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[H.A.S.C. No. 106–46]







FEBRUARY 8, 2000


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One Hundred Sixth Congress

FLOYD D. SPENCE, South Carolina, Chairman

BOB STUMP, Arizona
CURT WELDON, Pennsylvania
JIM SAXTON, New Jersey
JOHN M. McHUGH, New York
HOWARD ''BUCK'' McKEON, California
J.C. WATTS, Jr., Oklahoma
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WALTER B. JONES, Jr., North Carolina
LINDSEY GRAHAM, South Carolina
JIM RYUN, Kansas
BOB RILEY, Alabama
MARY BONO, California
JOSEPH PITTS, Pennsylvania
ROBIN HAYES, North Carolina

JOHN M. SPRATT, Jr., South Carolina
LANE EVANS, Illinois
GENE TAYLOR, Mississippi
MARTIN T. MEEHAN, Massachusetts
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VIC SNYDER, Arkansas
ADAM SMITH, Washington
JAMES H. MALONEY, Connecticut
MIKE McINTYRE, North Carolina
ROBERT BRADY, Pennsylvania
BARON P. HILL, Indiana
JOHN B. LARSON, Connecticut

Andrew K. Ellis, Staff Director
David Trachtenberg, Professional Staff Member
Ashley Godwin, Staff Assistant



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    Tuesday, February 8, 2000, Testimony on the Adequacy of the Defense Budget


    Tuesday, February 8, 2000




    Skelton, Hon. Ike, a Representative from Missouri, Ranking Member, Committee on Armed Services

    Spence, Hon. Floyd D., a Representative from South Carolina, Chairman, Committee on Armed Services


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    Gouré, Dr. Daniel, Deputy Director, CSIS International Security Program

    Perry, Hon. William J., former Secretary of Defense

    Ranney, Jeffrey M., Director for Strategic Planning and Financial Analysis, Management Support Technology, Inc. and Senior Associate, CSIS

    Schlesinger, Hon. James R., former Secretary of Defense and Member, CSIS Board of Trustees

[The Prepared Statements submitted for the Record can be viewed in the hard copy.]

Gouré, Dr. Daniel

Ranney, Jeffrey M.

Skelton, Hon. Ike

Spence, Hon. Floyd D.

[The Documents submitted for the Record can be viewed in the hard copy.]
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The Center for Strategic & International Studies Press Release

[The Charts submitted for the Record can be viewed in the hard copy.]
Chart 1
Chart 2


Mr. Spence


House of Representatives,
Committee on Armed Services,
Washington, DC, Tuesday, February 8, 2000.

    The committee met, pursuant to call, at 1:10 p.m. in room 2118, Rayburn House Office Building, Hon. Floyd Spence (chairman of the committee) presiding.


    The CHAIRMAN. The committee will please be in order.
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    Today's hearing begins the Committee's oversight of the fiscal year 2001 budget by focusing on the relationship between United States military strategy and the defense resources.

    Yesterday, the Administration officially released its defense budget request for fiscal year 2001. This is the Administration's last budget proposal and the first to propose a significant real increase in defense spending.

    Tomorrow, Secretary of Defense Cohen and Chairman of the Joint Chiefs General Shelton—General Shelton will appear before the Committee to present the—.

    Mr. SKELTON. Mr. Chairman, thank you.

    The CHAIRMAN. You are welcome. And rounding out the week on Thursday, the Committee will hear from our four service chiefs on the state of our military forces.

    For years there has been bipartisan concern that the level of resources, dollars and forces devoted to national defense is insufficient to permit the services to execute the national military strategy. The Nation's military strategy, which calls for our military forces to be able to successfully fight two nearly simultaneous major theater wars, was reaffirmed by the Department's 1997 Quadrennial Defense Review, or QDR, and most recently by the National Security Strategy Document released last month by the White House.

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    However, in recent years, the Services' ability to carry out this strategy has been placed at considerable risk due to the combination of inadequate resources, shrinking forces and extensive operational deployments, particularly peacekeeping operations.

    In fact, this combination of factors has put at serious risk the viability of our all-volunteer force. A force that took a generation to build following Vietnam. In this context, the Committee today will examine a recent report by the nonpartisan Center for Strategic and International Studies, CSIS. In this recent study entitled ''Averting the Defense Train Wreck in the New Millennium,'' CSIS concludes that the United States military is underfunded, estimating that, on average, an additional $100 billion per year for the next 5 years will be required just to maintain our current level of military capability.

    Much is being made of the fact that the Department's budget request will propose, for the first time, a level of procurement funding that meets the $60 billion target established by the Joint Chiefs back in 1995. While representing a welcomed, albeit, long overdue development, this modest level of investment will be inadequate to ensure even current capabilities. The CSIS analysis before us today concludes that the Administration's procurement budgets are underfunded and that, if the Department of Defense continues its pattern of funding near-term budget shortfalls at the expense of acquisition programs, the equipment of our military forces and the one that they rely on today will face obsolescence long before it can be replaced with more modern systems.

    Overall, the study ominously concludes, and I quote ''without larger defense budgets, the military services will have no choice but to reduce both force structure and personnel and accept higher military risk.''
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    In the forward to the CSIS study, our first witness today, former Secretary of Defense, James Schlesinger, notes, and I quote him, ''the coming defense train wreck is principally the result of the failure of the Administration to provide the funds necessary to pay for the kinds of military force and tempo of operations dictated by its foreign policy. The United States simply cannot continue to play the global leadership role envisioned by the current national security strategy without a substantial increase in defense spending.''

    This has become an all-too-familiar assessment over the past eight years. To help us better understand the implications of this growing problem, the Committee is pleased to welcome former Secretary of Defense and member of the CSIS board of trustees, Dr. James Schlesinger, along with the coauthors of the CSIS study who are Daniel Gouré, Deputy Director of CSIS International Security Program, and Jeffrey Ranney, senior associate at CSIS and director for strategic planning and financial analysis at Management Support Technology Incorporated.

    As a second panel later this afternoon, the Committee will hear from former Secretary of Defense, William Perry who will offer his perspective on the relationship between the United States military strategy and defense resources.

    Before turning to Dr. Schlesinger for his opening remarks, I would like to recognize the Committee's Ranking Member, Mr. Skelton, for any comments he would like to make.

    [The prepared statement of Mr. Spence can be found in the Appendix.]

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    Mr. SKELTON. Thanks so much, Mr. Chairman. We welcome our witnesses today, especially our old friend, Jim Schlesinger, it is great to see you. Dr. Gouré, Mr. Ranney, we look forward to your testimony as well as that of Secretary Perry, who will join us in a few moments on the second panel.

    The testimony before us today provides one assessment of the funding profile support of the force outlined in the 1997 QDR, Quadrennial Defense Review, that asserts that there is an annual $1 billion shortfall for DOD between 2001 and 2010. The report identifies two major resource challenges facing the Department: The need for increased investment budgets, and the need to address a continued pressure in the operating accounts.

    At the outset, let me say that the CSIS report provides a useful contribution to the discussion of defense issues, and I agree that these are two long-term challenges that do face the Department of Defense. However, I believe it is incorrect to contend that the Department of Defense requires a 1-for-1 replacement of existing weapons systems stocks, that existing equipment will be replaced with new equipment rather than have its service life extended, and that we will continue to support today's military infrastructure.

    The report makes a number of questionable assumptions in those areas. Moreover, I believe the report pays too little attention to prospects that acquisition costs may be controlled through reform, and that technological advances may yield less costly weapons systems in the future, or may make unnecessary the replacement of some legacy systems. Increased interoperability may also reduce the number of weapons platforms that will need to be required in the next ten years.
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    If the DOD is able to reduce its infrastructure, additional savings may be achieved that would ameliorate the budget shortfalls that the CSIS report projects. It is also important to think of our defense requirements in a much broader context. Meeting our national security needs, not simply as a matter of funding programs and operations, we may also serve our national security interest, as we all know, through diplomacy, through the provisions of foreign aid, through International Military Education and Training (IMET) and by developing trade relations with our adversaries to move them gradually to a less threatening military posture. The CSIS report makes little or no allowance for those considerations.

    Similarly, the report doesn't take into account that a new QDR will shortly be conducted, which could alter significantly the approach that we take to rightsizing our force structure and the weapons systems that go with it. We are beginning to see signs that steady state funding and replacement of legacy systems are not realistic. General Shinseki's vision is that we need to transform the Army, moving in many cases to lighter, more mobile, more lethal wheeled vehicles and away from the overreliance on heavy track vehicles.

    A related consideration is that the threats of today in the post-Cold War world are terribly different from those of ten years ago. The threats of today include domestic and international terrorism, the use of chemical and biological weapons, and the very real prospect of computer-oriented information warfare. The weapons systems and operational requirements need to address that these two emerging threats are maturely different from those we needed to be prepared to fight the Cold War. Although the world is still a very dangerous place today, there is no monolithic Soviet Union, and in many respects, the United States is the world's lone superpower without competitor. I do not believe that the report gives enough credence to this reality and how it affects the defense posture of our country.
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    Finally, as useful as the CSIS report is as an academic exercise, I believe the conclusion the study makes lacks political realism. To achieve an annual $100 billion increase in defense spending would require nearly a 40 percent decrease in nondefense spending in order to maintain balanced budget goals. Conversely, as much as an 18 percent increase in total discretionary spending would be necessary to accommodate the CSIS recommendation.

    I do not believe that such funding adjustments are politically feasible. I remain totally committed to fielding the most robust military our Nation can afford. We are the world's superpower, and we must maintain a defense establishment consistent with our status. However, we cannot analyze our military situation in a vacuum. We must plan to meet the threats of tomorrow as well as those of today.

    Mr. Chairman, I look forward to the testimony. I think it will be very enlightening and very helpful to us this year. Thank you.

    [The prepared statement of Mr. Skelton can be found in the Appendix.]

    The CHAIRMAN. Thank you. Without objection, the prepared statements of all the witnesses along with any accompanying material will be inserted in the record.

    I would note at this point that Dr. Schlesinger has graciously rearranged his schedule to be with us today but he will have to depart by 2:00 p.m. Accordingly, it is my intention to recognize Dr. Schlesinger for his remarks and then turn to as many members' questions as possible until two o'clock, at which time Dr. Schlesinger has to depart. And Mr. Ranney and Dr. Gouré will formally present the CSIS Study with members' question to follow.
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    Dr. Schlesinger, the floor is yours.


    Dr. SCHLESINGER. Thank you, Mr. Chairman. Congressman Skelton. It is a pleasure to be back here today. You may not know it, gentlemen, but a quarter of a century ago, the Chairman and I were participating in parachute jumps down in Fort Bragg and, of course, Congressman Skelton at that time was a youngster on this Committee. So time has passed.

    It is my responsibility today to present what is a definitive study about the shortfall, where we are heading in terms of budget projections.

    Some of you may know the story that Lyndon Johnson used to tell about this dim-witted boy down in Texas who decided that he wanted to work on the railroad. He went down to the station in town, and the stationmaster said to him, suppose there is a train coming down from San Antonio and another train coming up from McAllen, and it was a single track, what would you do? The boy looked at the stationmaster and said, I would run and get my brother. And the stationmaster looks puzzled and said, you would run and get your brother? Why is that? The boy says, because my brother's never seen a train wreck.

    Well, we are likely to see a train wreck. The simple reality, gentlemen, is that we cannot sustain the QDR forces on the prospective defense spending. Those QDR forces have been described by the Administration, described by Bill Perry when he was Secretary of Defense, as the minimum necessary to sustain our international position.
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    The simple reality is that we cannot sustain those forces. That is not a matter of opinion. That is a matter of simple arithmetic which is spelled out in this study.

    We are, at this time, living on our capital. We are also overstretching the existing forces. At the moment, we are spending about three percent of the GDP on defense. In 1941, fiscal year 1941, prior to Pearl Harbor, we were spending 4.1 percent of the GDP. We are projecting to go down to about 2-3/4 percent of the GDP spent on defense.

    Gentlemen, we like to imagine that we will forever be the sole superpower. We pride ourselves on being the sole superpower. Secretary of State has described the United States as the indispensable Nation, but let me assure you that we will not, over the decade, remain the sole superpower or the indispensable Nation on 2.8 percent of the GDP spent on defense.

    Why is this? I mentioned that we are living off our capital. We have been on an extended procurement holiday since the Cold War. That holiday is spelled out in this study. Right now, the depreciation on a straight-line basis of the equipment of the Armed Forces of the United States is over $1 billion a year. We have been spending roughly $45 billion, $50 billion, as the Chairman mentioned. The Administration is requesting $60 billion. In order to replace the equipment of the QDR designated force, we will have to spend approximately $100 billion a year.

    We have to spend considerably more than 2.8 percent of the GDP if we wish to sustain the position of the United States in the world. This is laid out in meticulous detail in the study by Dr. Gouré and Mr. Ranney.

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    The existing forces are already under considerable strain. We have a high operations tempo driven by the willingness of the United States to intervene in various parts of the world with now substantially-reduced force.

    We are maintaining that high operations tempo partly by underfunding procurement and partly by underfunding readiness, both short-run and long-run readiness.

    The long-run readiness means that we do not have enough spares. We do not have enough war reserves. We do not have enough in terms of depot maintenance and the like. Our nominal objective, our nominal strategy is to be able to fight two Multiple regional contingencies (MRCs) more or less simultaneously. The simple reality today is that we cannot fight two MRCs more or less simultaneously. It is difficult for us to have a major regional conflict, as was reflected during the Kosovo War when we drew down our war reserves substantially and forced us to suspend some of our operations over Iraq.

    We have many ways of rationalizing the shortfall. For years, we have discussed the possibility of base closings as a way of obtaining the resources to fund the shortfall in procurement. Quite simply, even if we were able to obtain the closure of bases, we would not obtain sufficient funds to fund the required procurement.

    But as you know quite well, we are not closing bases. And when we do close a few bases from past decisions of the Congress, the gains are slow in coming. We are also told annually about unspecified efficiencies that will be obtained by Department of Defense in the future. Those efficiencies are laid out in the abstract at the beginning of the fiscal year. By the end of the fiscal year they do not materialize.
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    The pigeons will come home to roost in that period from 2010 to 2015. We cannot maintain the present force structure and reequip the forces on the present budget levels or the prospective budget levels.

    We face, in the period after 2010, a substantial growth in the entitlements program. As a result, we will be faced then with a squeeze on the budget, which is likely to inhibit any reallocation towards defense.

    Mr. Chairman, let me turn from these simple numbers and our present condition to a few observations with regard to the policy implications. The United States has fallen into the habit of expanding its commitments at the same time it is shrinking its forces. We will not be able to meet all those commitments. So that leaves us, as the years roll by, with the following alternatives: we can shed commitments. Indeed, we can wait until the commitments fall due and welch on them. Second, we can live with a higher level of risk, which means that we have less deterrent capacity and that we have less capability to fight wars; or, third, we can begin to spend the money necessary to sustain forces more or less akin to the QDR level, forces sufficiently large to match the commitments into which we have entered and into which we continue to enter.

