Economics at the United States International 
Trade Commission.
    Welcome gentlemen. We are happy that you have found the 
time to be with us today and we look forward to your 
testimonies. We will begin with Dr. Feldstein.

STATEMENT OF DR. MARTIN FELDSTEIN, GEORGE F. BAKER PROFESSOR OF 
  ECONOMICS, HARVARD UNIVERSITY, PRESIDENT EMERITUS, NATIONAL 
                  BUREAU OF ECONOMIC RESEARCH

    Dr. Feldstein. Well thank you very much, Mr. Chairman. I am 
very pleased to be here. I have been testifying to 
congressional committees for more than 30 years, but this is 
the first time I have had the opportunity to appear before this 
very important committee, so I welcome it very much. I have a 
longer statement that I would like to submit for the record 
while reading just parts of that to the committee.
    The Chairman. Without objection all three of your written 
testimonies will be included in the record, and you can speak 
as you desire.
    Dr. Feldstein. Thank you.
    In your invitation, you asked me to comment on the effect 
that reductions in defense outlays will have on total economic 
activity that is on the GDP of the United States. I am happy to 
do that, but I want to comment first on the larger subject of 
the national security consequences of reductions in defense 
spending, and then I would also be happy in response to 
questions to deal with some of the broader issues that Mr. 
Smith raised in his opening remarks.
    In considering the appropriate size of the defense budget, 
it is of course important to recognize the immediate threats to 
the United States and to our allies from Iran, from North 
Korea, from the rogue states and from various terrorists groups 
along with the current and growing challenge in cyberspace.
    But defense spending today must relate to the more distant 
risk from China's future military policy. Since China has more 
than four times the U.S. population, China's total GDP will 
equal that of the United States when its per capita income 
reaches only one-fourth of the U.S. level.
    Even if China's growth rate slows significantly from its 
current level, its total GDP will exceed ours in less than 15 
years. And it is a country's total GDP that determines its 
potential military budget.
    Fortunately, the current Chinese political leadership is 
concentrating on promoting economic growth to raise the 
standard of living of its people.
    But China is also developing every aspect of its military 
capability. China's defense budget will grow with its GDP. It 
is important, therefore for us to recognize that future 
generations of Chinese leaders may use its larger GDP to pursue 
more aggressive policies.
    America's defense policy and our defense budget should 
therefore focus on these future generations of Chinese leaders 
and should recognize the virtual certainty of China's growing 
economic power.
    China's future military spending and its weapons 
development will depend on China's perception of what the 
United States is doing now and what we will do in the future.
    The United States, I believe should maintain a military 
capability such that no future generation of Chinese leaders 
will consider a military challenge to the United States or 
consider using military force to intimidate the United States 
or our allies.
    China is a resource-poor country so it is now buying oil in 
the ground around the world and land in Africa to feed its 
people. Some countries in the past have used military force to 
gain secure access to such materials. China's future leaders 
should not be tempted to follow that path.
    It is important also that our allies and friends like Japan 
and Korea, Singapore and Australia see the commitment of the 
United States to remain strong and to remain present in Asia. 
Their relations with China and with us depend on what they can 
expect of America's future military strength.
    We can't postpone implementing a policy of future military 
superiority until some future year. We have to work now to 
develop the weapon systems of the future. We have to maintain 
the industrial and technological capacity to produce those 
weapon systems. While reducing fiscal deficits is very 
important the task should not prevent the Federal Government 
from achieving its primary responsibility of defending this 
country and our global interests both now and in the future.
    Let me turn now to the narrower economic question of how 
cuts in defense spending affect U.S. GDP.
    Since Government spending on defense is a component of GDP, 
the immediate direct effect of a $1 billion reduction in 
domestic defense spending is to reduce our GDP by $1 billion, 
one for one. The resulting reduction in pay to military 
personnel and in compensation to the employees of defense 
suppliers then causes their spending as consumers to decline. 
And if defense suppliers expect the reduced level of the 
spending to be sustained, they will also cut their investment 
and equipment.
    The total effect of a $1 billion reduction in defense 
spending is to reduce GDP by more than a billion dollars, 
perhaps about $2 billion.
    Under current conditions, reductions in future budget 
deficits and in the resulting future national debt, will also 
raise the confidence of businesses and households needing to 
increase business investment and increase consumer spending, 
and that in turn will raise current GDP.
    But a similar confidence effect would result from 
legislated reductions in any form of Government spending so we 
can ignore this confidence effect in comparing the impact of 
reductions in defense spending with the effect of other 
spending cuts of equal size.
    The effect on GDP of changes in defense spending is larger 
than the corresponding effect of most other potential changes 
in Government outlays.
    For example, outlays for unemployment benefits are not in 
themselves a component of GDP. They lead to increased GDP only 
by raising the consumer spending of the individuals who 
received those benefits. While a high percentage of those cash 
benefits will be spent, it will certainly be less than a dollar 
of spending for every dollar of unemployment benefits.
    In some of the consumption purchased with the unemployment 
benefits would otherwise have been paid for out of reductions 
in household saving. A change in unemployment benefits also 
affects GDP by altering the incentive to remain unemployed. 
Reducing the maximum number of unemployment weeks will induce 
some individuals to find work sooner, thereby raising GDP.
    The overall effect on GDP of reducing U.I. [unemployment 
insurance] benefits will be the net effect of the reduction in 
consumer spending and of the increase in weeks worked.
    So the adverse impact on GDP of a $1 billion reduction in 
unemployment benefits would certainly be less than the direct 
effect of a $1.0 billion reduction in defense outlays.
    I will stop there and just say that I hope that these 
remarks are helpful to you as you consider the important tasks 
of deficit reduction in protecting our national security.
    I look forward to your questions.
    Thank you very much.
    [The prepared statement of Dr. Feldstein can be found in 
the Appendix on page 43.]
    The Chairman. Thank you.
    Dr. Fuller.

STATEMENT OF DR. STEPHEN FULLER, DWIGHT SCHAR FACULTY CHAIR AND 
 UNIVERSITY PROFESSOR, DIRECTOR, CENTER FOR REGIONAL ANALYSIS, 
        SCHOOL OF PUBLIC POLICY, GEORGE MASON UNIVERSITY

    Dr. Fuller. Thank you very much, pleased to be with the 
committee this morning. I have submitted a prepared statement 
but also two reports.
    I undertook a report for an analysis for the Commonwealth 
of Virginia several years ago regarding the economic impact of 
DOD spending in the state. It covered all types of DOD 
spending; personnel as well as contracting and retirement 
benefits.
    [The information referred to can be found in the Appendix 
on page 77.]
    It was undertaken because the state was beginning to be 
concerned about changes in defense procurement policies and 
spending policies within the state and it is a very important 
part of the economy. So it provides some insight about what 
would happen if you take that spending away.
    I also, just as you mentioned Mr. Chairman, released a 
report, it was released yesterday on the impacts of reduced 
spending for aerospace and military equipment acquisition.
    [The information referred to can be found in the Appendix 
on page 97.]
    Dr. Fuller. So I would just summarize some of those 
impacts. They follow in character the same kinds that you would 
see at the national level, changes in GDP, but in this case, 
state and local economic activity would be affected, changes in 
unemployment, changes in personal earnings.
    Summarizing what I found at the state level, and this would 
be just for Virginia, but it would be characterized of other 
states that have some dependency in their economy on defense 
spending, and this would be for fiscal year 2008.
    The GDP effect or gross state product effect in Virginia, 
DOD accounts for 15.6 percent of total economic activity in 
that state. It also supported almost 903,000 jobs within the 
state, that is, roughly 19 percent of total employment in the 
Commonwealth of Virginia was related directly or indirectly to 
DOD spending, supported about $44 billion in taxable personal 
earnings. And we also looked at the fiscal impact. DOD 
businesses and military bases and personnel do demand some 
services from the state, but they also generate taxes. And the 
net effect in the state was $1.1 billion.
    So as we look at the Commonwealth of Virginia, even, you 
know, just several years back--but it certainly hasn't changed 
dramatically, maybe become even more important as the rest of 
the economy has retracted over the recession.
    DOD clearly is a very important source of economic 
activity, personal earnings, jobs and fiscal benefits if in the 
absence of that spending, the state's economy would have been 
15.6 percent smaller. It would have had almost 19 percent fewer 
jobs and it would have faced a budget gap of $1.1 billion in 
fiscal year 2008.
    That gives it some perspective--I think, perhaps, more 
relevant as you drill down in the analysis that I have just 
completed for the Aerospace Industries Association. I was asked 
to examine the impact of reduced spending in fiscal year 2013 
for the acquisition of aerospace and military equipment, just a 
segment of the DOD budget.
    The number that I examined includes some reductions that 
have already been approved and some that could possibly evolve 
totaling $45.01 billion. The effect of this is this rolls 
through the economy. It starts with a decrease in sales of 
about $164 billion. So for every $1 decrease in the purchase of 
military equipment by DOD, it would generate an additional 
$2.64 in sales losses in other businesses. I will explain that 
a little bit further.
    If you take those sales losses as they roll through the 
economy, it would cost the economy. And by my calculations 
1,006,000 jobs; these are full-time, year-round equivalent 
jobs. Only about 35 percent of those are in the aerospace and 
military equipment manufacturing sectors. In fact, only 125,000 
of those are manufacturing jobs specifically to the production 
of these products, these military hardware.
    The other 65 percent are jobs on Main Street. They are jobs 
that are supported by the payroll spending of workers in the 
aerospace and military manufacturing industry. Their payroll 
and the payrolls of the other companies that work for those 
industries, so it is the primes and their entire supply chain, 
their spending supports jobs everywhere. Just like your 
spending and my spending for coffee or for water or for a 
mortgage or for our automobiles.
    And by taking their payroll out of the economy, the payroll 
losses would total something on the order of $60 billion. 
Taking that out of the economy would cost the economy over a 
million jobs. That would add a 0.6 percent to the unemployment 
rate. Current unemployment rate is 9.1 percent right now; it 
would raise that to 9.7 percent if this happened this year as 
opposed to in fiscal year 2013.
    There are also non-wage income reductions. So, sales of 
products and services to the aerospace and military equipment 
manufacturing sector would decline; also sales within the 
remainder of the economy. There would be less lettuce being 
purchased. It just rolls right on through the economy. Another 
$27 billion lost there.
    If you roll these up into one number, GDP, it would result, 
at least just from that $45 billion decrease in 1 year, would 
generate $86.5 billion in lost GDP, so, roughly 2 to 1 as we 
just heard. Given the state of the economy as projected for 
2013, that would constitute about 25 percent of the anticipated 
growth. So, without that cutback we would have 25 percent more 
GDP growth than without it. Slow the GDP growth rate that is 
now projected for 2013 from 2.3 percent to 1.7 percent.
    Now, these numbers could change. But it has a measurable 
effect. These numbers and these losses affect every state in 
the country because the suppliers of goods and services span 
all of the states, not just the actual prime or their immediate 
supply chain.
    Ten states would represent roughly 6 percent of these 
losses. Ten states being led by California, Texas and Virginia. 
But these 10 states would lose 600,000 jobs, or could lose, if 
that reduction occurs as I have analyzed it.
    So, the economic impacts can be measured. There is one 
other type of impact that I can't measure, but we know takes 
place. Many of the companies that supply goods and services to 
DOD contractors are quite small.
    They are specialized. And when they lose part of their work 
they go out of business. They just can't downsize 25 percent 
and still stay in business. They can't shift their market to a 
different consumer. Their base is quite narrow. And so the 
impact on business failure is just one of those kinds of 
corollary effects that we know happens.
    We have seen it around military bases that have closed or 
changed or downsized, sort of the BRAC [Base Closure and 
Realignment] effects. We see it here in D.C. on Georgia Avenue 
where businesses have lost some of their consumer market, and 
they have just had to close down because they couldn't stay in 
business at that scale of work. So, there are some collateral 
effects, I think, that need to be considered.
    I ran over my time. I am glad to answer questions. Thank 
you.
    [The prepared statement of Dr. Fuller can be found in the 
Appendix on page 52.]
    The Chairman. Thank you.
    Dr. Morici.

