[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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October 26, 2011
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