    Undoubtedly, we will have a combination of these various alternatives. The study does not make recommendations. The study simply points out the arithmetical gap that exists with regard to defense spending and what the Administration has specified as defense requirements.

    Gentlemen, we need to face the problem. We need to make the hard choices. I have laid out the alternatives. Sooner or later we will have to face up to them, and right now it is probably incumbent upon us to stop kidding ourselves about what we will have in the long run. Thank you, Mr. Chairman.
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    The CHAIRMAN. Thank you, Doctor. As I indicated earlier, we will go down the list and have some questions starting with Mr. Skelton.

    Mr. SKELTON. Thank you, Dr. Schlesinger. We take what you say with a great deal of understanding of your background and the work that you have done, which you have done so much for our country, and we thank you for being with us today.

    I look forward to seeing what the Budget Committee will do in light of your testimony today. So my only question today is not of you. My only question today is of the Budget Committee. What will it reflect? What will it say? What figure will it come up with when in budget authority the Administration has sent over a $15 billion figure for us to work with.

    So the bottom line cannot be answered by anyone on this panel. And, of course, the Budget Committee Chairman comes from this Committee. So I ask the question of the Budget Committee, what will thou say? Thank you.

    The CHAIRMAN. Mr. Hunter.

    Dr. SCHLESINGER. Mr. Congressman, may I just make one observation? It is essential that we achieve a consensus before we can increase defense spending substantially. And that was true at the time of the attack on Korea. It was true during the 1980s. Without a public consensus, this Committee, this Congress, will find it hard to raise sufficient spending.

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    I simply endorse your observations. I hope that the Budget Committee is generous, and I would presume that Members of this Committee will make representations to the Budget Committee.

    Mr. SKELTON. Dr. Schlesinger, I think you are right. There must be a national consensus, not just within the Congress here because we reflect the folks back home. And I see, for lack of a better phrase, a gap between military America and civilian America, with civilian America the body which the military America is to defend with less understanding of the necessity and the culture of the military today.

    Far fewer families across our country have sons and daughters, fathers, mothers wearing the uniform, and as a result, fewer and fewer people will write to us and say please take care of Johnny in Okinawa or Josephine at Tyndall Air Force base and the like. And I am not sure how that is to be addressed. If you have any ideas along that line I know we would all appreciate them.

    Dr. SCHLESINGER. Well, we are resting on our laurels as the sole superpower and the public is in a complacent mood. But it is the duty of all of us who are familiar with the defense problems to ring the Klaxon and see if we can shape or reshape that public mood.

    The CHAIRMAN. Mr. Hunter.

    Mr. HUNTER. Thank you, Mr. Chairman. Gentlemen, thank you for being with us, and Dr. Schlesinger, thank you for that which you are known for, which is basic common sense and an analysis that appears to be something that everyone must agree with, that is, that you simply took the—it appears at least this $100 billion, you simply took the equipment that is required in the QDR and treated it like any equipment, whether it is a fleet of taxi cabs or a fleet of sophisticated defense platforms, you treated it on the basis it has to be replaced at some point. And as I understand it, you take—the $100 billion arises simply from taking the ages of the equipment, presuming that at some point we are going to have to replace it, and figuring at a steady state what we are going to have to spend to do that. Could you talk about that $100 billion a little bit?
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    Dr. SCHLESINGER. Well, I will do that briefly, Congressman Hunter, because the specialists who are knowledgeable about it are right here to discuss it later on.

    But just as we face the age of our population and the growth of those entitlement promises after 2010, we face the aging of our equipment. Because of the decline in our force structure and the heavy investments in the 80's, we are in a position that we can draw for some extended period on existing equipments.

    Take the case of fighter aircraft. You go back to the early 1990s and we were purchasing 150—more than 150 fighter aircraft a year. Now we are down to about a dozen as I recall it from the last budget. A dozen fighter aircraft means a very small inventory if that purchase is extended for 10 or 15 years. Otherwise, we deal with older equipment, equipment that breaks down, for which the maintenance costs increase. And we will be in a position, like some of the European armies, in which as they face the possibility of combat, their equipment was obsolete. That will be the condition 20 years out.

    Remember, gentlemen, most of these equipments were purchased at the end of the 80's and in the early 90's. Twenty-year lifetime is what we used to think of at most for a fighter aircraft. Thirty years for a Naval vessel. At the present rate of procurement of Naval vessels, we will be down to a Navy just over 200 vessels. For the moment, that is probably sufficient if we did not want to have a worldwide presence. And I veer away from your question, Mr. Hunter, for a moment, that back there in 1994, 1995, we had 60 percent of our Naval vessels either underway or on station. Now it is 80 percent, and we are still shrinking in terms of the number of vessels.
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    So one cannot live on aging capital forever without substantial, substantial and growing risks.

    Mr. HUNTER. Thank you, Mr. Chairman.

    The CHAIRMAN. Mr. Sisisky.

    Mr. SISISKY. Thank you, Mr. Chairman. I thank you, Mr. Secretary. It is interesting. I just came from a Kundai conference in Munich and it used to be European security, and guess what? They had China there, Japan, Korea. Unbelievable. It is a whole new world. And as you look at a map of the world, I mean, you can see what our commitments are. And everybody is going to have—I say everybody, they are going to have to depend on us in the Pacific as much as in Europe.

    But I look in this report and DOD procurement budgets will need to average 164 billion annually during 2001 and 2010. You have been in office before. Politically that is unfeasible. We cannot do it. I would be happy to get $75 billion in a procurement budget. Now, my friend, the Chairman may get more than that and that is fine. I wouldn't agree with it. But I notice in the statements and this is what I was going to ask the other two gentlemen, really, in the statement everything was based on the QDR. Now, I assume that was the minimum in the QDR. But are you satisfied that the QDR is right? I am not. I have never been and that is why I painted the big world before that we are talking about.

    I mean, we had to leave the Pacific twice in the last three years, completely naked from carrier battle groups because we had other commitments and didn't the have the ships to do it in. But I don't know if you know this or not, but in the last year in the conference, House-Senate conference, this Committee insisted—I was one of them doing the insisting—that the QDR be based on threat rather than budget. So I don't know how this next one is going to come out. It may be $264 billion, if that indeed is true. But I think what we need to do is find out what we can afford.
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    What this Nation needs should be based on threat. Then Congress should decide publicly, here are the risks and this is what we have to do. So with that, I just yield back the balance of my time, and thank you for being here today.

    Dr. SCHLESINGER. My response, Congressman, to your comment is the QDR was based on the Bottom-Up Review, so-called, at the start of the Administration. The Bottom-Up Review was really a top-down review. The decision was made how much the budget would be and then forces were adjusted to that decision.

    If you asked am I satisfied with the QDR? We have used the QDR only because that is what the Administration has specified as the minimum necessary.

    The size of our Armed Forces depends upon the deployments that we make and the commitments that we have entered into. I, myself, think that we have been too careless or casual in entering into commitments. But if we are to enter into those commitments, then our forces are now stretched very thin. And the consequence in the long run will be poor morale, inability to recruit simply because people will be overseas, service people will be overseas too much of the time, much more than they expect.

    So given the commitments we are entering into, I am not sure the QDR is right. But we can say that the QDR will not be sustained over the next 20 or 30 years based upon prospective budgets.

    The CHAIRMAN. Mr. Bateman.
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    Mr. BATEMAN. Thank you, Mr. Chairman. Thank you, Dr. Schlesinger, for being with us today.

    It occurs to me as I heard your testimony and listened to my colleagues that with the QDR, there are few who can argue that it calls for excessive end strength and military capability. I know of no one who is really stating that case. But it is more than apparent that with the responsibilities we have accepted, the deployments we have made, we have not been able to sustain anything near the military requirements of that QDR.

    Obviously more is needed. My recollection is that until September of 1998, the Chairman and the members of the Joint Chiefs of Staff were assuring this Committee that our forces were as ready as they had ever been, and that they had confidence that we could execute the national minimum strategy with acceptable risk. September of 1998 realities finally confronted them to the extent that they had to admit that for modernization, they needed at least $60 billion a year. They didn't get $60 billion a year. And the capitalization problem, the modernization problem that you speak of has been exacerbated that they called for it three or more years ago, and didn't get it. And each year that they didn't get it we have dug a bigger and bigger hole.

    One of the problems that is a part of this, and certainly I am not the person who is going to be able to convince the American people that they have got to invest more in their national security as much as I would like to have the force and the power to do it. But someone needs to do it. But we also need to have a reevaluation by the American people and by the governors of the American people as to how often, and under what circumstances we do commit our forces and our strength.
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    It is of genuine concern to me that for one of those who has been saying for years that our people are being overextended, overworked, and that our military end strength in all services is too small, that we cannot even sustain that inadequate level of end strength.

    Do you have any comment on how we are going to manage this problem beyond the modernization, the readiness issues just in terms of maintaining an adequate end strength in the military services?

    Dr. SCHLESINGER. As you might anticipate, Congressman, I agree with you. On the procurement question, Vice Admiral Owens in 1995, I believe, said that the chiefs had requested $65 billion, and of course, at that time the budget was about $40 billion or 45 billion. After he retired, he said that the real requirement was $75 billion in 1995. So we are six years down the line. That is just on the procurement side. We are down to 1.4 million people under arms today. Those forces are stretched very thin. We have this fabulous economy out there, which means that it is harder to recruit, and the consequence is that we are having great difficulty sustaining that 1.4 million people.

    Mr. BATEMAN. We thank you for the clarion call. I hope people are listening.

    Dr. SCHLESINGER. Thank you, Congressman.

    The CHAIRMAN. Mr. Pickett.

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    Mr. PICKETT. Thank you, Mr. Chairman. Mr. Secretary, you made the comment a few moments ago about the percentage of the GDP that had been devoted over the years to defense, and you started out with a 4.1 percent in 1941 before we actually got engaged in hostilities, and I think at that time there was something like a half million men in uniform, men and women in uniform at that time. And then today you mentioned we are falling under three percent of GDP in the annual expenditure for defense.

    Is there some number for which a case can be made, some percentage for which a compelling case can be made as a basis for trying to persuade and convince the American people that once we fall below this threshold, we are approaching danger?

    And on the other side, I think there should be an upper limit that we should anticipate not exceeding in peacetime. Do you have some thoughts on that?

    Dr. SCHLESINGER. Yes, sir. There is, of course, always dispute at the margins, but what this suggests is to maintain, given our equipment needs, the QDR force is something on the order of four percent of the GDP. Possibly we can squeeze it below, 3.75. You will be making the choice, for example, whether we replace existing aircraft with more sophisticated fighters or replace them with existing available fighters. That will have a marginal effect. But we will need to have something on the order of 3.75 percent if we are to sustain the QDR forces.

    My guess is that we will not sustain even the QDR forces, and as we face up to the necessity of improving readiness and beginning to reequip those forces. But if we are to sustain those forces, it is going to be 3.75 percent.
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    It adds to the difficulty in that the American public at the moment has what, shall I say, not overwhelming zest for some of the engagements into which we have entered and therefore there is resistance, there will be resistance to sustaining those forces for purposes that the public may not regard as essential to our national interest.

    In 1941, we were in poor shape. You will remember that at that time our people were training with broomsticks. We did not have adequate number of rifles. Whereas in the late 90's we are living off the capital from the past. Very extensive inventories that were built up in the latter days of the Cold War, so that makes for a considerable difference, at least over the period in which those inventories have not aged.

    As you look out beyond 2010, you will find that those equipments are no longer capable of fulfilling the missions, the minimal missions, I think, that the United States will have in that period.

    Mr. PICKETT. Thank you.

    The CHAIRMAN. Mr. Hefley.

    Mr. HEFLEY. Thank you, Mr. Schlesinger, we appreciate it. I appreciate the study and appreciate your testimony and appreciate your message.

    Maybe you can help us with the mechanics of this thing. First of all, we live in a Polyanna society. That is, I don't think there is any country in the world who is more ready to jump in in a crisis and meet that crisis than the United States is. And yet, once that crisis is over and history tells us this over and over again, you mentioned the Second World War training with broomsticks. We want to beat our swords into plowshares and assume there is never going to be another problem, and that is not just a problem in the general public, that is a problem in the United States Congress as well.
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    And we have trouble, I think, getting the story from our experts at the Pentagon. And you have been there. You have been on the inside. Maybe you can advise us on how to do this, because of the chain of command, things, whatever the Commander in Chief decides, is the policy. Like the Bottom-Up Review, you set a budget figure arbitrarily and even Les Aspin admitted that. You set that arbitrarily, and then the chiefs and everybody else has to march to that drummer, and they testify that this is what we need and we can get by with this level. And then if we plus-up something because we don't agree with them or because they have told us on the side that they need a higher level, then we have some of our own members that demagogue it and say, looky here, they don't even want it and here we are giving it to them. Look at these pork-barrel politicians.

    Do you have any advice for us in terms of how we get from our experts, the guys that work at it every day, the true story, given the old chain of command culture that we have out there? We had the former Commandant of the Marines who was a little more forthcoming than some of our chiefs have been and he got himself in trouble as a result of it. So how do we get the true story of the need? We don't work at it every day. How do we get that true story so that we can then, in turn, translate that into public policy and translate that into public information?

    Dr. SCHLESINGER. When I was Secretary, we had a rule which was that senior military personnel would testify in favor of the Administration's position. However, if such people were asked for their personal opinion, they were free to give their personal opinion. It seems to me that that is something that could be much more frequently used than is the case at the present time.

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    Mr. HEFLEY. If I might interrupt for a second, what was the result, if they actually did that though? I mean, these guys are conscious of their careers, what was the result when they got back to the building if they had been asked that kind of question? What was the result?

    Dr. SCHLESINGER. They were protected as long as I was there. I am not sure whether that rule has been followed by which secretaries of defense. But I know that some have not followed that and that they have required the senior military to continue to adhere to whatever the Administration is proposing.

    You also have the possibility of asking senior military officers on the verge of retirement or I mentioned the case of Admiral Owens, who after he retired, said that the chiefs had requested $75 billion for procurement in 1995 and there are ways of finding out what the problem is.

    There is also a problem that it is not just coming down the chain of command, it is what comes up the chain of command. Senior military officers, quite understandably, are not eager to hear unhappy tales. And so as things come up the chain of command, they are likely to get cleansed.

    I think that you may have to dip down further into the services to find out what is going on. But we expect to have a military that is responsive to civilian leadership. Our military is responsive to civilian leadership, and we are going to have to live with the downside of what is a very responsible military. Responsible to their seniors in the executive branch.
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    The CHAIRMAN. Mr. Taylor.