   STATEMENT OF DR. PETER MORICI, PROFESSOR OF INTERNATIONAL 
  BUSINESS, ROBERT H. SMITH SCHOOL OF BUSINESS, UNIVERSITY OF 
  MARYLAND, FORMER DIRECTOR OF ECONOMICS AT THE UNITED STATES 
                 INTERNATIONAL TRADE COMMISSION

    Dr. Morici. Thank you, sir. Like Professor Feldstein I have 
been coming up here for--is it working?
    The Chairman. Yes.
    Dr. Morici. Like Professor Feldstein I have been coming up 
here for several decades. But this is the first time that I 
have been to this committee. And I am honored to have this 
opportunity to speak to you.
    The United States faces, after the wars in Iraq and 
Afghanistan are concluded, much broader security challenges 
than it faced a decade ago. The most significant of these is 
the whole issue of cyber defense and China.
    We now have on the global stage a country that does not 
share our values and institutions, that is much more capable of 
growing, and growing in ways that are attractive to other 
nations in the world. And we need to consider that in 
evaluating what kind of defense capabilities we will need going 
forward.
    It is important to recognize that after World War II the 
United States gave the world a clear prescription for 
prosperity and peace, and that was free markets and democracy. 
And we were quite successful in constructing a system that 
defines globalization, the rules of the road, that strongly 
supports the notion of free markets.
    For example, the World Trade Organization dramatically 
constrains, at least in theory, the behavior of governments as 
they treat participants in global commerce. It constrains 
Government policies from tariffs to Government procurement to 
conditions imposed on foreign investors to import and export. 
And you know, we now have to ask ourselves the question: Can 
the United States survive in a world of its own creation?
    This body of law that we have created that defines the 
rules of the road is quite sympathetic to American 
institutions, the way we raise our children, the way we play 
the game. So, we are very comfortable competing under those 
terms.
    China offers a very different model. They have an 
autocratic government that is very efficient. We are mindful of 
governments in the 1930s for directing industrial development. 
And it just simply doesn't share our democratic values, let us 
not kid ourselves. And China has ambitions in the Pacific, 
which it has outlined, and probably ambitions more globally 
owing to its need for natural resources that it has not yet 
admitted to.
    So, it is very important to recognize the interplay between 
the security challenge and the economic challenge. China offers 
the world a different model for economic development, and if we 
don't meet the China challenge both economically and from a 
security perspective, then we can expect the rules of the game 
to change because more nations in the world will find what 
China does attractive.
    The WTO [World Trade Organization] and other international 
institutions are a consensual system. That is there is no 
overarching authority that says they have to abide by these 
rules. They can change them as they go along. And frankly, 
China has said someday China will make the rules. Those rules 
will be very different in a world where more countries, you 
know, think that China's model of economic development is 
attractive and effective.
    China has effectively exploited the system that we have 
created. There has been much testimony in many committees to 
that effect. It is a subject of national debate. For example, 
China's exchange rate policy and so forth.
    The failure of the United States to address that 
forthrightly and with substantive actions has two important 
consequences. One is that it reduces our credibility with 
nations around the world. We are increasingly violated. Whether 
it is exchange rates or rare earth minerals, the United States 
is violated.
    And it is not one administration or the other. This has 
been an ongoing process for many years. But also it increases 
China's influence and it makes it easier for China to project 
power in the future and to project its values.
    Now, certainly it is important to recognize the reason we 
are having these discussions today is because we don't have 
enough money. And one of the reasons we don't have enough money 
is we simply haven't been growing. Each successive recovery for 
many years now has not been as strong as the previous one. And 
over time we have developed a very large trade deficit.
    Economists will tell you that one of the reasons we can't 
get out of this funk is because we have got this big trade 
deficit. Well, the trade deficit really just adds up to two 
forces: The big deficit with China, which is the result of its 
unanswered mercantilist policies; and the deficit we have on 
oil, which we have imposed on ourselves.
    If we had chosen to address these problems, we simply 
wouldn't be in the funk we are in, we would have more GDP, we 
would have more tax revenues. And the problems that we face, 
while still large, would not be nearly as large as they are 
today.
    There are a lot of myths about the budget problem and about 
the defense challenge from China, which I think bears some 
attention. One is that defense is the problem. Defense is only 
a very small part of the problem.
    Over the last 4 years Congress has decided to expand 
spending by $847 billion, of which defense was you know only a 
small portion. And of that $847 billion, only $62 billion was 
needed to account for inflation, according to the budget 
deflators published by the President in his annual budget 
report.
    So, clearly we are spending a lot more money; 11 percent of 
it was for defense. The rest of it is other purposes. Why, I 
don't know. The myth persists that somehow or other there is 
going to be a big peace dividend.
    I know that Congress has allocated monies for the wars, and 
that is not part of this discussion. But apparently one of the 
ways we have paid for the wars is by not paying attention to 
the aging of our force structure, the quality of our fighters, 
their age, their bombers--things of this nature. You are all 
familiar with those things; the size of our fleet. We simply 
have less capability other than ground troops, and the 
capability is much older and it needs to be modernized.
    I ask you, how can we ask sons to fly the planes their 
fathers flew? That is going on today. How well would we fight a 
war against a cyber-attack with 15-year-old computers? But yet 
we are going to defend our country with 25-year-old jet planes. 
I find it preposterous.
    The myths persist that China will not be able to challenge 
the United States any time soon in terms of the size of its 
defense spending, because at current exchange rates, that only 
comes to, you know, about 17 percent of the U.S. budget.
    But China's currency is dramatically undervalued. If we use 
purchasing power exchange rates, then its defense spending is 
27 percent. At the pace at which it has grown over the last 
couple of years, and given the projections that we have for the 
base budget without sequestration, China could easily be at 
about 60 percent of our spending in 10 years.
    Now 60 percent is still less, but it doesn't have to 
maintain a fleet in the Mediterranean. It doesn't have to 
maintain a fleet in the North Atlantic. It is not watching the 
Persian Gulf. It doesn't have troops stationed in Korea. All it 
has to worry about is securing the resources that it needs and 
projecting power in the Pacific, which is its stated goal.
    It is going to be very difficult for the United States at 
current spending levels to match China if they can devote all 
of their 60 percent to those purposes and we are so spread out. 
Our needs are growing, and it is silly to think that there is 
some sort of peace dividend out there that is going to permit 
us to spend significantly less.
    Another problem that we have is this misperception that 
American technology is so superior that we can rely on that, 
that somehow or other we are going to think our way out of this 
problem.
    I don't see that happening simply because the pace at which 
industry is moving from the United States to China and becoming 
much more sophisticated there, I mean, Boeing is operating 
there, General Electric is operating there.
    They are becoming participants in the Chinese economy in 
two very troubling ways--and I don't mean to single out those 
two companies; they are just nice examples--and that is they 
are becoming clients of Chinese mercantilism.
    So whenever we talking about doing something about it, 
there is an army of lobbyists up here. I don't know why China 
has litigation in this town. Caterpillar does a perfectly good 
job for them when it comes to the currency. Likewise, they want 
to participate in the Chinese economy. They want to prosper.
    So it serves their interests to help the Chinese develop 
their technology. And, you know, there are limits to the extent 
to which we can avoid technology transfer of a vital national 
security nature. The Chinese will be able to develop it on 
their own quite soon.
    Look at my engineering school, or the engineering school at 
any university in the country. Look who goes to school there. 
The Chinese will have the resources they need to do this.
    If we permit Chinese mercantilism to go unchallenged and we 
permit the projection of Chinese power in the Pacific to dwarf 
American naval and other capabilities, then what choices will 
countries like Malaysia, Indonesia, the Philippines and India 
have to make about the economic development models they choose?
    And what will that mean for the character of consensual 
institutions like the World Trade Organization? Remember, that 
organization will evolve over time, and the rules will change. 
The United States will be isolated or more isolated, especially 
when you consider the state of our allies in Europe and their 
economic condition.
    It will be more--the world as we know it is a very 
comfortable world for U.S. commerce and that will change. I 
agree with all these numbers. Basically, if you cut defense 
spending by $1 billion, you are going to get a multiplier 
effect of one-and-a-half to two.
    One hundred thousand dollars per job, it is very easy to 
figure out how many jobs you are going to lose. But more 
fundamentally, we are going to live in a world that is more 
hostile to our economic and democratic values.
    It is going to be more difficult for us to succeed 
economically in that climate. We are just not attuned to it. So 
unless we defend these values now, we will live in a world that 
is just not suitable to American success. And that is not a 
world I choose for my grandchildren to live in.
    [The prepared statement of Dr. Morici can be found in the 
Appendix on page 63.]
    The Chairman. Thank you very much.
    After the last election, Congress received a clear message. 
The primary concern of the American public is the economy. 
Americans want their government to get spending under control, 
reduce the Federal deficit and adopt policies to stimulate job 
growth, particularly in the private sector.
    We got that message. But we can't ignore the fact that 
while cuts to the military might reduce Federal spending, they 
harm national security and they definitely don't lead to job 
growth.
    You have outlined a variety of economic consequences of 
further defense cuts, yet this is something we seldom hear 
about in the news. It has kind of been left up to our committee 
to explain these facts to other Members of Congress and to the 
members of the public.
    At least two estimates, Secretary Panetta's and Dr. 
Fuller's, put job losses at over $1 million should 
sequestration occur. In arriving at those numbers, did you use 
the cuts that the chiefs are already working on?
    I had a meeting with Admiral Mullen shortly before he 
retired. And he said they had given instruction to the Joint 
Chiefs to cut $465 billion over the next 10 years. That is 
already in motion. That is already happening. That is already 
part of the equation. The sequestration of $500-$600 billion 
would be on top of that.
    Did you take those numbers, Dr. Fuller, into account in 
your study?
    Dr. Fuller. My analysis included the first tranche of that 
for fiscal year 2013 that was specified in the Budget Control 
Act. That portion is about $19 billion in reduced acquisition 
outlays for aerospace and military equipment, just that $19 
billion is included in the number that I use.
    And I added another $25.5 billion to it, which would be the 
amount if sequestration that the proposed or possible 