    Mr. TAYLOR. Dr. Schlesinger, I thank you very much for you sharing your valuable time with us.

    I look at what you have to say and what colleagues have to say about increasing defense spending by $1 billion a year for each of the next six years. What is going on in this town, at least from my point of view, is an almost lemming-like approach to tax cuts. We are finally coming close to breaking even in the general fund, and we do have a little bit of surplus in the trust funds. And yet the lemmings all seem to be running towards the cliff screaming tax cut. In your esteemed opinion, if there is any money left over in the general fund, would we be better off spending it in the defense of this Nation or in a tax cut, since you can't spend the same dollar in both places. We have learned that lesson painfully about $5.7 trillion.

    Dr. SCHLESINGER. Yours is a very penetrating question, Congressman Taylor, and I am not sure you want to get into that.

    Mr. TAYLOR. Sir, you have come here to make us aware of a problem.

    Dr. SCHLESINGER. Let me put it this way. I think that the first claim on the national resources—the first claim on the national resources is to spend sufficiently on our defense capabilities to carry out the national policy.

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    If the national policy continues to be as ambitious as it presently is, and as I mentioned earlier, we seem to enter into more and more commitments casually, we cannot continue to do so on shrinking forces. And, therefore, it is unavoidable that we increase defense spending in order to have an adequate level of force.

    We can shed commitments. In my judgment, we are entering into too many commitments. But if we have those commitments, we ought to have the forces and we ought to have the fiscal basis for sustaining those forces.

    Mr. TAYLOR. Nicely said, sir, but given the fact that this decision has to be made in fairly short order, is the Nation better off increasing defense spending taking whatever surplus—.

    Dr. SCHLESINGER. I would advocate increased defense spending, Congressman. I note, however, your reference to tax cuts which I have carefully avoided getting into. The President has called for tax cuts. Governor Bush has called for tax cuts.

    Mr. TAYLOR. I think they are both incredibly stupid.

    Dr. SCHLESINGER. So, I think that we have tax cuts in the future. Do not carry those tax cuts to the point that it endangers defense.

    Mr. TAYLOR. As far as—is my time up, Mr. Chairman.

    Okay. About one of those commitments, one of the things that—and I hope I am wrong, but I fear our Nation is stumbling into the Colombian civil war. Have you given much thought to that? As you know, we have A-teams down there, we have Seals down there, we have an observation plane that went down last year. Have you given much thought to that and the analogy to previous mistakes that our country might have stumbled into?
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    Dr. SCHLESINGER. I surely hope that we are not going to stumble into it. I hope if by chance we get involved militarily in a serious way, other than giving small-scale aid to the Colombian government, that we do that with our eyes wide open and that we do not stumble into it.

    We have become inclined to become engaged in operations for humanitarian purposes, compared to those operations for humanitarian purposes, I think that Colombia is a much more serious problem from a national security perspective than some of the problems that we see and in which we have become engaged.

    Why is that? In the first place, we have a substantial body of insurrectionists in Colombia financed now by the drug trade, so that they have superior weapons to the Colombian government. That points, I think, to clear need for the United States to support weaponry for the Colombian military.

    Second, you have an unusual head of state in neighboring Venezuela, I put that as delicately as I can. He has shown considerable sympathy for what is going on in Colombia and has offered to visit with the rebels. That is not neighborly behavior, but he is not inhibited by that.

    So, I think that you have a serious problem from the standpoint of the national interest in North and South America. Indeed, Colombian rebels attacked across the Panamanian border some weeks ago. So I urge to you look with some sympathy on the request for assistance in Colombia. I also urge you, as your question suggested, not to stumble into it militarily, but do it not because it is the only thing left, but do it for clear-eyed reasons.
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    Mr. TAYLOR. Thank you, Mr. Chairman. Thank you, Dr. Schlesinger.

    The CHAIRMAN. Dr. Schlesinger, the time has arrived and we appreciate your contribution more than we can say. You have been a great help to us.

    Dr. SCHLESINGER. Thank you, sir.

    The CHAIRMAN. Thank you again, and we will proceed with Mr. Ranney.


    Mr. RANNEY. Mr. Chairman, Members of the Committee, I thank the Committee for this invitation to appear before you today to discuss the results of the Averting the Defense Train Wreck study recently published by CSIS and MSTI.

    My statement will describe briefly: the nature of the military crisis facing DOD and Congress today; major conclusions of the study; and a definition of what we have termed the defense train wreck.

    I will also focus my remarks on two major challenges facing us this decade emerging from the study, namely the acquisition and force instruct challenges.
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    The United States enters the new millennium with arguably the world's most capable military. Although it is nearly 40 percent smaller in overall size than at the end of the Cold War, the U.S. military is capable in principle of the global power projection that is the hallmark of a true superpower.

    In the 1990s, U.S. military forces enjoyed a number of operational successes and demonstrated a number of astonishing technical achievements, most notably in the Persian Gulf and the Balkans.

    Fiscal year 2000, however, will mark the high point of U.S. military power in the post-Cold War period. For the past decade, the American people have enjoyed a substantial peace dividend in the form of reduced defense spending. Notwithstanding this, there is little public awareness today that DOD and Congress are faced with an imminent crisis in defense regarding resources. This crisis is large. This crisis is growing. This crisis is profound. This crisis is already underway, yet the American public has been told very little.

    Three issues define this crisis: first, the equipment assigned to our Armed Forces is reaching the end of its operational design life almost all at once, and must be replaced if military capability is to be retained.

    Second, the basis for manning our Armed Forces, the all-volunteer force concept, is in danger of collapsing as qualified men and women choose to not enter into military service and current servicemen and women choose to leave the military service.

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    Third, annual budget levels projected in the President's latest military spending plan are well below what is needed to support fully the current military force, the QDR force.

    We also know today that two additional factors will intensify this crisis even further and will shape perceptions and responses: first, DOD will face intense competition for Federal dollars from Social Security and Medicare programs as their operating deficits grow and trust fund assets are depleted. This is already evident. More importantly, any further weakness in the financial condition of those programs will quickly effect overall Federal budget projections, budget priorities and defense spending levels.

    For at least the next 20 years, the larger public policy issue will be how best to balance the competing budget demands of financial security, Social Security for the elderly and national defense. Unlike the last century, this will require a more integrated public policy approach and a better understanding of the relationships amongst policy, program and costs. Today, it is no longer possible to devise solutions in one program area in isolation from the others.

    Second, the U.S. economy is expected to grow more slowly during the next 20 years due largely to the fact that the baby boom generation will retire from the workforce. This is the long-term economic outlook offered by both government and private economists. As the economy slows down, the burden imposed on the economy by budget shortfalls, such as those projected for Social Security, Medicare, and defense, will become larger. Economic policy, therefore, is now, more than ever, a national security imperative.

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    What is the single, most important conclusion reached in our study? It is simply this: the Pentagon is facing annual budget shortfalls of at least $100 billion during the next five years. There is growing evidence that future budget levels currently projected for DOD might not be large enough to pay for the development and acquisition of a revolution in military affairs force. It might not be large enough to buy the next generation of military equipment needed to maintain the current QDR force, or even might not be large enough to rebuy the current force at today's prices. We reached this conclusion by comparing the funding needed to support fully the QDR force, that is the demand for money, with the funding that will be available, that is the supply of money, during the same period.

    By applying valuation and estimating techniques that are common to American business practices, such as replacement value and depreciation. And by employing cost benchmarks that reflect actual DOD cost-performance from 1945 to 1999.

    Accordingly, we estimate from the demand perspective the cost of fully supporting the QDR force to be $368 billion in fiscal year 2001. Our comparison revealed that the Pentagon will fall $88 billion short in 2001, and $583 billion short over the next five years of what it will need to maintain a force able to prosecute two regional wars at once. As a percentage of GDP, the United States must be willing to spend 4 percent of GDP to support fully the QDR force during the next 20 years. In contrast, the Administration projects that DOD spending will fall from about 2.9 percent in 2000, to 2.4 percent by 2010, and further to 2 percent by fiscal year 2020.

    The situation of underspending of national defense is not new. It has been ongoing for some time and will take years to overcome. What makes today's situation different is the fact that the equipment of the current inventory is running out of useful life nearly all at once. Almost 25 years have passed since the start of the current DOD modernization cycle. It cannot be stressed enough that equipment has a finite life span, and if capabilities are still needed, it must eventually be replaced.
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    Strategy, forces and budgets, therefore, must finally be reconciled or balanced, if not, military capabilities will eventually be lost. If the current underfunding of national defense is allowed to continue, the U.S. will face a de facto demobilization, and with it a diminished capacity to shape and influence world events and to safeguard and protect U.S. national interests in the future.

    More important, lack of funds will inevitably limit our ability to provide America's soldiers, Marines, sailors and airmen with the equipment and training they will need to fight future adversaries. The consequence could be more than simply a diminution of U.S. influence abroad. The result of underfunding could well be measured in American lives. This outcome we have is called a defense train wreck.

    There has been little public attention or discussion about the fact that DOD is faced with this situation. Today, what is needed is a vigorous national debate that addresses the issues of how much it will cost for the United States to be a great power in the 21st century, and whether the American people are able and willing to pay those costs. That debate cannot take place unless we are all better informed, and realistic about current and future defense costs. Until the White House, the DOD, Congress and the American public recognize and accept the magnitude of this financial problem and undertake specific actions to resolve it, the burden imposed on future presidents, congresses, and the American public will grow only heavier.

    I would like to focus the remainder of my remarks on two major challenges of this decade that emerged from the study.

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    The first major challenge is the acquisition challenge. For any postulated military force, realistic estimations of future procurement budget demands can be made through the use of three financial measures commonly used in American business practices today: replacement value, depreciation, and technology cost-growth rate.

    The current replacement value of the QDR force, that is, the cost to replace the entire inventory at current prices and making use of existing available technology products, is estimated to be $3.5 trillion, of which $2.1 trillion corresponds simply to the major end items such as aircraft, ships and submarines and tracked combat vehicles.

    Since DOD would never replace the entire inventory in a single year, annual depreciation cost provides a means for estimating annual procurement budgets. In general terms, annual replacement is computed simply by dividing the current replacement value by the expected service life for each item. Thus, annual depreciation simply reports the annualized procurement cost for the eventual replacement of an item at the end of its operational service life.

    With this formula, the QDR force would need a procurement budget of $121 billion in fiscal year 2000. In contrast, the DOD procurement budget for fiscal year 2000 was $53 billion, an amount that is 56 percent lower.

    We are not alone in identifying this magnitude of a potential budget shortfall. Last year, using a similar formula but different assumptions, the Congressional Budget Office disclosed in testimony to the HASC Subcommittee on Military Procurement, that in order to maintain itself, the QDR force would need a procurement budget of $90 billion in fiscal year 2000 or $37 billion budget higher than what was appropriated for 2000. According to the CBO testimony, the $90 billion estimate, and I quote, ''assumes that DOD will keep its major weapons systems longer than it has in the past.'' The CBO senior analyst further stated ''if DOD was unable to extend service lives as it plans, the CBO estimate would be much higher.''
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    In contrast, senior DOD civilian and military leaders remained silent about the annual procurement levels needed to maintain and modernize current U.S. military forces. Instead, they have maintained since 1995, a procurement goal of $60 billion. While it may be useful to better understand the differences between the CBO estimate and ours, it is really the gap between all procurement budgets and budget demands that deserve and merit serious attention and closer scrutiny by this Committee.

    Recent press reports suggest the Administration will achieve, and in fact has achieved its stated procurement goal in fiscal year 2001. Nevertheless, how much does a $60 billion procurement budget buy today? As projected last year, the military services planned to spend $61 billion in 2000 and a $61 billion procurement budget bought 18 new Army-track combat vehicles against an annual steady state requirement of 1,033 vehicles to maintain an inventory of 41,000 Army-tracked combat vehicles. A $61 billion budget bought 180 new aircraft against an annual requirement of 578 needed to maintain an inventory of 15,652 aircraft. And a $61 billion procurement budget buys 8 new submarines and ships, the amount equal to what is required to sustain a Navy of 304 ships and submarines.

    In all, the Administration planned last year to spend $61 billion that would provide only 216 new vehicles. Most of those procurement dollars would be used, instead, to fund safety and equipment modifications, spares and repair parts and purchases of support equipment needed for existing inventory assets that continue to grow older and move closer to the end of their operational life.

    It is important to remember that the $121 billion procurement estimate for 2000 represents the annual cost of buying today's force at today's prices with available technology products. It doesn't reflect, however, the additional costs often encountered in the past when purchasing next-generation technologies or capabilities. These additional costs, or cost premiums, pay for the acquisition of new technologies and the use of advanced materials, components and parts, new engineering, manufacturing and production processes, and modern business practices and facilities. To account for this cost-growth phenomenon, annual depreciation must be adjusted by a technology cost-growth rate.
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    Using this budget formula, DOD procurement budgets need to average $164 billion during this decade to pay for additional increases in military capabilities. If I may draw your attention to the chart over here on the left, the acquisition challenge for this decade is shown. And what this chart does is show that the future budget demands exceed proposed budget levels by at least a 2-to-1 ratio during this decade. If I may direct your attention to the lower part of the chart, that shows available DOD procurement budgets as reported last year. That plan provided for $61 billion in fiscal year 2001, and for continued growth reaching $68 billion in fiscal year 2005. The upper half of the chart depicts estimated procurement budget demands for four acquisition alternatives during the same decade. If I began with the second bar from the left, $121 billion would be needed just to rebuy the force at today's prices using available products. This estimate is the depreciation estimate that we have talked about before. The next bar labeled $164 billion is the bar that would be needed to modernize the QDR force to the performance levels of planned next-generation military equipment. That estimate reflects the current DOD practice of replacing older weapon systems with newer and more technologically sophisticated and better-performing systems.

    The bar on the far right shows that more than $164 billion would be needed to acquire Revolution in Military Affairs (RMA)-like capabilities. It is currently not possible to estimate those costs because of the absence of consensus as to specific military hardware to be developed and fielded for an RMA force.

    As clearly seen, whatever the technical merits of each of those three options, not even the least expensive, that is, the bar labeled $121 billion, is affordable when procurement budgets are in the range of $61- to $68 billion. Without an increase in the overall top line and without cutting military pay and other O&S costs, the military service will have no choice but to reduce force structure and personnel levels.
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    And if I may direct you to the first bar on the left, the bar labeled $91 billion. That bar shows the actual dollars that we incurred at the time to buy the military equipment that makes up the force today.