sequestration continued. But it was just for that 1 year.
    The Chairman. Just for the 1 year, the 2013. The number 
that is out there in the public from that deficit reduction is 
$350 billion. But based on what happened in the C.R. 
[Continuing Resolution], and the starting point that you 
choose, and the budget request of the President and our budget 
passed last year, there are a lot of different starting points.
    But I am using that $465 billion, which takes into account 
the $78 billion that Secretary Gates talked about cutting, and 
the $100 billion that he asked for from the chiefs earlier, to 
inefficiencies, when he said they could still keep it to use 
for other things. But when he came back, he said, well, they 
couldn't keep $24 billion of it. That had to be used for other 
expenses.
    So if you add those numbers to the possible sequestration, 
you are talking, over the next 10 years, almost $100 billion a 
year. So it is a big, big number, and I appreciate your 
comments on that.
    And it seems like you have addressed those and how it is 
going to affect our job loss, how it is going to affect our 
economy, and then how it will affect us in our defense posture 
and our economic posture going forward throughout the world.
    I recently visited with the ambassadors from Vietnam and 
Singapore, and they were very concerned. The Vietnam Ambassador 
said China is claiming the China Sea, which would make us 
landlocked, and that would tie in with what you talked about, 
Dr. Morici, about the China Sea and that area.
    Yes?
    Dr. Morici. Well, consider this: If China can project 
several hundred miles into the Pacific, Japan is within its 
sphere of influence, and it is the third largest economy in the 
world. We are supposed to guarantee Japan's security.
    The Chairman. And Taiwan and other countries in the area.
    Dr. Morici. The thing about it is--what I hate to think 
about is Japan's industrial establishment--consider the 
situation we are in right now, because of the threat of another 
recession in Korea. Korea's shipbuilding industry is 
extraordinarily important to that economy.
    And it is facing, because of the slowdown in global 
commerce, a very short order book going forward. It has got to 
figure out what to do with those shipyards.
    Now it might be beyond the control of the United States in 
a similar situation, 6, 7, 8 years from now, from those 
churning out ships for the Chinese Navy, or just merchant 
marine ships for China. And then they can turn their shipyards 
to other less useful purposes. But more than that, we are in a 
little bit of the Greek problem here.
    Whether we talk about cutting health care or education or 
defense, unless we find some other way to stimulate the 
domestic economy, it is going to have multiplier effects and 
make the pie smaller and the tax revenues available to us less. 
So we will be back here again after the next election, and 2 
years after that.
    And we will be--we are kind of in a slow-motion version of 
Greece. They do it every 3 months; we are going to do it every 
2 or 3 years. We have to cut, then there is less, then we cut 
again. Unless we find a way to stimulate the domestic economy, 
the only way out of this box is to deal with the largest drain 
on domestic demand, and that is the trade deficit with China 
and the deficit on oil.
    There was a time when we had to have the deficit we have on 
oil. We no longer have to have that. And it will not be 
resolved by whiz-bang electric trains from nowhere to no place 
in Illinois or by electric cars. It will be resolved by 
developing the oil and gas we have, because those other 
technologies are only going to come online so quickly.
    Now we can either develop them or not, but we can get no 
environmental benefit. But with regard to China, there is the 
whole issue of if we do not address the currency problem and 
its other mercantilist activities, we are making our defense 
problem impossible, because we simply won't be able to afford 
to deal with it.
    The Chairman. Thank you very much.
    Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    In terms of confronting the broader deficit problem--and 
there is a bunch of different ways to go at this--and, 
certainly, I agree; some of you have commented about things 
that were done in the past that, you know, led us to where we 
are at, and we can all have a robust debate about what all of 
those were. But we are where we are.
    Dr. Morici. Yes, right.
    Mr. Smith. So, you know, if we could skip that for the 
moment, what would you recommend going forward in terms of 
confronting the deficit? How much do we have to reduce it by, 
because that is certainly a legitimate point of debate, whether 
or not we should, you know, be focusing on reducing the deficit 
by, I don't know, $4 or $5 trillion, or whether or not a lesser 
amount makes sense?
    And then once you pick your figure by how important it is 
to reduce the deficit by how much, given that what I gather 
from your testimony, you don't even think that the $460 billion 
in defense cuts that are currently proposed should happen. So 
that is off the table.
    What would you propose at that point--and if we could be 
specific on the spending, because then I like to say everyone 
is sort of, you know, is against the Federal Government 
spending in the abstract. It is in the concrete that people 
tend to get a little mealy-mouthed about it.
    So if we could lay out the specifics of what we should cut 
in the budget, or what you think should happen with revenue and 
where the deficit is at going forward, because that is what the 
``super committee'' [Joint Select Committee on Deficit 
Reduction] is wrestling with.
    Dr. Feldstein, do you want to start?
    Dr. Feldstein. Well, I will take a crack at that. We are 
heading according to the CBO [Congressional Budget Office], as 
you know, to a debt-to-GDP ratio that will be about 80 percent 
and rising more or less without limit if we don't do something.
    The key driver of that is, of course, the entitlement 
spending. Since I don't run for office, I have the luxury of 
saying we have to do what the Bowles-Simpson Commission said, 
we have to bring under control the growth of Social Security 
and of the Government-financed health programs--Medicare and 
Medicaid.
    What is the target? The target ought to be to stabilize the 
debt-to-GDP ratio at the kind of levels that we have had for 
decades in the past, about 50 percent. And that means getting 
the deficit down to about 2 to 3 percent of GDP.
    We don't have to balance the budget, but we do have to get 
the deficit down to about 2 or 3 percent of GDP. So we need 
large enough cuts in spending and/or increases in revenue to 
get us to that goal.
    Mr. Smith. Do you believe that we need the increases in 
revenue as part of that equation?
    Dr. Feldstein. I do. I think we can get increases in 
revenue without raising marginal tax rates----
    Mr. Smith. By reforming the code?
    Dr. Feldstein [continuing]. By reforming the code. And I 
think the directions for doing that, there are various options, 
but I think putting a cap on the maximum amount that each 
individual can get in tax benefits by various so-called tax 
expenditures, putting a cap on that, letting people continue to 
have all of the deductions and exclusions that are in the code, 
but putting a dollar cap relevant to their adjusted gross 
income on that would produce a lot of revenue and allow us to 
reduce marginal tax rates at the same time.
    Mr. Smith. That makes a great deal of sense.
    Gentlemen, do you want to weigh in?
    Dr. Morici. Yes, I agree with Professor Feldstein, I have 
to say, about the deficit-GDP ratio, and the need for tax 
reform. There are a lot of different ways we can go about it. 
But he is basically talking about flattening--not a flat--but 
flattening the tax rate. So it makes sense to me; makes a lot 
of sense.
    In terms of where we can cut spending, one of the things I 
have recently written--and as you know, I publish widely in op-
eds and all this sort of thing--is that if you look at what the 
United States Government is proposing to do for its people, it 
is not outrageous as compared to successful countries in 
Europe, namely Germany, Holland and, say, what Japan does in 
terms of the amount of health care and so forth.
    The real problem is we are terribly bad at it. We spend 18 
to 19 percent of GDP on health care. The Germans spend 12. But, 
you know, let us not fool ourselves. This is not a public 
versus private issue.
    You know, whenever you talk about really reforming health 
care, as opposed to doing what happened last year, and that is 
just vote for more benefits and spend more money, when you 
really talk about reforming it, it is always cast in terms of, 
well, are we going to continue to have a private system, a good 
old American system? Or are we going to have one of those 
socialistic government-run systems?
    Well, the fact is, the Germans finance 80 percent of health 
care through a private system, through reimbursement. There is 
a wide variety and many dimensions to health care systems that 
are used, and some are successful and some are not. Ours is 
private, and it is unsuccessful. It just simply does not 
deliver the benefits.
    If we started to look seriously at, for example, how the 
Germans manage the pricing process for drugs and patenting, we 
could save a lot of money on drugs. They spend $400 a year. We 
spend $800 a year. They are healthier than us. Something is 
wrong.
    They also don't have commercials of ladies jogging to sell 
Boniva, and guys running to the bathroom. They don't spend all 
that money. We do. And that is silly.
    But we need to start looking at that, and we need to stop 
fooling ourselves among conservatives--and I am a 
conservative--that we can do this without government 
intervention, because we simply don't have a private system 
when we have 55 percent of it funded by the Government. It is 
setting prices.
    Likewise, let me not say that hospitals should be put on a 
diet, without saying that universities should be put on a diet.
    If we look at how we educate people today, the amount of 
time that it takes to produce a doctor or a Ph.D., it is silly. 
The Europeans just do it better.
    Also, if we look at the amount of research that is going on 
in American universities, and what it generates--I mean, you 
know, things of that nature. We could spend a lot less on 
education, but you are going to have to make people who are 
constituents of Members of Congress on both sides unhappy.
    Mr. Smith. Absolutely.
    I want to let some other folks--some of my other colleagues 
get in here. I would like to have a further conversation with 
you about China at some point, and, you know, what our 
realistic options are for confronting their rise; because they 
are going to rise.
    Dr. Morici. But we want to get on a better set of rules.
    Mr. Smith. Right. Right.
    I yield back. Thank you.
    The Chairman. Thank you.
    Mr. Bartlett.
    Mr. Bartlett. Thank you.
    If every afternoon when we left here we broke all the 
windows, which would then be placed overnight in preparation 
for the next day's work, this could create a lot of jobs. For 
those who provide the energy, to turn the sand into glass, for 
those who haul the glass here, for those that installed it, and 
then all those secondary industries, the dry cleaners, the 
grocery store and so forth.
    Would this have a long-term positive economic benefit?
    Dr. Morici. I could think of better ways of spending your 
money that smacking windows and replacing them. If you improved 
your roads, you wouldn't be destroying something in the process 
to replace it. You know, that is like saying let us knock down 
the George Washington Bridge and rebuild it to create jobs. Why 
not repair all the broken bridges and make the traffic move 
better?
    Mr. Bartlett. Your answer indicates, then, that there is a 
fundamental economic difference between jobs in the sectors of 
our society which consume wealth and the sectors of our society 
which create wealth.
    Dr. Morici. I don't think I said that, sir. I said there is 
a difference between destroying something to create a job and 
improving something that is broken.
    Mr. Bartlett. Okay. We could also create a lot of jobs if 
we simply had people dig ditches and then fill them up again.
    Dr. Morici. Same principle.
    Mr. Bartlett. Or haul stones from----
    Dr. Morici. Same principle.
    Mr. Bartlett [continuing]. Site A to site B. Yes, sir.
    Dr. Morici. Same principle.
    Mr. Bartlett. Okay. I think your answer is implying that 