    Put up the next chart, please. The second major challenge of this decade is the force structure challenge. It is illustrated as follows. Beginning with the last bar, annual DOD procurement budgets of $164 billion would be needed on average during this decade to provide for continued modernization and replacement of the QDR force. The overall budget, therefore, would need to average 4 percent of GDP and would support an active duty end strength of 1.37 million personnel. Such an overall budget also would provide for a new and fully modernized and full strength QDR force. This is represented by the modernization score of 100 displayed before the bar.

    If I direct your attention to the middle bar. If the overall DOD budget is instead maintained at 3 percent of GDP, the O&S costs would be the same as in the first bar as active duty end strength is unchanged but would consequently leave over $88 billion a year for procurement. This smaller budget would require reductions in procurement quantities. That, in turn, would lead to higher procurement unit costs. Consequently as shown, this level of procurement funding would be adequate to modernize and replace only 54 percent of the QDR force. Unless assigned equipment could operate beyond both physically and economically beyond its projected service life, force levels would fall eventually by 46 percent. The right-hand bar shows the outcome in procurement projects if the government forecasts of available DOD dollars, in this instance, the overall DOD budget is maintained at 2.5 percent of GDP. At this budget level, the O&S costs would be the same as if we would not have cut end strength and would leave over $48 billion in annual procurement. This level of procurement funding would be sufficient only to modernize and replace 29 percent of the QDR force; and again, unless assigned equipment would operate beyond its service life, force levels would fall by 71 percent.
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    Chart two also provides two additional insights into the force structure challenge. There are some that argue that the defense train wreck can be averted simply by abandoning the requirement to fight two regional wars nearly at once. If one accepted this recommendation, the U.S. military forces could be cut in half. The middle bar would come to represent the annual procurement budget needs of the significantly smaller force. This $88 billion annual procurement budget, again, representing the demand for money, would still exceed by $40 billion the likely available procurement budgets during this period as indicated by the bar on the right. Higher defense spending levels would still be needed.

    Still, others have argued that future weapons systems will be more capable than the weapons systems they replaced. If true, future equipment inventories could be reduced without any loss in capabilities. DOD no longer would need to rely on one-for-one replacement. The middle bar of this chart would represent annual procurement budget level needs of this smaller force in which weapon systems replaced older weapons systems on a 2-for-1 basis. This force so constructed exceeds likely available budgets during this period by also $40 billion. In fact, future weapons systems would have to approach a 3-to-1 improvement in capability throughout and across all levels of the military services. It also bears reminding that at some point, quantity matters.

    Let me close my remarks with an answer to the following question that often comes up in our presentations to groups outside the Pentagon: Why should senior citizens, soccer moms and dads, or anyone on Main Street, Wall Street, the inner-city or in Silicon Valley worry about this issue?

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    Our answer is simply this: If you have a child, grandchild or possibly even a great grandchild born after 1990, the first decade of the post-Cold War peace, they are at risk and may pay with their lives the consequences of today's disinterest in military affairs and neglect of the military.

    RDT&E and procurement decisions before the Committee this fiscal year will define the military equipment they will have available, the safety and condition of that military equipment, and the morale of the organization they will be assigned when they become eligible and choose to volunteer for military service at the end of this decade and beyond.

    History reminds us all too well about the human consequences of the lack of American military preparedness, hollow forces and military surprise. The 20th century offers us three vivid examples: 3,581 Americans who died or fell wounded in the Japanese surprise attack on Pearl Harbor December 7, 1941; the defeat in 5 months of the combined American and Philippine army of 140,000 who were poorly equipped and supplied during the Battle of Bataan in 1942; and the subsequent 7,000 deaths during the next 3 years of captivity in various slave labor camps in Japan, Korea, China and the Philippines.

    And the 7,340 Americans who were killed or wounded during July 1950 as part of the American's Task Force Smith and 24th Infantry Division's efforts to halt the North Korean surprise attack on South Korea.

    The Committee has before it this year a tremendous opportunity for providing leadership about the future direction of national defense. The first step in exercising that leadership is to acknowledge that projected defense budget levels fall considerably short of the levels required to fully support the current U.S. military force. As Secretary Schlesinger has stated on a number of occasions, this is not a matter of opinion; it is a matter of simple arithmetic.
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    Thank you.

    Mr. HUNTER [presiding]. Mr. Ranney thank you.

    [The prepared statement of Mr. Ranney can be found in the Appendix.]

    Mr. HUNTER. Dr. Gouré.


    Dr. GOURÉ. Thank you, Mr. Hunter. I would like to express my appreciation to the Chairman, to Mr. Skelton and to the Committee for inviting me to appear today to discuss the strategic and military implications of our study, Averting the Defense Train Wreck in the New Millennium. Before I start, I would like to acknowledge the role of your Chairman, Mr. Spence, in keeping a spotlight pointed on the issue of readiness and the underfunding of the military. At times he was, in fact, a lone voice crying in the wilderness. We have now come to a point, I think, as Mr. Ranney pointed out, where there is a growing consensus that defense budgets have fallen too low, that there is a need for additional spending. In effect, we are not arguing any longer about whether there will be a train wreck, but only about how many cars are going to go off the rail when the train wreck hits.

    Since my colleague has discussed with you already the sources, nature, and magnitude of the impending train wreck, I would like to focus on the strategic and military implications that we can draw from our study.
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    The next administration and subsequent congresses will have to address the consequences of the chronic underfunding of the defense budget that has occurred over the past decade or so. They can do so in a number of ways. Mr. Skelton did point out that the study did not expressly address a number of the different variables that might be taken into consideration in thinking about the shortfall between forces and budgets. In fact, we did think about those, and I would like to sort of give you some of the thoughts that went along with our analysis about what the alternatives really provide.

    One thing we can do is in response to the inadequacy of funding is to allow the force to shrink. And in fact when we have talked to many of the people inside the building and outside, that has been the answer. It is too large. We may have too many commitments. We have to shrink this by some number, perhaps one MRC. Since it is difficult to argue that the U.S. confronts a kinder, gentler world in the 21st century, to make that case it seems you would have to explain where it is safe for the U.S. to let our current forces shrink further.

    For example, you could argue that the U.S. should go down to one major regional contingency force, one major theater war and withdraw, in effect, from a part of the world, only capable of fighting that one war. This would naturally lead to the question, from which part do we choose to withdraw? Does the U.S. withdraw from the Middle East, leaving it open to Iranian, Iraqi and other aggressive forces? Does it withdraw from East Asia, allowing North Korea, perhaps China, to run free? For those are the two regions where these canonical major theater wars are focused. Which one do we neglect, abandon?

    If the U.S. does withdraw from part of the world, who do we want to take our place? When the British withdrew in the 1970s from half the world pulling everything they had east of Suez to the west, we were there. That was the not the first time that we essentially filled the breach. When and if we leave, who will take our place? And if the answer is nobody, then what is to be done to preserve and protect America's vital interests our friends and our allies?
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    If the Administration, the Congress, the American people decide that we do not wish to withdraw from part of the world, we wish to be global and protect our interests that are global, can we make the Armed Forces more capable? That is often the argument. Future forces are better than the forces that have come before.

    That is, we would stretch the existing force on a unit-for-unit basis by making each system or unit more capable than the one that it replaces, able to cover more territory, deter across a wider spectrum of conflict, et cetera. I would argue that it is extremely hard to make those systems that we now have, the ones we project, better at lower cost. In fact, all of our experience has been that as you try and make these systems better, more reliable, with fewer failures between reviews or maintenance procedures, the cost goes up.

    Also at some point, you may have the best plane, tank or ship in the world, but you cannot have it in two, three, our four places at once. And, therefore, there is a downward limit.

    At one time, I would point out to you we relied on nuclear weapons as the answer to the quantity-quality problem. The Russians seemed to be going back to such a strategy, at least in the public discussions, precisely because they do not have the money to fund a modern conventional military. That approach has downsides. I would not advocate it, but I would point to you that if we are not going to shrink the military, or if we find it expensive to replace quantity with quality, then essentially we have to find the additional money to pay for our forces.

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    We could also choose to redefine how we employ our Armed Forces. For example, we are focused on highly ready forces capable of rapidly responding to crises and engaging in instantaneous intense combat. What we saw in Kosovo or at least the elements of that that we saw fairly recently. We could have done even more in terms of that kind of warfare than we were allowed politically. We could, for example, reduce our costs then by reconfiguring the U.S. Armed Forces based on the strategy that didn't emphasize high states of readiness, rapid responsiveness or intense tempo of operations. You could tier readiness of forces.

    If you wanted to, you could also delay responsiveness so that the next time there was a war in the Middle East, we would have to accept the fact that Kuwait would fall, Saudi may fall, it may take us a year or more to build up the military necessary to respond, but essentially, we would get there. That is how we fought World War II. That is almost how we fought Korea. You build up the military, you return. We do not choose to fight that way now, but that is an alternative that could save us some money.

    Another way of reducing costs for future forces is to be willing to incur greater numbers of casualties when we employ the Armed Forces. Part of the reason our systems cost what they do is that they are intended to both save the lives of our people, soldiers, sailors, airmen and women, as well as make them as effective as they can be in combat. The simple equation is that if we buy less capable equipment, the costs will go down in dollars, but the costs in lives will almost inevitably go up. We could have a less capable and responsive military, one that does not offer the men and women of the Armed Forces the best in protection and combat capability, if we are willing to pay the price in human life. I would argue with you that none of these alternatives is viable or possible.

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    We have a national consensus about the need for the U.S. to have a leadership role in the world, at least in general, if not in all circumstances. We believe that there is an agreement that the U.S. must be present and active in the world defending America's interests, protecting allies, ensuring no hegemon can deny us access to regions of interest to our friends to trade and the like.

    We think there is also a national agreement about how we want to conduct military operations and what we want to do for the people in the Armed Forces. We want a military that is very effective, well-trained people that have the right equipment to do the job, able to go where we want them to go immediately, close with the enemy, defeat them, and those people must be cared for and their families in peacetime as well as in wartime.

    Therefore, if we agree basically on the strategy. If we agree on the character of the military, force structure in some sense, we are down to one question and one question only: how do we pay for that military?

    Of course, if the answer is we cannot, then we go back and have to ask the question how do we change our strategy? How do we change our forces to accommodate the reality of the numbers?

    The problem we are facing is becoming all the more difficult because of the inherent tension in U.S. force development between quantity and quality. As the Armed Forces try and reduce force structure in response to budget restraints, we are not reducing, but, if anything, increasing the missions we perform and the manner in which they are performed. There is a natural tendency to demand new systems be even more capable, better than the ones that they replace. Multimission, higher performing and the like.
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    Logically, it follows, of course, that if each system is better, there will be fewer of them. The problem is that in the end, the logic works backwards. Those systems cost more, oftentimes much more than the systems they replace. New equipment must push the envelope or be multimission capable or be able to go longer than the ones that preceded them, and as a result, the price of each piece of equipment tends to go up. It particularly goes up in high technology areas where pushing the envelope to eke out the extra ounce of performance, areas such as tactical aircraft, space systems and missiles, capabilities that are essential to our modern military and which at moment we are dominant.

    The problem is that as you try to downsize and as you try and find more effective ways of doing your business, the cost of each system means you buy in fewer and fewer numbers, that means you put greater and greater demand on their technical performance. And you have what Undersecretary Jacques Gansler said a few years ago is a death spiral. You simply cannot afford the systems in the numbers and other characters that you want for the dollars available.

    So far, I have addressed only the implications of the underfunding for defense in terms of national security and the safety of the men and women in uniform. There is still a larger problem. Today's underfunding could well put at risk the domestic well-being as well as the physical security of all Americans when the due bill comes due and must be paid. Why is this? Because the failure to address the problem of an aging force now means that when that force ages out at the end of the next decade at the latest, it will have to be replaced and will have to be replaced at circumstances which are likely to be far less advantageous to this country.

    Two reasons for this: first is that the threat is likely to be more intense, possibly less deterrable. The Quadrennial Defense Review projected the emergence of more capable regional threats about midway through this decade. In fact, that was the reason that they were talking about this ''prepare'' part of shape, respond, prepare. To anticipate those threats. Shortly thereafter, according to the QDR, 2014, 2015 there is the possibility of a potential peer competitor emerging. These are the countries of sufficient size and capability that will really challenge us, certainly in those regions in which they physically exist. So rather than having the leisure to replace our military on a time line that suits us, we may have to replace it on a time line dictated by our adversaries.
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    At the time when the QDR force ages out is also the time when we start to confront the economic and political consequences of the retirement of the baby boom generation. My colleague has mentioned that. A future administration and your colleagues, when then confronted not only by the need for major reinvestment in defense, possibly on the order of a wartime mobilization, but looming Medicare and Social Security shortfalls are going to be caught in a trap. I would suggest to you this could be the worst possible moment for any political leadership to have to make the choice between, in effect, guns and Geritol. That is a function of the failure to address the problem and at this point.

    The future starts today. So such a situation by the way is not new. We know of past cases where governments have confronted and failed to confront correctly problems between domestic well-being and international and national security. We have the lesson of the British government in the 1930s confronted by the consequence of the Great Depression, the need to essentially shore up an economy that was floundering or barely keeping its head above water. Downing Street focused on domestic security.

    At the same time, January 1933, the British government officially recognized Nazi Germany as a threat, their 10-year rule. They knew they had a problem and the problem was growing. What they were incapable of doing because of the domestic, economic, and social situation was to invest sufficiently in defense at the time, the decade of the 30's. What they attempted to do was deter Hitler by making small incremental additions to British defenses hoping that each incremental capability would somehow persuade the aggressor to back off. What they, in fact, got was an arms race in which they could not compete and a war in which they, on their own, could not win. That is very much what we may face a decade, 15 years hence, if this problem goes unaddressed.
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    Two final points. One is, I am sorry to say this, that our analysis is actually a best-case look at the problem. We have assumed no recession in the next 15 or 20 years. There is only positive growth. We have essentially taken the Administration's view on the long-term future of the economy. We have not added to the total cost for anything not defined as part of the QDR force. So the Department of Defense or this Committee, if it believes that it is advisable to put more money to missile defense or buy an extra 100 C-17s to improve airlift, has to add to our figure that additional bill.

    My final point has to do with economic growth, and I understand that is beyond the purview of the Committee. In view of the dangers that the demands for domestic well-being, that is entitlements and spending might be on a collision course with national security, maintaining high levels of economic growth should be viewed not only as a domestic priority, but as a national security imperative.

    The only way to avoid a clash of fundamental national priorities and concerns aside from some prudential financial management activities now is through growth. High growth rates provide the best means to provide the needed funds to assure domestic and national security. Only through high growth are we going to be able to have the national security we need, the economic well-being we desire and the Social Security that we have promised to our citizens.

    One final point: we have not advocated any given level of defense spending. We have simply told you what we think the reality is. If we were to have a military of the character, quality and general size that we have now, the dollar figures are what we have seen on my left here. If we choose any other course, we either have to change our national security strategy or what we expect from our Armed Forces. There is no third option. Thank you.
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    Mr. HUNTER. Dr. Gouré, thank you, thanks to both our witnesses and we will resume our questions in the order that members came in.