you believe that there is a fundamental difference in the 
sectors of our society that consume wealth and those that 
create wealth, from a purely economic perspective.
    Dr. Morici. I think if----
    Mr. Bartlett. If we ignore the fact that we have got to 
have a military and it is going to be too small, I think, with 
these cuts, if we totally ignore that, and we just look at 
jobs, aren't jobs in our military in the sector that consumes 
wealth?
    Dr. Morici. All jobs consume wealth. All jobs consume 
resources. We have judges. Judges consume wealth, but they 
provide a framework for commerce--contract law.
    A safe world provides highways for commerce; places for 
boats to go unimpeded. And the projection of American power for 
the last 75 years has been responsible from democracy almost 
being extinct in 1939 to prospering in the world, and for the 
spread of market institutions which has created great wealth--
that has a certain overhead.
    Mr. Bartlett. So then there is no----
    Dr. Morici. The foreign services--the same thing, sir. We 
could say the same thing about diplomats.
    I don't know where we are going with this.
    Mr. Bartlett. We are making the point that we may continue 
on this committee that national security is enormously 
important; that a military--adequate--is enormously important. 
But, today, I thought we were talking simply about economic 
effects.
    Dr. Morici. Well, the point is that if you denigrate the 
economic system, so it is hostile to American economic 
institutions, the United States will not be able to compete 
competitively, and our GDP will be decidedly smaller 25 years 
from now than it would be in a more favorable environment.
    Mr. Bartlett. I have no argument with what you are saying.
    Dr. Morici. Okay.
    Mr. Bartlett. But I thought today we were simply talking 
about economic effects----
    Dr. Morici. Well, the economic effects of cutting----
    Mr. Bartlett. And I must confess that although I am not an 
economist, I am concerned that about every 12 hours we have 
another $1 billion trade deficit. That is more than a $1 
million-a-minute trade deficit.
    You know, if we could increase our economic growth by 
simply increasing the activity in a service-based economy, then 
if we all took in each other's laundry for $100 a load and cut 
each other's hair for $100 a haircut, we would have an 
enormously increased economy, would we not?
    Dr. Morici. Well, no, eventually you will run out of money, 
because you have to import oil to generate the electricity to 
run the restaurant.
    Mr. Bartlett. So you are making my point that unless you 
have people in that sector that is creating wealth----
    Dr. Morici. I share your concern about----
    Mr. Bartlett [continuing]. Forever spend wealth.
    Dr. Morici. Exactly, and I share your concern about the 
trade deficit. That is why I say that we cannot afford the 
defense that we need unless we resolve that problem, because 
the economy will grow too slowly.
    If we could cut the trade deficit in half, using the same 
multipliers, if we could cut it in half, we could increase U.S. 
GDP by a very sizable amount, and create about 5 million jobs 
over the next several years. It would have a preponderant 
effect on unemployment, and the economy would grow much more 
rapidly. But that requires addressing China and having a 
favorable set of rules in the global economy.
    Mr. Bartlett. And if we don't, disaster awaits us. Thanks 
very----
    Dr. Morici. Exactly. I think it is in the last paragraph of 
what I submitted. And I was trying not to be too emotive, but 
basically I say that if we do not move in the direction that we 
need to move in, you know, America will become isolated and 
dramatically weakened.
    Marginalized, it will resemble Italy or Greece--charming 
and quaint, but hardly able to independently sustain its 
standard of living or ensure its own security, or worse 
bankrupt and at China's doorstep for a bailout.
    We are on the path to becoming Greece. Greece did the very 
same thing. It borrowed from foreigners to sustain its standard 
of living. Right now, we are borrowing from foreigners to 
finance our military and our health care.
    Thank you.
    The Chairman. Thank you.
    Ms. Sanchez.
    Ms. Sanchez. Thank you, Mr. Chairman and thank you 
gentlemen for being before us today, although this has got to 
be one of the strangest hearings that I have had to endure on 
this committee, to tell you the truth.
    You know, I always look at sitting on this committee as 
something from a strategic standpoint. I mean we have to look 
forward into the future and try to figure out with our military 
experts what the world will look like and what we need to 
address issues that may come up.
    And we have been working on that for the last 15 years that 
I have been on this committee. We have not only done that type 
of planning but we have done things like transformation, where 
we decided we would get a lot of our troops out of Germany and 
bring them back home. I know that when we did that and we 
increased the size of Fort Bliss and my colleague Mr. Reyes's 
area and over these last few years, he has had about a $6 
billion infusion and building more base and constructing--they 
are about to start constructing a hospital and housing and 
bringing our troops and their families home here.
    And I think the multiplier effect, which I know we just got 
a lecture from one of you on, it is pretty big on construction, 
and so I think that his economy has gotten better because we 
moved out our troops, a large majority from Germany and brought 
them here.
    You know when I looking at my operating area, one of you 
guys talked about the small contractors I have in my area. You 
know, they have not had business for the last few years because 
those monies for real systems have been cannibalized by the 
Afghanistan and Iraq operating costs of being over halfway 
around the world fighting a battle we just really don't seem to 
get anywhere with.
    And they have had to remix their customer base. So those 
that have survived so far know how to do that. They are just 
not in defense anymore.
    And then I think about the day maybe a couple years ago 
when I heard on the news that a gallon in Afghanistan costs me 
$400 to move my troops, and I couldn't believe it, and I went 
to the head of the appropriations defense committee and he 
looked at me and he said that is absolutely true.
    Now in California we scream when it is $4 a gallon. So I 
ask myself if we weren't in Afghanistan or we weren't in Iraq 
and I only had to spend $4 for a gallon of gas in California, 
where would that other $396 go? So I think it would be invested 
right here in the United States.
    I think Roscoe Bartlett was correct when he said when we 
are at war and we are not getting anything for it, we are 
really not getting anything for it, we need to figure out, it 
is not that difficult to figure out where to get the money to 
bring some of this defense spending down.
    I think the monies come from getting out of Iraq and 
Afghanistan. I think what we did before when I talked to the 
former Comptroller for George Bush, Mr. Walker, he said 70 
percent of the deficit we created during those 8 years, 6 of 
them under total Republican control up here, the White House, 
the House, the Senate was because we didn't raise revenues.
    So you can't have it both ways. You know, you just can't. 
We have to decide what military we need for the future. We have 
to decide that we are not winning in places, and we need to get 
our troops home and there is some fat to be cut.
    But I would agree with you, Mr. Chairman, $465 billion is a 
lot to put on the table. I am not too thrilled about putting 
much more on there. But I think we are much better capable here 
on this committee to figure out how to make those cuts than to 
have a macroeconomic impact come and tell me what I already 
know. The more money I keep here in the United States, the 
better off I am going to be at seeing people go back to work.
    So I don't know what this hearing really was called for, 
but I agree with you. We have put a lot on the table. We don't 
want to put much more on. But I think the sooner we get out of 
those wars, the better off we are.
    Thank you, Mr. Chairman.
    The Chairman. The purpose of this hearing is to find the 
economic impact of these cuts that we are seeing from defense 
from economic experts.
    I am going to yield a couple of seconds to Mr. Bartlett to 
respond to what you said he said.
    Mr. Bartlett. Perhaps because I am a scientist, I have a 
penchant for wanting all facets of an issue to be on the table. 
So I frequently end up the devil's advocate. It may be 
sometimes difficult to differentiate my personal positions and 
my devil's advocacy positions.
    Thank you.
    The Chairman. Thank you.
    Mr. Forbes.
    Mr. Forbes. Thank you, Mr. Chairman. Thank you, gentlemen, 
for your expertise and for being here.
    I just want to kind of bring us back to the jurisdiction of 
the committee. We have the rules of the committee and they are 
basically on defense policy, ongoing military operations, the 
organization and reform, the Department of Defense and it is 
not just this hearing.
    Over and over again, we have folks on this committee that 
don't want to talk about those aspects. They don't want to talk 
about them unless they can talk about increased revenue, which 
is the kinder and gentler way of saying increased taxes or 
entitlements, kinder and gentler way of talking about Social 
Security or Medicare of spending, which is our stimulus 
programs, but the purpose of this hearing is because when we 
make defense decisions, it comes down to two things: Is this a 
strategic benefit and secondly, what is the economic cost of 
doing it?
    On the strategic benefit, it comes down to risk and as one 
general told me yesterday, the number of people who come back 
from a particular mission.
    And I just take issue, I don't think that is breaking 
windows and replacing them by digging ditches. When I am 
talking about trying to fight to reduce the risk, I am talking 
about fighting to make sure I have more people come back than 
otherwise would come back. And that is important for this 
committee to do, and it is a big difference, and I disassociate 
myself with that line of discussions.
    But the second thing is we should be looking at the 
economic cost of making any kind of decisions we are making.
    So on the one hand we are told we are told you are going to 
save all these dollars and what you gentlemen are here for 
today and I thank the chairman for doing this, is to say are we 
really saving all those dollars or is there going to be a cost 
on the other side that is going to offset some of those 
dollars?
    And Professor Fuller, when I look at your studies, you 
looked at R&D costs and procurement costs, that is what you 
have, but I don't think you even took into consideration O&M 
[Operations and Maintenance] and reduction of active duty 
forces and reduction of civilians.
    But just based on your study, you look at a state like 
California on the one hand we are saying we can save all these 
monies, but if we do this, we are talking about cuts that are 
going to equal three times the largest employer in California.
    When you look at Virginia, it is six times the largest 
employer in Virginia; Texas, it is over one time the largest 
employer in Texas; Florida, larger than the largest employer in 
Florida; in Massachusetts, over two times the larger employer 
in Massachusetts; in Maryland, the largest employer in 
Maryland, gone; in Pennsylvania--the largest employer in 
Pennsylvania almost; in Connecticut, three times the largest 
employer in Connecticut; in Arizona, three-and-a-half times the 
largest employer in Arizona; and in Missouri, you are talking 
about roughly three times the largest employer in Missouri.
    We need to put those costs on the table when we are saying 
okay over here you are going save all this, we need to let all 
these states and people know we are not saving it, we are just 
passing it on to you because basically you are going to lose a 
lot of jobs in making this decision so you just need to say 
does it make economic sense to try to save a dollar here if you 
are going to lose two dollars over here. And I thank you guys 
for your study that helped us at least evaluate that.
    Now Professor Fuller, have I misrepresented anything your 
study has said?
    Dr. Fuller. No, not at all. I think it is important to 
recognize, as you pointed out, that this is just a part of the 
budget. It is just equipment and so it doesn't include 
personnel, it doesn't include gasoline, it doesn't include the 
purchases of goods and services needed to operate.
    Mr. Forbes. Which is going to make a much greater impact.
    Dr. Fuller. This is roughly 45 percent of the $100 billion 
a year that it could be sequestered.
    But I think the important issue with this paper and the 
kind of work that I do is just to identify that there is an 
economic consequence.
    Somebody has to evaluate better----
    Mr. Forbes. And that is what the Chairman has been kind 
enough to let us do before we make a decision in the (?).
    And Dr. Feldstein, one of the things that you have 
correctly pointed out is as we reduce our spending, doesn't 
that have an impact on the reduction in defense spending with 
our allies around the world and it encourages China, I think by 
your testimony to spend more, which means if we try to come 
back later, we are going to have to spend more money to have a 
lower capability vis-a-vis China.
    Can you just elaborate on that just a bit?
    Dr. Feldstein. Yes, I----
    Mr. Forbes. Your microphone.
    Dr. Feldstein. The point that I wanted to emphasize in the 
first half of my testimony was the fact that China inevitably 
is going to have a larger GDP than ours, will have a larger 
capability of spending on defense, and that we have to be 
prepared in advance to stop them from taking advantage of that 
to try to intimidate the United States and our allies.
    So I think that is very important, and it is not something 
we can postpone.
    Can I make another related point?
    We are talking about cuts in defense spending, but we are 
talking about it in an environment in which the economy already 
has a 9 percent unemployment rate and many others who are on 
part-time work, so we are making worse the weakness of the 
American economy by cutting spending in the short run.
    In the long run there are different issues. But in the 
short run we are making it worse and what I have advocated in 
the past in writing was that we ought to ask the military 
services if they can move forward in time some of the 
replacement and repairs and inventory rebuilding that is going 
to happen anyway in the future.
    Mr. Forbes. And my time is up. Mr. Chairman, I just want to 
thank you for having this hearing so we make these decisions 
with the information and not blindly making them and thank you 
gentlemen for your expertise.
    The Chairman. Can you be very brief?
    Dr. Morici. Very brief.
    Going forward, when we talk about what our allies can do, I 
think that realistically speaking what is going on in Europe, 
the only places we can look for real significant assistance in 
meeting security challenges--and this is going to be very 
difficult for you to deal with--is Germany and Japan, because 
everybody else is pretty flat out.
    The Chairman. Thank you.
    Mrs. Davis.
    Mrs. Davis. Thank you Mr. Chairman. Thank you all for being 
here. I agree. I think part of the difficulty is here that 
there are a lot of different perspectives on this issue, and it 
doesn't feel as we are getting all of that. What I was 
interested in hearing is that I think that there are a number 
of things that you have mentioned which tend to go along the 
line of stimulus spending.
    I agree. I mean in some ways it would make a lot of sense 
if the military would identify those machineries, equipment, 
carriers, et cetera, that really could be put on a fast track, 
and that we could spend in those areas. But at the same time we 
are talking about that, it almost appears as if, you know--if 
we just tripled or quadrupled the defense budget, all of a 
sudden we would have a lot of stimulus spending.
    And I don't think we would agree that that makes any sense. 
So we need to think more in--we try to do that in this 
committee--think in terms of a whole-government approach from 
time to time, and in what areas we can actually find greater 
growth or development that really mitigates the defense budget; 
and whether we could be helping ourselves along if we spent 
more in some areas.
    That means we don't have to spend quite so much on defense. 
Can you comment on that? Would you like to?
    Dr. Feldstein. Yes, I think you hit the right word--``fast 
track.'' That is the idea that I was suggesting is not to 
increase total defense spending over the next decade, but to 
take some things that might be done in 2014 or 2015 and tell 
the military to hurry up and do it now when we have got a lot 
of unemployed resources.
    Hopefully a few years from now the economy will be back at 
full employment and we won't be able to do that. But now when 
we have got so many unused industrial resources, would be the 
right time to do some of the replacement and some of the 
repairs and some of the inventory rebuilding that will have to 
be done later.
    So it doesn't add to the total debt over the next 5 years; 
doesn't add to total defense spending over the next 5 years. It 
just pulls it forward to a time when we have a lot of slack in 
the economy and would give a boost to aggregate spending.
    Mrs. Davis. Yes, sir. Do you want to comment?
    Dr. Morici. And I am not a defense expert, which I freely 
acknowledge. I mean my background is in international 
economics; international relations; international agreements. 
But it seems to me that in the post-Afghanistan era the nature 
of American force structure is going to have to change 
dramatically because we are going to be largely facing a naval 
challenge and a cyber challenge with China.
    And that doesn't mean we don't need any ground forces at 
all, but I don't know that we are going to need 100 maneuver 
battalions any longer. We may need less. I don't know how that 
all works out, but within even the same pie, I mean the fact 
that our fleet is shrinking is very troubling to me when China 
is launching aircraft carriers.
    Mrs. Davis. I think what is difficult is sometimes setting 
those priorities. We try and do that. We use the QDR 
[Quadrennial Defense Review]. We use a whole number of other 
factors, but trying to set those priorities of what we truly 
need to plan for the next war, which is obviously a difficult 
one to do.
    Dr. Morici. I don't know that there is a next war as much 
as there are going to be interesting confrontations about who 
gets to sail where.
    Mrs. Davis. Yes. Yes. One of the other things that you have 
brought up along stimulus spending, I think is roads, bridges. 
We know Simpson-Bowles of course dealt with infrastructure as 
well as it dealt with decreases in defense spending. You have 
mentioned Simpson-Bowles and that being not necessarily a 
model, but at least a jumping-off point for talking about the 
situation that we are in today.
    Do you feel that they went overboard when it came to 
defense spending within their recommendations?
    Dr. Feldstein. I do. They said $100 billion of domestic and 
$100 billion of defense. So that was not the kind of carefully 
thought-through analytics of how much we need for defense. It 
was just saying, ``Here is a way of doing something that 
appears on the surface to be fair.'' But that isn't what our 
defense planning ought to be about. It ought to be thinking 
through what our needs are.
    And again I just keep emphasizing your words about ``fast 
track.'' Doing something sooner in spending in defense that has 
to be done eventually makes, to me, an enormous amount of sense 
in an economy that has so much slack, so much unused resources, 
and won't forever. We are going to get back to full employment.
    Mrs. Davis. Thank you. Thank you Mr. Chairman. I----
    Dr. Morici. Just 10 seconds? The context of thinking about 
China and the Pacific has changed dramatically in just a few 
years. The notion was we didn't really have to worry about them 
because their defense spending was small just a few years ago. 
So I think that you need to look at the context in which 
recommendations were given and the context that we are in now.
    The Chairman. Thank you.
    Mr. Wilson.
    Mr. Wilson. Thank you, Mr. Chairman, and thank all of you 
for being here today. And I appreciate that what you are 
focusing on is facts. And I want to commend one of our 
colleagues, Congressman Randy Forbes, who has produced a 
memorandum that I hope the American people have the opportunity 
to see. It is ``Strong Defense, Strong America'' and, Dr. 
Morici, it hits right on point about Army Brigades since 1990--
they have decreased from 76 to 45; Navy ships from 546 to 288; 
bombers from 360 to 154.
    There has been an extraordinary reduction in our 
capability, and the American people need to know this. This is 
at forbes.house.gov/strongamerica. And in dealing with facts, 
Dr. Morici, in your statement that you provided, there were 
some startling facts I believe the American people need to 
know.
    And that is, in 2007, there were two wars. We had the tax 
cuts in place. The deficit was $161 billion. But in 2011, the 
deficit was $1.3 trillion and you further explain there was an 
$847 billion increase, but people need to know that the 
increase of the defense budget was 11 percent of the $847 
billion. These facts, really the American people are not aware.
    Then we get to a myth, and I would like for you to explain 
this myth. You say that there is a belief that the United 
States spends too much money on defense and winding down the 
wars in Iraq and Afghanistan will create a peace dividend. And 
you indicate that is a myth. Can you explain that to us?
    Dr. Morici. We have been through this before. We went 
through it with Vietnam. You did appropriate monies over and 
above your base of about--what is it, $573 billion--$575 
billion to fight the wars? And you look at defense spending. It 
is seven-something, not five-something and that is the war 
budget.
    However, those extra appropriations were monies that could 
have been spent in other ways. And one of the things that has 
happened over the last several years, as you have pointed out, 
is our ability to project power has shrunk. We have fewer 
planes, fewer boats, things of that nature. But also that 
things have gotten old and we are going to have to make sizable 
investments as we reconfigure what we have to address the 
challenges we will have that are different.
    But we are going to have to do an awful lot of 
modernization. I simply don't think you would like to be 
operating with 15- or 20-year-old computers. I don't know why 
we should be flying 25- and 30-year-old fighters? They do get 
old after a while.
    Mr. Wilson. Additionally, you indicate that it is very 
important that we stimulate the domestic economy. Well, we are 
all quite interested in that. And I appreciate that you raise 
the issue of domestic energy production. I would also like to 
point out last week I was in Alberta, Canada. That every dollar 
spent by the United States, and Canada is our leading importer 
of oil to us, every dollar or 90 cents is spent back in the 
United States, including in the District, buying tires--
Michelin.
    So it is positive. Can you explain again about stimulating 
the domestic economy?
    Dr. Morici. There is a little bit of difference between 
financing energy development in Alberta and funding it in 
Nigeria, okay? But, essentially, if we could free up domestic 
oil and gas development that will provide the same kind of 
stimulus as road construction, but it would be private money. 
It wouldn't increase the deficit; it would reduce it because it 
would generate tax revenues.
    It is the same stuff. It is steel. It is cement. It is all 
the good stuff that people like, you know, when they do those 
things. Likewise if we did something substantive about the 
trade deficit, it would create manufacturing jobs. It would 
create tax revenue and it would reduce the deficit. You know, 
there are things we can do to stimulate the private sector 
right now. And that would not cost you any money. And they 
would have the same kind of effect as stimulus spending and 
make your life easier.
    Mr. Wilson. And more jobs in Alberta, more jobs in America. 
Mr. Feldstein, the multiplier effect from military spending, 
can you explain the difference between military spending as 
opposed to other public spending?
    Dr. Feldstein. Military spending is a direct component of 
GDP. So every dollar that is spent on military procurement or 
military salaries is another dollar of GDP directly. In 
contrast, if you spend money on, say, transfers to state and 
local governments, that is not immediately or directly a 
component of GDP, so it doesn't add to GDP directly, only when 
those states and localities spend that money.
    Now if they spend every dollar of the transfer, well then 