    [The prepared statement of Dr. Gouré can be found in the Appendix.]

    Mr. HUNTER. Mr. Kuykendall.

    Mr. KUYKENDALL. I had one for the earlier speaker.

    Mr. HUNTER. In that case, Mr. Sherwood.

    Mr. SHERWOOD. I thought your comment was very interesting on the timing. You told us that we don't dare put it off now because we, as a Nation, won't be able to afford it in 15 years because all our resources will be going to address the time bomb in Social Security and Medicare. And I think that that is a dimension on the discussion that we have not thought enough about. I thank you for bringing that to our attention.

    Mr. HUNTER. I thank the gentleman. Mr. Snyder.

    Mr. SNYDER. Thank you, Mr. Chairman. I need to have you help me out here and kind of a basic understanding of your report. I haven't read all of the report but I have looked through some of the sections, and you are basing your report on the analysis of the QDR and what it takes to properly fund the QDR; is that correct?

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    Mr. RANNEY. Yes.

    Mr. SNYDER. I first started here in January of 1997, both as a Member of Congress and a member of this Committee, and ever since then, I have heard everybody tell me that the QDR is budget-driven. But it seems that we can't have it both ways. If the QDR is budget driven, our defense budget would be 100 billion more than it is. So what you are telling me is that the QDR was not budget-driven; that, in fact, we have inadequately budgeted for the QDR? Is that a fair analysis?

    Dr. GOURÉ. Yes, it was top-line driven, which is different from budget-driven. It was not driven by the budget to fully fund the force, but the argument would be the available dollars that the government was willing to put against defense.

    Mr. SNYDER. Is that something different than what I said?

    Dr. GOURÉ. No, it is budget driven in a different sense of the word.

    Mr. SNYDER. You have four or five pages in here in which you all discussed Base Realignment and Closure (BRAC), and I know you all didn't look on it as you were taking policy issues, but it seems to me that you were making a statement that we could save $3.6 billion on an annual basis if we would go ahead and have another round or two of BRAC. Is that a fair statement?

    Mr. RANNEY. The answer would be based on the Department of Defense's estimate that you would save on the order of $3- to $5 billion per year. What we would say is, but look at that in the sense of the total problem of $100 billion. So to rely on BRAC by itself and only on BRAC to deal with this $100 billion, you are only putting 5 percent of it—.
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    Mr. SNYDER. Right, but you all agree that $3 to $5 billion on annualized basis is real dollars.

    Mr. RANNEY. Correct.

    Mr. SNYDER. The third point and a comment, really, I remember, we kind of have government on a base 10 number, since your numbers ended up at $100 billion a year that we need. But I think back to 2-1/2 years or so ago, the morning after we had that vote on Mr. Shuster's amendment to cut .6 percent across the board, which would amount to a billion out of the Defense budget, we happened to have Secretary Cohen testifying that morning and everybody was tired and someone made the comment that he should ask for more money in the defense budget, and he had spent the night trying to find a billion dollars to cut out of the budget if the Shuster amendment passed, which failed by two votes, thanks to the leadership of Mr. Spence and some of the other members in Congress.

    Ironically, some of the members of this Committee voted for that. It is not just a public consensus that we have to have; you are advocating for an additional $1 billion— maybe ''advocating'' is not the right word, but saying if we want to pursue this strategy, that is what we need, when we have trouble on occasion just maintaining the levels that we have. Some of us are proud of the budget we came up with for this current fiscal year and what we did for the men and women in the military, so you presented a lot to chew on.

    The final point I wanted to make, Mr. Ranney, you said your first statement ''arguably we have the world's most capable military.'' Cannot we just say that unequivocally? Don't we clearly have that and haven't our allies, after Kosovo, realized that we are a full generation ahead of them in many ways?
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    Mr. RANNEY. Yes, I stand corrected.

    Mr. SNYDER. Thank you.

    Mr. HUNTER. Thank you.

    Mr. McKeon.

    Mr. MCKEON. Thank you, Mr. Chairman. And thank you, gentlemen, for being here and for your report. Most of us on this Committee would probably be classified by the other Members of Congress as ''defense hawks.'' Most of us are strong advocates and supporters of the military. By the same token, we have to answer questions to other Members of the Congress. I am going to propose a couple to you that I have been hit with in the last few days and see what your response would be.

    We were in a budget meeting discussing how we can come up with more money for defense, and I was the only defense hawk in the room, and one of the Members said, really, now, look at the military. Don't we have more generals now than we had during World War II? Aren't we top heavy in the military?

    What would be your response to that? If we are looking for ways to improve, yet do some cutting at the same time, smart improvement?

    Mr. RANNEY. Factually, I think the answer would be that, yes, you are top heavy. The explanation as to why that occurs is the reliance on information technology, command and control. That is pushing us in that direction. And so to the extent that is the direction you want to go into, then the consequence of that choice is that you will have relative to past history, more higher grade personnel.
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    Mr. MCKEON. If that were changed, if we changed—did some tinkering there, are we talking any substantial dollars compared to, say, the cost of the new weapons that we are looking at? Would that make much difference?

    Mr. RANNEY. My recollection there is probably you could tinker, and at the end of all that, maybe get somewhere between $1- to $2 billion in savings a year.

    Mr. MCKEON. That doesn't go a long way toward $100 billion.

    Mr. RANNEY. Right.

    Mr. MCKEON. We are talking about 10 to 20 years, our weapons becoming obsolete or more obsolete or running out of their usefulness. At the same time, we are adding what was the number, like 12 fighter planes a year. I saw some historical channel the other night, I was watching on the history of World War II and it seemed like as we were ramping up trying to help England, as they got into this before we did, the numbers boggled my mind, but we were turning out something like 50,000 war planes a year. Fifty-thousand and we are now at 12?

    That just boggled my mind when I heard that number. We are still, though, turning out 10 to 12 planes a year, very high technology planes. At the end of 10 or 20 years, we will be underequipped. But what about who would we look at 10 to 20 years from now as a competitor that is now turning out more equipment, building more planes now or more tanks that would be someone that we would look at as a real danger when our equipment phases out at 10 to 20 years? Is anybody else in the world developing military of a greater potential than we are? This is another criticism that we have that they hit us with. You know, why do we need this? Nobody else has it, nobody else is spending money.
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    Dr. GOURÉ. I would argue, Congressman, that there are two reasons. We don't want to stand still in the way we perform our missions. The issue on Kosovo, for example, was essentially an all smart weapon conflict conducted at high altitude with precision that lowered casualties, kept them to a minimum, both on our side and on the ground, civilian and otherwise. That kind of capability, benchmarking ourselves in improving, costs money. That is the first thing.

    Second, there are improvements in military capability going on in the world. And the potential for sales, even from our friends, to third parties. Russians are not only looking to sell the S-300 as an antitactical ballistic missile and an air defense system, but they have a new one, the S-400, that is following behind that is more capable. China is buying advanced Russian equipment and the like. So the question is over the period of a decade or 20 years, could you face opponents with enough capability and the home-court advantage that would cause a QDR military, or in particular, a smaller version of that QDR military, even with advanced weapons, a very rough day?

    I think you cannot argue against that possibility. And hence, to ''stand still'' means—in fact, that was my colleague's first chart, to ''stand still'' means that we are going to get older, more obsolescent, less capable as the other guy inevitably improves.

    Mr. MCKEON. Not putting us in danger of losing but in our risk to our people goes up exponentially.

    Dr. GOURÉ. The time it takes to win a war, the cost to innocents on the ground goes up and so on.
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    Mr. HUNTER. Mr. Andrews.

    Mr. ANDREWS. Thank you, gentlemen, for your testimony. I am one who shares your premise that in order for us to do the things we must do to defend the country we have to put more resources toward that objective, I think that is correct. And I am interested in working with other Members of the Committee on both sides of the aisle to configure a practical strategy to meet that objective.

    Hearkening back to something Mr. Skelton said, the possibility a $100 billion procurement budget in fiscal year 2001 is impossible. Having said that, I do think it is possible to build a consensus coalition in the country and in the Congress, based upon a couple of factors. And the first is, as I appreciate the reference to economic growth. Sustained economic growth makes choices less difficult and possibilities much greater.

    I think that the number one thing we can do to promote sustained economic growth is to pay down the national debt. I think that is a crucial element of the country's fiscal strategy, and thus of this.

    Second, and I think there is very broad support for that here on both sides of the aisle. Second, I think it is also possible to build a coalition that recognizes that we need not choose guns or Geritol, but we can frankly make phased-in compromise choices of each. That may strike some as middling position, but very often middling positions win. With that as background, what kind of phase-in period—let's say that we made an agreement that we are going to try to get to $100 billion worth of real dollar procurement by some date certain. Given the current environment, given the risks that I think you very well outlined, what kind of phase-in period to reach that goal do you think is reasonable?
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    Mr. RANNEY. My sense here is that you could probably talk in terms of four-year increments. What comes to mind is if I go back to the chart that is hanging up there now, you can look at that chart as percents. And so, if you would say let's take the $100 billion, you can eyeball very quickly that $100 billion means so large of a force structure reduction, and then with that force structure reduction and with a time frame for phasing in the program, you now can begin to construct your ramp-up in terms of the budgets.

    Mr. ANDREWS. One way to look at this is that a 4-year, 25 percent phase-in of this would close a $40 billion gap between the $60 billion the Administration now proposes and the $100 billion that you claim is optimal is a $10 billion a year proposition. That is an awful lot of money. It is also one percent of one percent of economic growth in the country's economy, which I think is certainly induced by the policies of long-term interest rates that are low and debt reduction.

    Let me ask you another question. Given the certainty that we are going to have to prioritize among those procurement needs over some period of time, whether it is four years or more, what criteria should we use to choose among the competing procurement priorities as to which is most needed and first needed? How should we do that?

    Dr. GOURÉ. It seems to me that one ought to prioritize in the following way: that set of either investments or of interests that are most critical to national security. And I would argue that, frankly, it goes major theater conflict at least one; countering weapons of mass destruction and threats to the U.S. homeland; and then third, it is assuring access to regions or areas of interest, and perhaps presence as a part of that.
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    Inevitably, you are going to have to decide what set of activities, perhaps even commitments, certainly deployments fall off the bottom of that list because the force we are talking about at even $100 billion will have to shrink somewhat. So we have to phase in the shrinkages in some level of numbers of things as well as the addition of more funds.

    Mr. ANDREWS. I would just conclude by echoing something Mr. Taylor said in his questions that I do think that as a country we have an elemental choice about this non Social Security surplus about whether we want to principally devote to reduction in the tax burden, which is right, good, and popular, or investment in other spending priorities. I would align myself with his comments and choose this as the first spending priority to the exclusion of the other goal. Thank you.

    The CHAIRMAN. [presiding.] Mr. Buyer.

    Mr. BUYER. Thank you, gentlemen, for your time. I have a couple of comments and then a question. I agree with Mr. Andrews. I didn't particularly care for the statement about the future, choosing between Geritol and guns. I just want you to know that I don't think that is very accurate at all. It is a cute phrase, but it does not add anything.

    Millennium seems to be the word that everyone passes around here today, and I noticed in your opening that you used the word ''empire.'' Dr. Schlesinger wrote it. So it put me on a type of thinking here and I thought, well, from 988 when Vladimir the First first introduced Christianity to Russia, where have we been over the last thousand years?

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    You used the empire as an example, and we don't like to think of the United States as an empire. We think of ourselves as a superpower. This is not an exhaustive list and you could correct me and add to the list: The Incas, the Aztecs, the Mayans, the Yan, the Ming, the Shogun, the Mongrals, the Gondat, Ottoman Empire, Belgium, the Danes, Netherlands, Spain, France, Germany, Great Britain and the Soviet Union. So in the last year of the thousand years, we the United States find ourselves as the sole remaining superpower.

    Now we find ourselves in a discussion here about how do we extend our power in the world. The President introduces an engagement policy. If he really believed in the engagement policy, we should have doubled the size of the military force to accomplish the goals and aims for which it sought instead of cutting it by 40 percent and stretching the force. So when I look at all these other empires, part of their demise, yes, it came from inward, but they were also pretty overstretched.

    You used an example at the beginning, you cited the British Empire. I found myself over the years here also stressed—I don't like to jump into budgets year after year and say okay, we have to do this for this particular program and buy this because of that. Policies and strategies drive everything. So I am hopeful that the United States, if we change administrations, I am hopeful that—there is such an intangible in this town. There is an implied force that there are certain things that drive policies. And I am hopeful that we don't continue in this engagement policy. And then if you are against the engagement in the world, then that must mean you are an isolationist. Well, that is false. That is false.

    The predicate that was also cited in here, using Great Britain as an example, said that even the former colonies of Great Britain—excuse me—when they wanted to give Britain's former colonies time to take charge, they made sure they didn't create a vacuum. Well, that is true. In the absence of authority it always creates a vacuum. I understand that.
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    I for one felt like a lone voice for a while in this town. I believe that we have to make greater demands upon our regional allies. We permit them to escape the responsibilities of the world. And the other thing that turns my gut, I just want to share this with you, turns my gut is we have gotten away from here are our Nation's vital interests and we build a military to protect them, yet we deploy them based on moral authority.

    What is that? That will get us in trouble in time. I will let you know my opinion, Steve Buyer, I dislike it and I have disdain for a policy that makes us appear as though we are bigoted in the eyes of the world; that we are willing to go to one continent but unwilling to go to others. We could turn to East Timor as an example. We did the right thing. Bill Cohen's influence, he did the right thing. That is what we should have done in other places of the world. Australia feels much greater in influencing beyond the borders of their own country to provide for securities in regions.

    So I was flipping through here, and I will look at this because you have taken a lot of time, but I didn't—did you at any time in your analysis or study think about how we turn to our regional allies and we exercise leadership and say, excuse me, Great Britain, Germany, Japan, others, in particular Germany and Japan, you cannot hide behind your constitutions from World War II. And you can no longer cut your defense budgets. Be a friend, be an ally. Is that taken into account?

    Dr. GOURÉ. We didn't exclusively take it into account but one policy alternative, is to put greater reliance on the allies or to say we are going to take second chair to Japan, to the EU in those local areas. Part of the problem is we have to go to those people and make it clear that is what is happening and give them enough time to be able to respond. The worst case is we decide two or three years from now under budget pressures, perhaps a downturn in the economy, that we have to pull a Great Britain, and the Japanese get told on a Thursday that it is their responsibility on the following Monday.
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    The second issue, of course, is that if we are in a difficult strait with respect to the gap between budgets and forces, our friends are in even a worse position almost uniformly. The Germans have just cut their defense budget this past year. There is no good news out there from our friends. That may be subject to a high level international effort by the Administration but there is no one out there to help us along.