it would be like defense. But typically they will use some of 
that money to replace money that would be funded out of rainy 
day funds or by raising taxes and so you get less than a dollar 
to start the process. And so that is why defense spending has a 
bigger multiplier, has a bigger impact on GDP then spending on 
other things.
    Mr. Wilson. Thank you all very much.
    The Chairman. Thank you.
    Mr. Johnson.
    Mr. Johnson. Thank you.
    Defense spending has a bigger multiplier than spending, 
say, on grants to state and local governments, with a specific 
purpose to retain the employment of teachers and police 
officers, firefighters and other public service workers?
    Dr. Feldstein. If every dollar that gets transferred to a 
state is used for that purpose----
    Mr. Johnson [continuing]. For that purpose?
    Dr. Feldstein [continuing]. Then it is the same as defense.
    Mr. Johnson. And----
    Dr. Feldstein. If they would have paid out of----
    Mr. Johnson. And I understand that. You are assuming that 
the money would be spent for purposes other than what the 
Federal grant or the Federal allocation to the state would 
require.
    But let me move on because I think we have heard talk of 
Government stimulus of the economy; Government spending on 
defense. And, of course, the purpose of defense spending is to 
secure the nation, as opposed to stimulate the economy. But it 
does have that incidental impact, and that is undeniable.
    Isn't it a fact that when you spend money for 
infrastructure; when the country invests dollars in 
infrastructure--roads, schools, and the like--broadband 
extension--those things create jobs as well? Is that correct?
    Dr. Feldstein. Absolutely, yes.
    Mr. Johnson. And so it has the same impact--domestic 
spending for infrastructure has the same impact as defense 
spending?
    Dr. Fuller. I would like to disagree a little bit----
    Mr. Johnson. Hold on. I will let you all come in. But what 
we are talking about here, basically, is a philosophy of 
Government spending. If you are going to spend on defense and 
it has a purpose of--or it has an incidental effect----
    Dr. Morici. There is a difference, sir----
    Mr. Johnson [continuing]. Of stimulating the economy----
    Dr. Morici. No, there is a difference----
    Mr. Johnson. Hold now.
    Dr. Morici. No, no, no, it is not a philosophical 
difference. It is a technical difference.
    Mr. Johnson. I have got the mike.
    Dr. Morici. Okay.
    Mr. Johnson. And I am entitled to my view of things, and I 
am entitled to ask questions based on those views. You may 
disagree, and I think that there is room for disagreement. We 
just simply need to, in this Congress, have more of a will to 
discuss the issues instead of just say, ``No.''
    You know, I don't think there is anybody who wants to just 
say no to defense spending. We can't ride around in 30- and 40-
year-old planes and operating on DOS operating systems on our 
computers with 20-year-old hardware. No, we can't do that. We 
have to continue to invest in our military. But since we have, 
kind of, bordered upon, here, talk of economic stimulus, if you 
will, I think that this is an appropriate philosophical issue 
for us to address.
    And you apparently disagree with me as far as the effect of 
domestic spending, domestic spending for infrastructure.
    Dr. Morici. Yes, sir, I do. And can I explain why?
    Mr. Johnson. Okay, please.
    Dr. Morici. I understand there is a genuine philosophical 
difference in this room, in this Congress, in this country, 
between the desirability or the positive systemic effects of 
defense spending versus the positive systemic effects of 
education spending or to keep firefighters on the job and so 
forth. I acknowledge that.
    However, there are technical differences that are not 
ideological or philosophical in nature. When you spend a dollar 
of Government money on widgets--let us keep this neutral--if 
the widget manufacturer gets all of his materials in the United 
States and employs entirely U.S. labor, it will have a higher 
multiplier effect than if the widget manufacturer uses imported 
steel.
    And there is a difference in that defense spending tends to 
have a greater domestic content than does a construction 
project. We use a lot of imported materials in construction. So 
there is that kind of measurement issue.
    Mr. Johnson. I mean, what is the difference between the 
materials that we would use in domestic spending as opposed 
to----
    Dr. Morici. Well, for example, suppose----
    Mr. Johnson. We would use the same steel from the same 
source----
    Dr. Morici. No, actually, there are 700 different kinds of 
steel made in the United States. Construction steel tends to be 
more commodity steel, basically folded cold-rolled steel that 
you see in two-by-fours. You can import bridges.
    The kind of steel----
    Mr. Johnson. And is it American companies that are the ones 
that have moved those operations----
    The Chairman. The gentleman's time has expired.
    Mr. Johnson. Thank you, Mr. Chairman.
    The Chairman. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. And, Dr. Fuller, I 
represent the Eighth District in Georgia. Specifically, Robins 
Air Force Base is the largest industrial complex in Georgia, 
and a lot of good men and women are working there, taking care 
of the warfighter.
    Where would Georgia fall in that list of job losses, in the 
top ten? Are we in the top ten?
    Dr. Fuller. It is not in the top ten. But, in this case, 
these top ten are just in the manufacturing and production of 
aerospace and equipment, so it didn't include personnel.
    Mr. Scott. Okay.
    Dr. Fuller. And that would change that list, if we were 
talking about military personnel or civilian contracting by 
DOD.
    Mr. Scott. If you have those numbers, I would like to see 
those numbers.
    First of all, I voted against the sequestration and the 
potential for it. And I think, maybe, the point that I would 
like to again make is that, when we spend money through the 
Department of Defense and we are purchasing equipment, that, by 
definition, creates manufacturing jobs, doesn't it?
    Dr. Fuller. Enormous job impact. I mean, and that is one of 
the differences with this kind of spending and some of the 
other kinds, when you are talking about that the employment 
multipliers are higher because some of those employment 
multipliers are driven by payroll.
    Mr. Scott. Yes, sir.
    Dr. Fuller. And that just spreads out across the economy. 
But the supply chain is very broad and very long in military-
equipment manufacturing.
    Mr. Scott. And so is it a fair statement to say that our 
challenge as America is that our GDP is not growing anywhere 
close to as fast as our competitors, both in industry and our 
potential military competitors in the future?
    Is it fair to say that that is our real problem right here 
and why we are having all of these discussions?
    Dr. Feldstein. Well, there is a short-run problem and a 
long-run problem. And in the short run, we are growing at about 
2 percent, and that is not enough to begin to absorb all the 
excess unemployment.
    Mr. Scott. Yes, sir.
    Dr. Feldstein. So that is a serious problem.
    In the long run, we are not going to grow as fast for the 
next decade or two decades as China or India or other countries 
that are still very poor on a per capita basis and will be 
catching up with us.
    But as I emphasized in my testimony, in both of those 
cases, their populations are much larger.
    Mr. Scott. Yes, sir.
    Dr. Feldstein. And therefore, long before their per capita 
income even comes close to ours, their total GDP and therefore 
their ability to support a defense budget will be much larger 
than ours.
    Dr. Morici. Yes, may I? It is important to recognize a 
distinction between the quantity and quality of growth. With 
China growing at 9 percent a year and the United States growing 
at 2 percent, the U.S. position is being fundamentally 
degraded. And the two lines cross sometime in the next decade, 
and the best defense posture--that is just not a good situation 
to be in.
    However, if we address the trade deficit with China; if we 
balance trade with China and develop their own oil and gas, 
then not only would we be growing more rapidly, but we would be 
doing it by manufacturing more, by undertaking more R&D, so the 
quality of U.S. growth would be very good, and we would be able 
to maintain for a very long time our technological edge.
    We have a lot of assets in the United States that are 
underutilized, and are on the verge of atrophy. For example, 
Congress, in its wisdom, created the land grant universities. 
So we have a plethora of engineering schools in the United 
States.
    Mr. Scott. I am getting very short on my time----
    Dr. Morici. Okay, but you see what I am--it is the quality 
of growth as well. If we grow at 4 percent, we are not just 
going to grow double; we are going to grow better.
    Mr. Scott. Absolutely. But 4 percent GDP growth, I think, 
is a very reasonable and good goal that we should have for this 
country. This country can, and Americans can, grow at 4 percent 
GDP.
    My point is that the cuts that the military is being asked 
to take is going to further reduce our starting point in 
getting back to that 4 percent GDP, which I think is the point 
that you have tried to make as well.
    Dr. Morici. Yes.
    Mr. Scott. One of the things I would ask each of you to 
take a look at, and then I will yield back the remainder of my 
time--one of my primary concerns is the President's budget 
revenue estimates. I hope that you will each take a look at 
that--for 2010 he is saying the revenue from corporate taxes, 
$191 billion; 2011, $198 billion; 2012, $327 billion; 2013, 
$397 billion; 2014, $478 billion.
    Those are pretty strong growth projections that he has 
built into his budget. And I would appreciate it--certainly, I 
respect each of you--if you would take a look into the tables 
where he has put some, I think, pretty robust assumptions.
    Dr. Morici. Well, I have looked at the--by the way, this 
Administration is not novel, but the President, in his February 
budget, assumed about 4--it is in my testimony--about 4 years 
or 5 years of 4-percent growth. And since we are not growing at 
that pace, it just means the revenues aren't going to be there.
    Mr. Scott. And it means the deficits will be larger?
    Dr. Morici. That is why we will be back at this in 2013, 
after the election.
    The Chairman. Mrs. Hanabusa.
    Ms. Hanabusa. Thank you. Thank you, Mr. Chairman.
    Thank you, Professors.
    Dr. Fuller, beginning with you, I just have a clarification 
question. In your testimony on the top ten states, you said 
that they are manufacturing only.
    Can you tell me why you selected the manufacturing 
component in arriving at the ten states that would lose the 
most in terms of jobs in thousands, as well as the funding in 
terms of gross state product?
    Dr. Fuller. Well, if I left the impression it is only 
manufacturing I misspoke. What we do with DOD spending for 
equipment, which starts with manufacturing, but it also 
supports a very, very large--almost eight jobs in non-
manufacturing for every one job in manufacturing. So, the job 
numbers that I have here include manufacturing and all of the 
corollary jobs or support jobs that go with those industries.
    Ms. Hanabusa. So, it would be like a multiplier impact of 
loss of one job in manufacturing and DOD related situation, and 
then how it affects the other ancillary----
    Dr. Fuller. Yes. It is only 12 percent of the total are 
the----
    Ms. Hanabusa. Right. Right.
    Dr. Fuller [continuing]. Direct aerospace manufacturing 
jobs.
    Ms. Hanabusa. Okay. And you said that if you were to 
translate that to personnel, just loss of personnel, you would 
have a different ranking of the states.
    Dr. Fuller. It could very well have included the purchase 
of oil and other kinds of support commodities that the military 
consumes. I don't know what the answer is, but I suspect--
Virginia gets more DOD spending of all kinds on a per capita 
basis than Texas and California. But Texas was number one last 
year in total. So, there might be some rearrangement of the 
ordering in this.
    Ms. Hanabusa. And is that readily available, so you could 
give it to us? Or is that something you would have to 
calculate?
    Dr. Fuller. No, it is published every year. It would be 
easy to get it for you.
    Ms. Hanabusa. Thank you very much.
    Both Dr. Feldstein, as well as Dr. Morici, gave a strong 
testimony on China. And I represent Hawaii, so you can imagine 
my interest in the Pacific.
    Dr. Feldstein, first beginning with you, you said something 
in your testimony that I was interested in. And you said that 
you know we have to define the debt and GDP ratio. And you said 
about 50 percent. Did I hear you correctly? And then you said 
to get deficit down to 2 percent to 3 percent of GDP. Was that 
something----
    Dr. Feldstein. Historically, our debt ratio has been 50 
percent or a bit less for decades now. But it is getting way 
out of control. And to get it back to that it would take 
bringing the annual deficits down to the 2 percent to 3 percent 
range.
    Ms. Hanabusa. Of GDP.
    Dr. Feldstein. Of GDP.
    Ms. Hanabusa. So, so that I am clear, for example if we 
agree GDP is almost $15 trillion, $14.7 trillion, somewhere 
around there, and the debt that you are speaking to that we 
would have to get down to would be about 7 point whatever. Are 
we talking about the same thing?
    Dr. Feldstein. If it were to be true today, yes.
    Ms. Hanabusa. Right.
    Dr. Feldstein. Exactly.
    Ms. Hanabusa. Thank you.
    Dr. Morici, you said in your testimony something that 
caught my eye. You say without a strong economy and military 
capable of meeting the emerging challenge posed by China in the 
Pacific, American values in the U.S. economy cannot succeed. 
And then you said something else, which was--and I am going to 
ask you how you relate the two or what you think we should do.
    You said large American multinationals, which have invested 
in China to serve the market, have been clients of Beijing's 
protectionism, and invest in the middle kingdom mercantilism. I 
haven't heard middle kingdom used in a while.
    And so I guess what I am looking at is as you say that we 
have this definite need in terms of a military power to look at 
China. And yet we have our own in China. And I think the end 
result of this was the transfer of technology.
    And I think that is how you are drawing it together, that 
we think China doesn't have the technology that we have, but 
China's taking care of our great, big manufacturing. And you 
are assuming that the technology will transfer. So, can you 
tell me how you are putting these two statements in, and what 
you think the ultimate result is going to be if we let this 
continue?
    Dr. Morici. Well, essentially, in order to manufacture, to 
sell in China, you have to manufacture in China. That is why 
their exports to us exceed their imports from us 3.5 to 1. That 
is a huge spread. I mean, one of the best-selling vehicles in 
China are Buicks. But we can't export them.
    Now, in a recent example, to benefit from the subsidies 
that they have, like we do, for electric vehicles they want to 
require General Motors to transfer its EV [electric vehicle] 
technology, its Volt technology. We are establishing labs in 
China that have the effect of people gaining experience, 
developing backgrounds and so forth, which is transferrable, 
whether it is software or the design of computers or the 
development of aircraft.
    By having design facilities in China people work there. 
They learn. They quit their jobs. They go someplace else and 
they can do the same thing. I mean, the same sort of thing 
happens in the United States, but we are developing this for 
them.
    Ms. Hanabusa. Thank you, Mr. Chair.
    The Chairman. Dr. Fuller, the study that you put out 
yesterday for the AIA [Aerospace Industries Association], you 
have the top ten states. But I understand you have that for all 
the states?
    Dr. Fuller. I do.
    The Chairman. Could you make that available to us, please?
    Dr. Fuller. I will.
    The Chairman. Thank you very much.
    Mr. Young.
    Mr. Young. Thank you, Mr. Chairman. Appreciate all of our 
panelists being with us today. It has been an interesting 
hearing, and I really appreciate the chairman holding this 
hearing; first a comment, then a question.
    The comment is, as we make defense spending decisions here 
in this country I think it is important to clarify our greatest 
consideration should not be the multiplier effect of any given 
Government spending. It should not be, you know, other 
considerations. First and foremost, it is military strategy.
    None of you pretend to be military strategists, and so we 
defer to them. First and foremost is these different tradeoffs 
are made, assessments of risk and proposals to mitigate the 
risk. And so I just want to make sure that is clear. That is 
not the purpose, as I understand it, of this hearing.
    Dr. Morici, a question about the trade deficit with China, 
something you brought up a number of times, probably a little 
outside the scope of this hearing. But since we have heard it 
so many times, I am going to give you an opportunity to fill in 
some concrete policy suggestions as to what could be done here 
at the Federal level since it does in fact have implications 
for employment in the defense sector, our country's growth and 
whatnot.
    Dr. Morici. I am not alone in making this suggestion. While 
I am known as a conservative economist, and sometimes 
referenced to a political party of which I am not affiliated, 
economists, shall we say on the other side of the aisle, have 
made the same suggestion. And that is that one way or another 
we could put a tax on Dollar-Yuan conversion so as to raise the 
value or raise the price of buying in China and investing in 
China to what it would be if China revalued its currency.
    We could determine the tax by dividing the value of its 
foreign exchange purchases, its currency intervention, which 
are quite transparent, published by the Bank of International 
Settlements and the IMF [International Monetary Fund] by the 
value of its exports. That would dramatically change the price 
of Chinese goods in the United States, and change buying habits 
and sourcing habits.
    It would also affect investments into China, and it would 
be in China's hands because China could reduce that tax by 
reducing its intervention and letting the value of its currency 
rise.
    Mr. Young. Thank you. I suspect you have published on this 
topic, and could direct me towards at least an article you have 
written?
    Dr. Morici. I am sure I could do that.
    Mr. Young. Are there articles critical of your position 
that you could also direct me to, perhaps?
    Dr. Morici. I suggest you find them on your own, but some 
people would say that that is a protectionist position. And my 
position is that what China is doing is protectionist----
    Mr. Young. All right. All right.
    Dr. Morici [continuing]. That we are in a trade war and 
they are shooting and we are, you know, using a pea shooter.
    Mr. Young. And if you could restate your earlier point 
about the quality of GDP growth as opposed to the number 
there--I lost that point.
    Dr. Morici. If the United States were to resolve its trade 
problems by dealing with China and oil, we would be 
manufacturing a lot more in the United States, which would 
finance a great deal more R&D. And that would create a lot more 
employment, for example, for American engineers, which would 
raise their wage rates and encourage young people to register 
in engineering programs.
    You know, one of the reasons that students major in finance 
instead of electrical engineering is because it pays better and 
there are more jobs. And one of the reasons there are more jobs 
is simply because we have this trade deficit.
    So, my feeling is it would improve the quality of human 
capital in the United States. And it would also result in us 
having a greater treasure trove of patents and knowledge and 
things that we could sell to the world.
    Mr. Young. So this would translate into more sustainable 
GDP growth into the future. That is the benefit in terms of 
quality.
    Dr. Morici. Right. And on top of that----
    Mr. Young [continuing]. Would be broader as well.
    Dr. Morici. That is right. The income issues are very 
different. By encouraging finance in this country, we encourage 
the problem that we have.
    But on top of that, we are going to have to acknowledge 
Professor Feldstein's point. China is a very big place. And 
until the Chinese grow old from the One China policy, which is 
not until the next century, we have got a problem.
    So, we are going to have to have a technological edge if we 
are going to survive. We are going to have to be smarter. And 
we are going to have to have a better industrial capability to 
do that. And right now, on the path we are on at 2 percent 
growth, we are mining out and denigrating our industrial and 
R&D capability.
    Mr. Young. I yield back. Thank you.
    The Chairman. Thank you very much.
    Excuse me. When I went to the Steering Committee to try to 
get the job as chairman of this committee, I told them that I 
saw the job as chairman of the committee to lookout for the 
defense of this Nation. And specifically to make sure that all 
of our people in uniform that are out on point defending our 
freedoms, wherever they may be around the world, have all the 
equipment, the training, the leadership, all of the things they 
need to carry out their missions and protect us, and return 
home safely.
    I am very concerned about the cuts that are in place, and 
those that we can see coming down the line on defense. We have 
held five hearings now to hear from specific experts on 
military and former Members of Congress who have chaired this 
committee to find out what their feeling was about the impacts 
of these defense cuts on our defense and on carrying out that 
mission with regard to those who defend us.
    I also think, though, that it is important that the Nation 
understand that these cuts will have significant economic 
impacts. And without a hearing such as this, they are not 
hearing that. In fact, most of the Members of Congress don't 
even understand or know of the significance of the cuts that we 
have already made.
    That is, again, why the hearing.
    So I appreciate you being here. I understand that you 
haven't testified before this committee before, and maybe we 
haven't ever looked into the economics before, because that 
does fall under the purview of other committees.
    But in this particular case, it does have significant 
impact on our job as members of the Armed Services Committee, 
and I appreciate you being here today, and I appreciate your 
testimonies. And Mr. Smith, do you----
    Mr. Smith. Well, I thank you for the hearing as well, and I 
think the last conversation from Mr. Young there is very 
important.
    The industrial base really matters here, and I think going 
back to Mr. Bartlett's, you know, digging holes and refilling 
them, I think there is certain types of spending that make a 
bigger difference, and I think defense, because of the 
manufacturing base that it has developed, and the workers' 
skill set that it develops, that what I hear a lot from our 
defense contractors, is if you say, well, we are going to take 
a pause.
    We are not going to build submarines for a couple of years; 
you can't come back a couple years later and have the 
subcontractors and the skilled workforce that is necessary to 
build that submarine or aircraft carrier or bomber. You need to 
maintain that industrial base and also the manufacturing skills 
that are developed in doing that; have private-sector 
applications as well.
    And you can begin to develop products, whether it is in 
energy or health care or any other number of different other 
sectors, where you begin to manufacture and produce things in a 
way that help your broader economy.
    Now I happen to think this line of argument also applies to 
broad infrastructure building, that if you are talking about 
bridges and energy and roads and maybe even trains, even--not 
specific train, if you don't like it, but some sort of 
infrastructure product--go ahead. Sorry.
    Understood. That is fine.
    You know, that type of infrastructure also has those same 
benefits, that you--you are manufacturing; you are employing 
the workforce that will grow wealth and move you forward in a 
more positive direction.
    So it doesn't just apply to the defense area, but I think I 
really do think that is the biggest argument folks don't 
understand out there--the importance of defense spending to our 
industrial base and our manufacturing economy. So I think this 
hearing has been very helpful, and I appreciate all of your 
gentlemen's testimony. I appreciate the chairman for having 
this hearing. I yield back.
    The Chairman. Thank you very much.
    This hearing stands adjourned. Thank you.
    [Whereupon, at 11:51 a.m., the committee was adjourned.]
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                            A P P E N D I X