    Mr. BUYER. I just want to be clear. So in absence, this is based on no assistance or relationship with our allies in sharing burdens in the world?

    Dr. GOURÉ. That QDR is based on assumptions. It does include the assumption that our allies are going to buy JSTARS. They were supposed to buy, I think, four of them. We have put aircraft back in because they are not buying. Only to that degree.

    The CHAIRMAN. Thank you.

    Mr. Talent.

    Mr. TALENT. Let me go back to a question Mr. Snyder asked about the Bottom-Up Review (BUR), and he asked about whether it was budget driven or not, and I want to clarify something. When you said it was budget-driven, what you meant was, as I understand it, that the military was given a figure that fit into the overall budget.

    Dr. GOURÉ. That is correct.
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    Mr. TALENT. And told to come up with a force structure that fit into that figure; is that what you meant?

    Mr. RANNEY. Yes.

    Dr. GOURÉ. Yes, it was to accommodate to an overall fixed top line.

    Mr. TALENT. That was pretty obvious at the time and I have been going through your book, which I find very interesting. One point you mention here that: Thus before the threat-based force assessment was begun, the President's economic plan had already established the budget personnel levels and modernization priorities for the BUR. Senior DOD officials insisted, however, that their deliberations during the BUR were not constrained. They suggested it was merely coincidental that the BUR arrived at a set of decisions that matched the guidance of the President's economic plan.

    Do you believe it was coincidental?

    Mr. RANNEY. No.

    Mr. TALENT. Yes, I don't either.

    Another point you mention that: Clearly the Administration continued to state and to insist that the United States can remain a global power at the substantially lower defense budget as submitted to Congress.
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    I believe the conclusion of your book is that we cannot remain a global power at the lower defense levels the Administration has submitted to Congress; is that correct?

    Dr. GOURÉ. Not while maintaining the approach of the military, the number of commitments, no, we cannot do it anything like the way we are doing it now.

    Mr. TALENT. And here is a fascinating juxtaposition of statements which I recommend to the Members of the Committee, chapter 1, page 4 of it: When General Shelton stated in his first annual posture statement in February of 1998, while we are undeniably busier and more fully committed than in the past, the U.S. military remains fully capable of executing the national military strategy with an acceptable level of risk. I can assure the Congress that we are not returning to the 1970s. We are fundamentally healthy and continue to report our readiness status to the Congress and the American people with candor and accuracy.

    In September 1998, I guess about 5 months later, he said: In my view, we have nosed over and our readiness is descending. Goes on in that vein. And earlier in the summer, Undersecretary of Defense for Acquisition Gansler noted that: We are trapped in a death spiral.

    I have a question for you. You mention in your book that the Department of Defense has estimated that we could save $3.6 billion with another round of base closing. Can you give me a single reason why, as a Member of Congress on this committee after the record of the Department and its highest officials in the last seven years, that I should believe anything that the Department of Defense tells me?
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    Mr. RANNEY. Well, I guess the answer to the question is that I think in theory we would agree that a closure of an activity or a program or a base or a facility will, in fact, if closed, result in a savings. Okay? And so, therefore, the question becomes—is the execution of that theory, okay? Which, in fact, is to incur the costs needed to close the facility and in fact move the people and the equipment off the facility and save those dollars.

    Mr. TALENT. In theory it should. That $3.6 billion that is like their statements that—I am picking out base closing in particular. I mean, the problem we have got is a credibility problem which you don't talk about in your book. Wouldn't you agree with that? The record of the 1980s is a record that with leadership which begins with honesty, the American people, led properly, are capable of meeting our threats abroad and meeting our responsibilities as a global leader, because when President Reagan came in in the early 1980s, nobody believed that defense spending would be increased either, and defense spending was increased and that was one of the reasons why we ended up winning the Cold War, wouldn't you agree with that?

    Mr. RANNEY. Yes.

    Mr. TALENT. You go through a lot of scenarios—and I am going to read your book thoroughly—different alternatives that we have. As far as you have now figured it, what are the minimum increases we are going to need? When you go through all the different viable options, all of them require substantially more money than we are now spending; is that correct?
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    Dr. GOURÉ. Yes.

    Mr. TALENT. What is the minimum extra expenditure?

    Mr. RANNEY. The logic works this way: if you believe the QDR force is the size and character of the force you need to provide for our security, if you believe that, then you have no choice but to figure out how to finance four percent of GDP to do that. If you believe that you can go to one MRC and that provides the security in the world that you envision in that environment, okay, then you can go to a three percent GDP option. And if you believe that we are at the end of wars and we can go down to a 2.5 percent, then that gets you to that third bar.

    Mr. TALENT. And the third bar requires how much more per year? $40 billion?

    Mr. RANNEY. So it is the logic of saying, here is the costs priced out across alternatives that allows you to say, here is my ''if'' statement. This is my capability that I want. Here is the tab for doing it.

    Dr. GOURÉ. Put it another way, sir, that the minimum, if you want to show up to the party at least once somewhere in the world, is that middle bar which means you need approximately, when you get there, about $30 billion more in procurement dollars for the same size military. Now you can try and adjust between numbers of people and equipment. For example, decide that you are not going to do low-intensity operations and you are going to do big wars, but essentially, you are talking about a minimum level that is between $30 and $50 billion as you stretch out over a period of years annually at that point.
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    Mr. RANNEY. Now, if I may, if you now add to that and say, okay, base closure, what could be its contribution to that policy? That policy of let's say the middle bar. Well that is a $3.5 billion to $4 billion. If we say, hey, we can eliminate all the pork that exists in the Defense Department, $3 to $5 billion there is its contribution. If we could streamline and save another $3 to $5, there is its contribution. That still leaves a large amount to either say, hey, I have either got to raise the budget or I have got to reduce forces and cut back on the policy premium, if you will, as an insurance policy of what I want.

    Mr. TALENT. Well, thank you, and Mr. Chairman, thank you. I think your book is an important contribution. It documents what everybody sitting here has known and I appreciate it.

    The CHAIRMAN. Thank you.

    Mr. Weldon.

    Mr. WELDON. Thank you, Mr. Chairman. I too want to thank you both for coming. And I am well aware of your work and appreciate what you are saying. In fact, it has been what this Committee has been saying for the past six years.

    But I, in reading chapter two of your book where you outline three of the reasons why you think we are in the problem that we are in, one of the problems was that Clinton and Les Aspin were convinced that we could spend significantly less on defense budgets, and you cite some speeches given by both of them in the early part of their career. And the second was that we could not maintain the plan that Bush had left, given Clinton's commitment for domestic priorities.
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    But I am convinced this was a deliberate effort by Clinton himself. This was not some accidental issue. This was deliberate and had very strong beliefs in that regard.

    Let me ask you this, the report has been out two months now?

    Mr. RANNEY. Yes.

    Mr. WELDON. Has the President asked you to brief him?

    Dr. GOURÉ. No.

    Mr. WELDON. Has the Vice President asked you to brief him?

    Dr. GOURÉ. No.

    Mr. WELDON. I think that sums up the problem with this Administration. In fact, in my opinion, the President had a deliberate plan to basically lull the American people into a false sense of complacency, convincing them there were no serious threats and, therefore, not requiring additional defense budgets. And finally, in his last year, realizing that we really have our backs against the wall. And I don't say this in a vacuum. Let me give you an example. Last year's State of the Union speech, as he did this year, the President spoke for 1 hour 17 minutes. I took a stopwatch to the speech because I had some ideas of what I was going to hear. Out of an hour and 17 minutes, he spoke on security threats for 90 seconds, after he acknowledged the pilot up in the audience and talked about how great our pilots are. Ninety seconds.
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    Yet the day after that speech he had Bill Cohen give a major foreign policy speech outlining our change in terms of missile defense because of the Rumsfeld Commission Report. The week after that State of the Union speech, the President himself gave two speeches. One was on cyberterrorism, and the other was on weapons of mass destruction, yet none of these issues, all of which are major, emerging threats, were in the State of the Union address when the President had the entire audience of the American people to see what is really happening in the world.

    If you look at this President throughout the past seven years, that has been his practice over the past seven years in my opinion. Because when the American people and Joe Six Pack sitting in my district laying on the sofa watching the Flyers play ice hockey, when he is convinced because our Commander-in-Chief says there is no threat, he questions why the Congress is spending more money.

    So I have a question in that regard. This is the $64,000 question. The Congress, with Republican and Democrat support over the past six years since we have controlled the Congress, has increased defense authorization spending by $43.1 billion more than the President asked for. Now, the gentleman who is going to come in next and speak fought us every step of the way and criticized us publicly, along with the President, for throwing money at the Pentagon they didn't need. Where would we would we be today if we hadn't plussed up defense spending 43.1 billion over the President's request in the last six years? How much worse it would be?

    Dr. GOURÉ. Without sort of having all the details of what was being spent on, you would be in substantially worse shape. There is no question. At this point, we are so low, our people are stretched so far, and the spares are so few, the equipment is so old, that every dollar added counts like gold.
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    Mr. WELDON. I would hope that my colleagues would grill Secretary Perry when he comes in here who had the audacity to come before our committee each year and roundly criticize us publicly for giving the Pentagon money that supposedly it didn't want, even though each of us as subcommittee chairs had the service chiefs coming on their knees begging us for more money each year. Yet publicly, the President and the Secretary admonishing us for giving the Pentagon more money that it needed, and now the President has the audacity to say we need $15 billion more. It is outrageous to me. It is not just outrageous, it is disgusting. In my opinion, this commander-in-chief has done more to undermine the security of this government than any administration in the last century, because it was a deliberate effort. It was a deliberate effort not to be realistic with the American people.

    I think it extended through our intelligence community. We go back to NIA 9519, which was spun by Secretary Deusch to control the whole debate on missile defense. And we had to go to the General Accounting Office (GAO) and then form the Rumsfeld Commission, which the CIA eventually agreed with, that the basis of President Clinton's veto of our defense bill in 1995 was shallow and was wrong because, as this Congress and this Committee pointed out, there was an underestimation of the threat and there was not an adequate assessment of the use of proliferation to cause other Nations to gain technology, like Iran and Iraq have done and North Korea has done, that we are going to have to eventually face down.

    Mr. WELDON. I wish there was another chapter in your book, and I wish someone—the mainstream never covers this area—would do a study on how this President personally—and in my opinion that is exactly what it was—deliberately gunned down the American people so he could get away with increasing domestic spending and criticize us publicly for putting $43 billion more of additional defense spending because we supposedly didn't need it and got away with that. Now has the audacity to come in and say we are about $15 billion short. Because, to me, that is the greatest disservice that a commander in chief and a leader of our country could ever do to the American people and perhaps more significantly to the men and women who wear the uniform.
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    Thank you.

    The CHAIRMAN. Thank you.

    Well, gentlemen, we have come to the end of the row up here; and it looks like the bells are ringing, too. We appreciate your contribution to the Committee; and your work, obviously, from what you have heard, is well appreciated by all of us. And we have been, as you indicated, talking about these things a good while. You make our case for it I think a lot better. So we appreciate what you have done, your work and continuing work in this field, and we will be calling on you later.

    The CHAIRMAN. We are going to go on now to the next panel, Secretary William Perry.

    Thank you again, gentlemen.

    Dr. Perry, you can proceed as you would like. And I announced earlier, if you have any prepared statement, it can be submitted for the record; and you can proceed as you like.


    Dr. PERRY. Thank you, Mr. Chairman. I do have some informal remarks I would like to make.
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    I would like to begin with a brief reference to the book that was written by the previous witnesses. I believe that it makes several very good and very important points—that the U.S. is the strongest military force in the world today; that in the years ahead the United States will face security crises which require us to maintain that capability; and, most importantly, the point they make in the book is there are forces at work eroding the quality of our military; and, in particular, our modernization is falling behind. So I agree with all of those points in the book.

    I do not agree with the remedial actions described in the book and especially do not agree that the defense budget needs to be increased by $100 billion or more to solve those problems. I will remind you that the defense budget has decreased in real terms about $100 billion since the ending of the Cold War, and so this prescription essentially eliminates that peace dividend that we got from the ending of the Cold War. To make my point as straightforward and as precise as possible, I believe that an increase of this magnitude is neither necessary nor desirable.

    It is not desirable because this peace dividend has brought very real benefits to our country. It has been an important factor in balancing the Federal budget, as you well know, but it has also been a contributing factor to the long sustained economic boom that we have had this past decade, and this economic boom is not only good for the people of the country but it strengthens the business and industrial base on which our Defense Department depends.

    So those are, in summary, the reasons for not believing it is desirable to go back to Cold War spending, but I also believe it is not necessary, and it is in that point I would specifically disagree with the authors of the book.
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    Now, the approach that they take in the book I think is entirely reasonable, of looking at individual systems in lifetimes and estimating replacement costs. Nevertheless, the answer does not seem reasonable to me. I do not have either the staff or the time for making a detailed program-by-program analysis of the points made in the book. So, instead, I have done a top-down analysis to try to determine what I would consider a reason for why I find these conclusions not compelling.

    We had, at the end of the Cold War, more than 300,000 troops in Europe. Since then, we have pulled out 200,000—those troops were there waiting for an attack, deterring an attack from Soviet Union, Warsaw Pact forces. Since then, in the absence of that threat, we have pulled out more than 200,000 troops, leaving just about 100,000 today which I believe is an appropriate level to leave in Europe.

    In addition to that, we have made a major reduction in our weapons of mass destruction. For example, we reduced the deployment of strategic and theater nuclear forces almost two-thirds. We stopped altogether the production on the MX, the ALCM, the Trident submarine, the Trident missile, the B-1 bomber, the B-2 bomber. Those changes in military operations, in requirements and others, have allowed for 30 percent reduction approximately in force levels, and there just have to be significant savings associated with that 30 percent reduction.

    The budget we have today relative to the—at the end of the Cold War is about 25 percent less in real terms. So it is approximately equal to that 30 percent reduction in force. And so the question is, why do we still have a problem? Why indeed has modernization fallen behind, which I agree with the witnesses that it is falling behind. So I want to go through a very simple analysis to give you my answer to that question and also some recommendations as to what can be done about it.
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    If we take a look at the budget proposed to you today, the 2001 defense budget, and compare it to the defense budget in 1989, just at the time the Berlin Wall fell, what I will take arbitrarily to be the ending of the Cold War, if we look at the components of those budgets, the personnel account is 30 percent less in 2001, 30 percent less. Our force reduction is about 30 percent less. So that is a perfectly reasonable and appropriate reduction.

    R&D is about 20 percent less. It is harder to gauge that because you don't size R&D with the size of the forces. My own judgment, the 20 percent reduction is quite reasonable, and indeed, even at that level, it is substantially more than the R&D level was during the late 1970s, the time I was the Under Secretary of Defense, Research and Engineering, and during the period we were actually developing, during the R&D, on the systems which were later used in the Gulf War. So we have a baseline of saying that should be an adequate R&D program.