                            October 26, 2011

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                            October 26, 2011

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              Statement of Hon. Howard P. ``Buck'' McKeon

              Chairman, House Committee on Armed Services

                               Hearing on

             Economic Consequences of Defense Sequestration

                            October 26, 2011

    The House Armed Services Committee meets to receive 
testimony on Economic Consequences of Defense Sequestration. We 
are joined by a panel of top economists who will share three 
distinctive perspectives with the Committee--the macroeconomic 
impacts within the United States of further cuts to defense, 
the regional economic effects which may vary from state to 
state, and the global dynamics of further cuts to our military.
    The committee has held a series of five hearings to 
evaluate lessons learned since 9/11 and to apply those lessons 
to decisions we will soon be making about the future of our 
force. These hearings also focused on the national security 
risks posed by sequestration. We received perspectives of 
former military leaders from each of the Services and the Joint 
Staff, former chairmen of the Armed Services Committees, 
outside experts, and Secretary Panetta and Chairman of the 
Joint Chiefs, General Dempsey. Today, we will change direction 
and focus on the other side of the coin--the relationship 
between the U.S. military and the economy.
    As a fiscal conservative, I tend to oppose increasing 
Government spending for the purpose of job creation. But I 
think we must understand that the defense industry is unique in 
that it relies entirely on Federal Government dollars. We don't 
spend money on defense to create jobs. But defense cuts are 
certainly a path to job loss, especially among our high skilled 
workforces. There is no private sector alternative to 
compensate for the Government's investment.
    Secretary of Defense Panetta has said that cuts on the 
scale of sequestration will result in a 1-percent hike to 
unemployment and 1.5 million jobs lost. The Aerospace 
Industries Association released a report yesterday, based on 
the analysis of Dr. Fuller, one of our witnesses today, that 
estimated just over one million industry jobs would be lost--
based on cuts to procurement and R&D alone. When one factors in 
the separation of Active Duty service members and DOD 
civilians, the number is quite close to DOD's. The impact is 
not proportional across all 50 states. Dr. Fuller's testimony 
suggests that nearly 60 percent of the jobs lost would come 
from just 10 states. One-third of the lost jobs would fall in 
three states--California, Texas, and Virginia. How does this 
translate to the larger economy? In 2013 alone, growth in GDP 
would fall by 25 percent.
    But the economy could be affected further, as the U.S. 
military might no longer be seen as the modern era's pillar of 
American strength and values. There is risk that some within 
the international community would try to take advantage of the 
fragile American economy and the perceived limitations on our 
military's ability to promote global stability.
    In these difficult economic times, we recognize the 
struggle to bring fiscal discipline to our Nation. But it is 
imperative that we focus our fiscal restraint on the driver of 
the debt, instead of the protector of our prosperity. With that 
in mind, I look forward to hearing from our witnesses today.
    Now please let me welcome our witnesses this morning. We 
have:

         LMr. Martin Feldstein, George F. Baker 
        Professor of Economics, Harvard University, President 
        Emeritus, National Bureau of Economic Research;

         LDr. Stephen Fuller, Faculty Chair and 
        University Professor, George Mason University, 
        Director, Center for Regional Analysis at the School of 
        Public Policy; and

         LDr. Peter Morici, Professor of International 
        Business, Robert H. Smith School of Business, 
        University of Maryland, Director of Economics at the 
        United States International Trade Commission.

    Gentlemen, welcome to the House Armed Services Committee. 
We know this may be an unusual venue for you and this is a 
first for us. Thank you again for being here. I'm sure there is 
much we can learn from you.

                      Statement of Hon. Adam Smith

           Ranking Member, House Committee on Armed Services

                               Hearing on

             Economic Consequences of Defense Sequestration

                            October 26, 2011

    I would like to thank the witnesses for appearing here 
today. We are in a time of significant uncertainty concerning 
the budget, and the advice provided by the witnesses will be 
extremely helpful in understanding the impact of potential 
defense sequestration.
    Our country faces a long-term, systemic budget dilemma--we 
don't collect enough revenue to cover our expenditures. 
According to the House Budget Committee, we currently must 
borrow about 40 cents for every dollar the Federal Government 
spends. If we're going to fix this problem in the long run and 
avoid sequestration in the short run, I believe that we must 
address this from both ends--spending will have to come down, 
and we're going to have to generate new revenues.
    Like many, if not most, of our members here, I share the 
view that large, immediate cuts to the defense budget caused by 
sequestration would have dangerous impacts on the ability of 
the U.S. military to carry out their missions. I am also deeply 
concerned about cuts to all non-entitlement spending, which 
bore the brunt of the recent deficit deal, and which also 
directly or indirectly support the jobs of thousands of 
American workers. This committee is properly focused today on 
the impact of the defense budget on jobs, but we also serve a 
larger body--the American people--and we owe it to them to 
approach the budget and jobs debates carefully and 
comprehensively.
    If we can avoid sequestration, I believe that we can 
rationally evaluate our national security strategy, our defense 
expenditures, and the current set of missions we ask the 
military to undertake and come up with a strategy that requires 
less funding; indeed the Department of Defense is currently 
focused on just such an evaluation. Sequestration would make 
that rational evaluation impossible, which is why it must be 
avoided. But it is also important that we address the revenue 
side of our budget problem. Recently, some of my colleagues on 
this committee issued dire warnings about the potential impacts 
of additional defense budget cuts. I share their concerns, and 
that is why we must consider raising additional revenue. In 
order to avoid drastic job losses caused by cuts to our 
military and other important programs, revenue must be on the 
table.
    It is my hope that this hearing will help remind everyone 
here that we have to make some serious choices. Our budget 
problems must be looked at in a comprehensive manner. If we are 
serious about not cutting large amounts of funding from the 
defense budget, something else has to give. Large, immediate, 
across-the-board cuts to the defense budget, which would occur 
under sequestration, could do serious damage to our national 
security. They would also likely result in thousands, if not 
tens of thousands, of Americans losing their jobs. 
Sequestration would have a similar impact on American workers 
in cutting other non-entitlement spending. In order to avoid 
these large cuts and the resulting job losses, we're going to 
have to stop repeating ideological talking points and address 
our budget problems comprehensively, through smarter spending 
and enhanced revenue.
    Thank you again, Mr. Chairman, for holding this hearing. 
And thank you to our witnesses for appearing here today.

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