    But the procurement account is 40 percent less than it was in 1989. Worse than that, the procurement account during the last six years has been 50 to 60 percent less, and so we have accumulated during that period what might be called a procurement deficit. Since the budget was only down 25 percent, why did we have a procurement down 60 percent? And the answer was because the O&M account is only down ten percent from the 1989 budget.

    Some of this is a result of having more emphasis and priority on training and quality of life; and I supported those, as you well know, when I was the Secretary of Defense. But a good bit of that disproportionate emphasis on O&M comes because of inefficient business practices, inefficient buying and because of an inappropriately large base. Too many bases, to put it bluntly.
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    Finally, we have used that O&M account for funding unscheduled operations, and that has typically come at the expense of the training or the quality of life features.

    Now, my bottom line then on procurement is that we do have a procurement problem, and in that I agree with the previous witnesses. The first thing I have looked at is how much is necessary to fix that procurement problem, and in that respect I do not agree with the previous witnesses.

    Procurement proposed to you in this budget is $60 billion in round figures. My own judgment is it probably needs to be perhaps $70 to $80 billion, and I will give you a very crude top-down rationale for how I arrive at those figures.

    If we look at the procurement budget at the end of the Cold War, 1989, in today's dollars, it was $98 billion. Today, we have a force that is 30 percent less than the force we had then; and, therefore, it would be reasonable to believe that we would have to spend 30 percent less in order to reply and sustain that force. And taking 30 percent off that figure gets you a number more like $70 billion, and that would argue that we have perhaps a deficit of about $70 billion if you believe, as I do, that the budget we had in 1989 was reasonable for the force we had then.

    Now, another way of looking at it is that this force modernization is already at a deficit level; and, therefore, we need a buildup. It isn't just the one-time effect here, and so I have looked historically for comparison purposes to Reagan buildup. Because when we went into the Reagan era, it was argued, and I think correctly, that we had a deficit in acquisition and force equipment then. And so if you look at the 8 years of the Reagan buildup, look at procurement during those 8 years, the average spent for procurement in those years was $113 billion. Now, if you take that 113 and say that was a reasonable amount of money for building up that force, this force is 30 percent less than that, so, therefore, we would take 30 percent off that, and that takes you down to $80 billion.
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    So by this top-down analysis, comparing with historical data, I would get a number more like $70 to $80 billion needed for procurement for the size force which we have today.

    I hasten to tell you that I have not done the detailed analysis the previous witnesses have done. I am only using this top-down analysis. I do think that a historical analysis is reasonable because we have been through this problem before, and the experience we had is relevant, and the data we have bears on today's problem.

    Now, if you accept that, then the question is how you get to a $70 to $80 billion procurement budget. One very obvious way is to add $10 to $20 billion to the top line of the defense budget, and I would leave it to your assessment as to whether that is politically feasible. I am not representing the Administration. I am not representing the Congress. I am just presenting facts for you to consider.

    I would suggest to you, however, that before you come to that conclusion you do look at some other alternatives of ways of dealing with this deficit, $10 to $20 billion deficit, whatever it is; and the first of those is to look back to the O&M budget and see if we can shift over time, not immediately in 1 year, but shift over time. In my judgment, perhaps $10 billion could be shifted from O&M to procurement, to get O&M and procurement more in line with the historical experience we have had there.

    If you are going to do that, the Department and the Congress would have to join together the two things.
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    First of all, it would have to reduce the overhead we have, the infrastructure we have. That is, there would have to be further reduction of bases. I know this is a recommendation which the Congress does not want to hear. I will make it anyway. I think there needs to be some further reduction of our overhead, and that does require another base closing round.

    Second, and this is something that the Department needs to do, but the Congress can encourage it to do, is get more efficient buying practices in the O&M account. And there is no doubt in my mind that there is perhaps $5 to $10 billion of savings that could be made by introducing modern buying practices. This is not, in my judgment, a theory. It is being done every day in business and every day in industry. It involves buying supplies through e-commerce, and partly through that means and partly through other means is making major reductions in inventory. Every successful company today is doing that, and every successful company is realizing very substantial reductions in overhead.

    I will give you just one example, which is a company that I am on the board of and so I know the numbers very well, in my head in fact. That is United Technology, which for the last 5 years has had revenue increases of about 5 percent since stable markets, fairly flat revenue increases, but has had property increases of about 20 percent. The difference between that 5 percent and 20 percent was productivity improvement, and I have described to you the techniques that they have used to get that productivity improvement. Those techniques are available to the Defense Department as well. Some of them are being used but not nearly to the extent they could be.

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    The second change that can be made and that could have a very major effect on this outcome is if you are spending $70 billion for procurement, it is to get more leverage from the money you are spending, get more bang for the buck, get more unit per dollar spent. This involves two different techniques, both of which are well-known, both of which have been demonstrated in many cases. First of all, buying more commercial components. This is what we called—what I called, as Secretary of Defense, acquisition reform in which this Committee, as a matter of fact, passed legislation which helped introduce those. Again, this is not a theory that will work.

    Let me give you one example from it. This Committee authorized us to establish five pilot programs back five years ago. One of those was the Joint Direct Attack Munitians (JDAMs), which is now a mature program, and we have detailed results from that. And the savings introduced by using commercial components and giving the program manager the authority to waive the Military Specifications (MILSPECS) requirements was not 5 percent or 10 percent but approximately 50 percent or, to put it another way, for a given number of dollars, we can buy twice as many JDAMs by using these reform acquisition techniques.

    The second technique, which is more recently being considered in the Defense Department, is the introduction of continuous process improvement during the manufacture, during the production of old defense equipment.

    During the 1990s, early 1990s, American companies had fallen badly behind Japanese companies in competition in world markets because of their productivity inefficiencies. Many of the best companies then went to school to learn what the Japanese are doing. They learned in detail about how the Japanese were applying this continuous process improvement, and they brought it back and applied it to their own companies. Now, many U.S. companies are world leaders in the field and are outcompeting their Japanese counterparts by the introduction of these techniques.
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    So this is not a theory either, nor is it a theory that it only can apply—that it can apply to defense companies.

    I would like to call your attention to the C-17 program, which back in the 1994 time period was a troubled program, very close to cancellation. At that time, with the encouragement of the Defense Department, McDonnell Douglas introduced continuous process improvement techniques. I visited the production line of the C-17 just a few months ago and was pleased to learn that they have a learning curve that is steeper than on any commercial airplane today. It is an amazing success story, and it can be applied to many more programs in defense.

    All of this simply says, one way of getting more equipment is putting more dollars in the budget. Another way is getting more unit equipment for every dollar spent, and we need to be doing both.

    Final point to make, and I will entertain your questions then, is that it is important, I believe, not to erode the O&M budget by funding unplanned deployments out of it. I believe that if the Administration plans to undertake an unscheduled operation it should come to the Congress, request the additional funds for the specific operation and not take that money out of training, not take it out of quality of life.

    Well, in sum, Mr. Chairman, I believe we do have a modernization or procurement problem. I do not think the solution requires another $100 billion a year in the defense budget. It may require $10 to $20 billion a year, which is no small matter, but with good management and with good cooperation between the Department and Congress, a good bit of that $10 to $20 billion may be gained by improved efficiency of operation and improved productivity.
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    I thank you.

    The CHAIRMAN. Thank you, Dr. Perry.

    The CHAIRMAN. Those of us who have been in this place for a while appreciate your service over the years, and I remember some of the things you were talking about we have been through together. C–17 was most recently. I remember here in the Committee one day we came down to just about the place where it was scratch time and decided to go ahead with it, as you indicated, and it is a real success story now.

    One of the things that I think has disturbed some of us on this Committee for a long time and we have been wrestling with it with the Department of Defense, is this question of whether or not we have the size force and the capability of carrying out the national strategy of fighting two major theater wars at the same time. And over a period of time it has developed into questioning our leaders of our military, it started off them saying, well, yeah, you know, we can do this. It might entail some risk, but we can do it. We can swing things here and there in two situations, like maybe the Persian Gulf area and Korean Peninsula.

    And then you get on down into detail and you ask, well, what kind of risk are we talking about? And they would say, well, moderate risk. And you start asking why, and they say, well, you know, we have to swing these things back and forth and hold over here and try to do something over here, and in the meantime it is going to take a long time, but we will finally prevail.

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    And I would always come back and say, well, what kind of risk in terms of casualties, American lives lost of our military? And we would start talking about hundreds of thousands of lives, and we would go on and on.

    And, finally, the most recent assessment has gone from moderate to high, high risk now.

    And so my question is, why are we in that situation? Have we reduced our force too much, capabilities not there? What is it that leaves us in this place? What can we do?

    I don't want us to assume any kind of risk. I know it is impossible to look at it that way, but the less risk, as far as I am concerned, the better.

    Now, can we lessen the risk and the lives lost and the jeopardy that puts our national security in by going on this path that we are on now or do we have to rebuild our forces, add more to it, more procurement and all these kind of things? I don't know about $100 billion more for the next 5 years each year either, but do we need to do more? Where are we today?

    Dr. PERRY. I believe that we have today the forces capable of dealing with one major regional conflict and winning that war quickly, decisively and with minimal casualties; and I think that should be our criterion when going into war. That is what we want to do.

    We do not have a capability of fighting two at the same time. For one thing, we do not have enough airlift and sealift to go to two places at once. So the best we could expect to do, if a second conflict started right on the heels of the first conflict, is to hold that area as well as we could until we are able to redeploy forces, win the first one quickly and move to the second one.
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    Fixing that problem at a minimum would require building much more airlift and sealift than we have today. It would be a very expensive undertaking. That is not in any of the budgets that have been presented to you. That is not in the budget calculations which were done in the book which you have been reviewing. That would be quite an expensive undertaking.

    The CHAIRMAN. That is what concerns me, it really does, and of course that would be the very time something else might break out while we are involved in one of them.

    I know back during Kosovo we should have learned a lesson there I think or should have had a wake-up call or something. Because here we had to marshall all of our air assets from all over to carry on that Kosovo operation, which on a scale of threats to our national security didn't rival the one in the Persian Gulf or Korean Peninsula, but we had to marshall all of our assets, the Air Force did, to carry on that campaign. And we about expended our cruise missile inventory, no lineup following that, and I started wondering and others did, too, what if something had broken out at that time in the Korean Peninsula and the Persian Gulf, what would we have done?

    We had to bring aircraft carriers from the Korean Peninsula to the Adriatic, leaving us over there bare in that respect, and that should have been a wake-up call right there that we might not have this thing figured right from the standpoint of our capability to handle these things. And I don't know if that is the right strategy or not, but evidently that is the one that we have, and it was based on that QDR we keep on talking about back there.

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    But, anyway, I was just wanting to get your idea about whether or not we could do that or not. But, as you said, we can do one, but if we are going to be required to do two, we need to build up more. Is that what your answer is?

    Dr. PERRY. To do two simultaneously would require substantially more airlift and sealift than we now have.

    The CHAIRMAN. Mr. Skelton.

    Mr. SKELTON. Dr. Perry, thank you so much for being with us today. We appreciate your thoughts and your expertise.

    In the late 1970s and 1980s you were deeply involved in technology programs that later produced gains in stealth and precision munitions. Can you share with us your thoughts on the advantages in the field force of 2010 and beyond that technology might provide?

    Dr. PERRY. That is a very good question, Mr. Skelton. I will try to discipline myself in answering it because it is a subject that is dear to my heart.

    Let me take two examples, though. One of them is the one you mentioned, stealth. Stealth is a great force multiplier. I think that was dramatically demonstrated in Desert Storm when we didn't send our ordinary fighter bombers over Baghdad. We sent only the stealth, and we could also use the stealth aircraft to defeat the air defense and command and control system, making it more effective for the other bombers to perform their mission.

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    So the force multiplier aspect, what you look for in technology generally is force multiplier, and the stealth is one of the most dramatic ones we have had in many years.

    The second important force multiplier is getting precision location oftargets through dramatically improved intelligence. We tend to take that for granted today, but all wars in history, up until the Gulf War, we simply most of the time did not know where the opposing forces were and how many there were of them, and history is replete with battles that were lost because of faulty intelligence.

    During the Gulf War, we knew essentially where every enemy vehicle was all through the theater at all times and in essentially real time. That is a remarkable capability, and it gives our battle commanders a huge advantage.

    And then, finally, us having the precision guided weapons to attack them.

    Now, in these last two categories, the major breakthroughs have already been made, and now they are being introduced into the force and being carried down to the platoon level, not just the headquarters level. But the second important thing that technology can do and is doing now is it is being used to reduce the cost of equipment that we buy.

    We take it for granted in the commercial field that introducing microelectronics technology not only improves performance but it reduces cost, and it can do that in the military as well, not just by buying cheaper components but by introducing process techniques using the computer for control as, for example, is being done in the C–17 program today.
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    So, those are the two big areas—technology being used in our weapons system as a force multiplier, which allows fewer weapons systems, fewer people to be involved and fewer people at risk; and, second, using technology as a cost saving.

    Mr. SKELTON. Thank you.

    The CHAIRMAN. Mr. Hunter.

    Mr. HUNTER. Thank you, Mr. Chairman.

    Welcome, Dr. Perry, to our panel.

    Let me go over—you put the procurement requirement at between $70 and $80 billion, but it appears to me you kind of backed into that by using the proportion that we spent on procurement in 1989 versus other sectors of the defense budget. Wouldn't you agree that the probably most accurate way to figure out what you need for equipment, whether you are replacing a domestic fleet of vehicles or military fleet, is to take your projected life of those vehicles and/or those platforms and to figure out how much they cost and figure out what steady state replacement is required to keep the fleet at basically mid-life? Because that is essentially the exercise that the authors of the book went through, and it looks to me like in the end it is more straightforward and probably more instructive and more accurate and more valid than simply doing the proportion of the budget in two different eras.

    They came up with a defense inventory, if you will, of I believe $3.5 trillion and simply used the projected lives of those major systems. I think $2.2 billion was major systems, and they came up with I believe $121 billion per year procurement steady state requirement.
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    Now, Congressional Budget Office (CBO) last year, using basically the same method but using what they called their most optimistic scenario, one in which systems lasted longer than we had projected they would last and in a less optimistic scenario, came up with a $90 billion procurement requirement. So wouldn't you agree that that is the best way for us to do it, is to simply look at what we have got and if we figure that is indeed what we need pursuant to our strategic analysis, whether it is QDR or something else, figure out what it is going to cost us to replace it? And if we figure we have a valid and accurate lifetime projection on those systems, we should be able to figure out how much we are going to have to add each year.

    If you do that, you do come out at closer to $100 billion, it appears to me, than $70 or $80 billion. In other words, simply because we have got these so-called enablers and we have got a promise of more efficient procurement, that hasn't evolved.

    I remember I used to kid my colleagues, when you used to come see us, there were two things that you were really worried about. One was the North Koreans getting nukes, and the other was my amendments to cut the shoppers out of the defense acquisition system actually going through and actually losing some of those shoppers. Remember, we were always after the 300,000 acquisition guys who were averaging about 53,000 bucks apiece who were in the system, and it appeared to me it was extremely difficult to get them out under your Administration and I think just as difficult to get them out under the present Administration at DOD, although I think we are making a little headway, but those folks were costing a lot of money.

    And, last, with respect to base closure, you know, interesting thing about base closure is we all voted for it, and we basically said, for better or worse, we will take our hits. Come through and let the Blue Ribbon Panel make their recommendation and we will vote it through.
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    And I think almost everybody here took hits. I know we lost a naval training center in San Diego. We had lots of other shots in California and across the country we had major reductions, but Congress did vote for those. However, the expected savings never came about in the amount that we projected I think largely because there was such an enormous environmental cleanup price tag attached to them.

    It was like giving your nephew a string of condominiums, and he comes back and says, before you can give these to me you are going to have to do a hundred thousand dollars of environmental cleanup per condominium unit. And we ended up with the transfer costing us—in terms of the taxpayers—costing us a lot of money.

    But my last point with respect to base closing, didn't we do four rounds of base closing?

    Dr. PERRY. Yeah.

    Mr. HUNTER. I guess my question is, you guys were in charge of the base closing apparatus at one point. Why didn't you have them get everything that you thought was necessary? I mean, Congress voted it through. We said, go take the excess bases and you know we will go out, make our pitches for our bases and let the chips fall where they may and we will go on with life.

    And it always seems to be a little bit inconsistent for the Administration that helped to host several of those base closings to say the real problem with Congress is there is not enough base closings going on. Well, presumably, those base closing panels could have and should have gotten everything that was indeed excess.
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    Last, the real thing that cost money is not just owning property. There are ranchers in Texas who own more real property than the U.S. Navy does, individuals. The real cost of owning these bases is cost of operations, and some of that cost is manifested in that 300,000 person acquisition core which seems so difficult to reduce under any administration.

    Just a couple of ideas for you, but the main idea is why isn't this method that our authors and that Mr. Schlesinger talked about, this method of simply taking the defense inventory that is necessary to carry out the QDR, take that, figure out how many years of life you project for these types of equipment and figure out how much you are going to have to replace each year so that you are going to maintain a steady, reasonably aged force. That is how they came up with the $100 billion dollars in procurement. Why isn't that an accurate way of doing this?

    Dr. PERRY. I will be very direct, Mr. Hunter. I think this technique is a very fine technique, and I would recommend it be done and may be done by several different groups. It is probably the best single approach you can use for trying to get a bottoms-up calculation of what costs are going to be. It is not, however, infallible. It does depend on the assumptions that are made. There are assumptions made about the role of technology, technology improvement.

    Since it is not a static force or a static world, the example that I will use in discussing with Mr. Skelton is with the F–117; the F–117 dramatically changed what we can do in air attacking, and this method doesn't really have a good way of taking that into account. It depends on assumptions about cost growth, and there are assumptions made in the analysis about cost growth. They are reasonable assumptions. They may be wrong.
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    In particular, in the industry today, we are looking at cost decreases per year, not cost growth per year. And not only is that a question of assumptions in the analysis, but it also a question of whether the Congress should hold the feet to the fire of the Defense Department to try to bring those cost improvements, cost decreases into force.

    And, finally, I must say I am not a cost analyzer. I am an engineer, and an engineer typically approaches a problem by trying to size up what is a reasonable answer to the problem, and then when somebody gives them a calculation which doesn't strike as a reasonable answer he tries to figure out why not. But I never accept an answer that has gone through a long complicated calculation without trying to have some sort of rule or reason as to whether it right.

    This one didn't strike me as being right for the reasons that I have described to you, but I am not suggesting to you that the simple-minded analysis I have done should be the thing that guides you but it should make you suspicious that maybe this number is too high and you should take other cuts at it.

    The CHAIRMAN. Thank you.

    Mr. Pickett.

    Mr. PICKETT. Thank you, Mr. Chairman.

    And, Dr. Perry, I take this opportunity to thank you for your distinguished service to our country, and I know that it is not over yet because you continue to serve in various essential capacities.
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    I have several items that I would like to just get you to comment on.

    This one of using a percentage of the gross domestic product as a measure of the adequacy of defense spending, does that have any true relevance or is that just like an accounting number that doesn't tell you much in the long run?

    Second, you mentioned commitments, and that has been talked about here today. And we have seen our military be pulled into things that they traditionally have not done, like trying to intercept narcotics trafficking, becoming involved in that, involved in humanitarian projects simply because they are there, they have got the capability. And what is your thought about the fact that if we have a military available and it is not doing anything, somebody is going to find something for it to do?

    On the base closing, I don't want to pile on to what has already been said, but I noticed in the recent budget that has been submitted that they are asking for two base closings, two additional ones, in '03 and '05. It strikes me that if the military knows what their excesses are, that one should be enough and they should get the job done and get it over with instead of struggling through two more, an additional one beyond the one that I think is necessary and I would support.

    And then, finally, on the issue of research and development spending, some years ago we were talking about the desirability of increasing research and development spending as the size of our forces came down to ensure that we were always on the leading edge of technology and would not be subject to technological surprise in some contest that may evolve. And I noticed that you seem comfortable with bringing down research and development, and I feel rather strongly that we should keep that up as a way to ensure that we don't get caught by surprise by some unexpected scientific development.
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    If you would just comment on those, please.

    Dr. PERRY. Thank you, Mr. Pickett, particularly for giving me an opportunity to comment a little bit more on the R&D.

    I am comfortable with the size of the R&D budget. I think it is $38 billion that is being proposed. What I am not comfortable with is the size of the Science and Technology (S&T) component of the budget. That is the component of the budget that deals with the element of surprise you are talking about. And I think we should be increasing the S&T component, but that could be at the expense of other parts of the R&D budget. They perform very different functions, but the element of our budget which best protects us from technological surprise is the S&T component.

    When I was the Under Secretary for Defense, Research and Engineering, I got permission from both the Secretary and the President to increase S&T in real terms five to ten percent every year and did that, but that has leveled off since then, and I would like to see that go back up again.

    Second, on the base closing, going back, first of all, to Duncan's question, why didn't we close them all then, it is just damn hard to close bases. It is not just getting the agreement from Congress to do it but the execution of base closing is a very manpower-intensive effort, including when I was the Secretary and Deputy Secretary my own time. I don't know how many of those bases I personally went out to and met with the citizens of that area and talked with them and helped them set up redevelopment plans. Because we have a responsibility to the people in those areas.
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    I think the reason for stringing it out is because it is so hard, not just on the communities themselves but on the Defense Department team that has to execute it. And there are just limited resources that can do that, and some of them have to be at very high levels in the Defense Department.

    On the gross domestic product issue, it is to me a very important measure of affordability of defense, and you look at countries that have gone up to 10 or 15 percent of their GDP and defense and their countries are heading for bankruptcy or they are being subsidized by somebody else. So there is some upper level, but we are not even close to that level. We sustained it at five to six percent during the Cold War, and right now it about three percent roughly. So there is no question in my mind that our defense program is affordable as measured by GDP. It is not a measure, though, of the need for the Defense Department, and that is what I was trying to address in my comment—in my other comments.

    In terms of the other missions which the Defense Department gets involved in, the drug missions and the humanitarian missions—counternarcotics I meant and humanitarian, I think there is both a negative and a positive, and I have different view on that as has been expressed by other people.

    The big negative of those missions is they invariably take O&M dollars to do it. And when you look at where those O&M dollars come from, they will usually come from training or quality of life, and, therefore, I am negative about them for that reason. But in terms of does it detune our people, make them inappropriate for being able to go and conduct real missions of fighting wars, I don't think so. I think it is as good training as they get at the base in Germany or in their base in Colorado or wherever. There are many aspects of what they are doing that are actually useful training.
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    I spoke with General Nash two days after our troops returned to Germany from Bosnia after spending a year there, and I asked him that question, how soon if we have a real crisis and I need to use the First Armored Division in a war, how soon is it going to be ready to go? And he thought about two weeks. He has to get through some gunnery training, some things he had to do to prepare, but it was measured in weeks, not in years. Some aspects of what they were doing, the patrol for example, the security aspect of what they were doing was good training. So I have a mixed feeling about that question.

    Thank you.

    Mr. PICKETT. Thank you very much.

    Thank you, Mr. Chairman.

    The CHAIRMAN. Mr. Kuykendall.

    Mr. KUYKENDALL. Mr. Secretary, the earlier panel had another Secretary of Defense on it as well. One of his comments was trying to get at an answer for Mr. Hefley which addresses an issue we frequently face here, and that is we are faced with a lineup of generals and sometimes the Secretary telling us exactly how much they can afford, that they think they need to run the program, and we would like to know really what it is because we will get abused, because we will maybe buy a few too many jets or too many ships or we buy an extra submarine, and, darn, the Navy didn't want it, you know, and we get beat over the head for that because it isn't what they told us in their testimony.
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    Secretary Schlesinger said his policy had been that you took the company line when you set up there, but if you were asked for your personal opinion you could give it and he would protect you as long as you were there for giving your personal opinion if you asked for that. One thing, is that kind of the policy you had in your area when you were Secretary of Defense?

    And, second, if it wasn't, what do you think is a legitimate way for us to try to get at requests when we want to understand what they are? And the reason I say that is we have now had two panels, the most conservative of which in the amount of money they talk about is yourself, and that says $10 billion more than the current budget calls for. So whether we even took that number or anybody else's number from there all the way up to a hundred plus billion, we have obviously got to find out what that number is from somebody that is an expert.

    So that is a long way of saying that, and I have one other just little short question after that.

    Dr. PERRY. First of all, I will give you my personal opinion, whether you ask for it or not. I am not representing the Administration. I am not representing any institution. I am just doing the best I can to tell you what I believe about these issues.

    Second, I want to say I have not done a detailed analysis of this budget, and I would not suggest to you that you take a number I give you as guidance or as authoritative. All I am suggesting is you question the number you have got.

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    Mr. KUYKENDALL. Your number is authoritative. A former Secretary of Defense telling me how much it costs to man the procurement budget is authoritative.

    Dr. PERRY. I am suggesting that you use a historical analysis. A top-down as well as a bottom-up analysis and continue at the process until those two figures converge. And right now they are very far apart. So I don't think you are in a position yet to take a number as authoritative, not my number, not the number you heard from the earlier witnesses.

    Mr. KUYKENDALL. How do we go about getting at that feedback, though, if we have a budget that comes in at $60 billion worth of procurement—and so far we don't have anybody saying that is an adequate number. We have everybody saying it is a whole lot more, except that the Administration, which I think in the next few days we are going to have their testimony from the chiefs and the Secretary.

    Dr. PERRY. The Administration will be telling you that $60 billion is adequate because that is the budget they are proposing. My judgment is that is on the light side for procurement, and I told you my best judgment is $70 to $80, but I also gave you a lot of caveat in that I have not done a detailed analysis of it.

    Mr. KUYKENDALL. Just a final follow-up.

    One of the other questions that have been asked to earlier panel members were had they been called in to either the Department of Defense or the White House or the Office of Management and Budget (OMB) for discussions on this subject, and their answers were in the negative, that they hadn't been, as I think they were, in many people's views at least, experts on the subject that could at least bear their opinion to people just like you are giving us your opinion today.
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    Are you aware of any gatherings—I know in the past many Administrations will pull together previous secretaries of defense or a director of the CIA and maybe get them together and ask for an opinion on these kinds of things to see whether or not they are on the right track, and are you aware of any of that being done in this Administration to help build up the budget they are presenting to us?

    Dr. PERRY. When I was Secretary I would not infrequently call on former secretaries, usually not on a budget issue but on an operational issue—should we go into Bosnia, should we go into Haiti, and if not, why not. I don't recall having sought their budget advice. I get calls occasionally from Mr. Cohen, Secretary Cohen, asking me for opinions, but generally, again, it is about an operational issue he is considering rather than a budget issue.

    Mr. KUYKENDALL. I guess if I had a message for the Administration I might call upon some of the previous leaders in these areas, whether they be Republican or Democratic administrations. We have men and women who have served very admirably, and their advice might be useful in coming up with the budgets they present to us. Thank you.

    Dr. PERRY. I guess that is—generally, my advice is sought more often than I have time to give it. So for me that is not a problem.

    Mr. HUNTER. [presiding.] I thank the gentleman.

    Mr. Weldon.
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    Mr. WELDON. Dr. Perry, thank you for being here. There is a great deal of frustration in the Congress over our ability to respond to the needs of both R&D and acquisition and our operational costs for the military, and I want to respond to several of the points you make, and I want to ask you one question.

    I agree with you on the unfunded deployment issue, and for the past seven years we have raised that issue every time our troops have been inserted. In fact, we used a comparison of a period of 40 years before 1991 when all the presidents in that time period deployed our troops 10 times. In the last 8 years our troops have been deployed 35 times. None of those deployments were paid for in advance. We were always left with the responsibility to go find a way to pay for them after the troops were inserted, with the Administration knowing full well we weren't going to pull the plug and stop the funding but had to find a way, which is why we ended up spending over $20 billion of unfunded contingency costs by taxing R&D account lines.

    They weren't logical cuts. They were cuts because the big ticket programs had support bases and mechanisms, labor unions that fought hard for those programs, and there weren't similar support mechanisms for the R&D account lines. So we agree with you on unfunded deployments. It is just a shame that we have unfortunately over the past eight years, starting before President Clinton took office, not been able to convince the administrations to ask for the money to pay for those deployments when they occur, and we are paying a price for that.

    I agree with your point on acquisition reform, that we could save hundreds of millions of dollars if we simply bought smarter, but, Dr. Perry, we can't talk about that without speaking to the issue of the massive budget cuts sliding out procurements so you drive up the costs per copy of an aircraft.
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    In the case of the V–22 program, because of starvation of that program, it is going to cost us $5 billion more than what that program should have cost us. So you can't talk about acquisition reform if you are not going to fund a logical buy of those platforms so you can achieve the savings that should be realized, and we have not done that. We have slipped programs out to the outyears but have driven up the cost of those platforms by billions and billions of dollars.

    The third point is base closing. You know why there is no base closing? I will support base closing in a minute, but I am not going to support another politicization of the base closing process. In 1996 was the last round of BRAC. We had two tough base closing rounds. Democrats and Republicans—and I had one of the first bases closed, the Philadelphia Navy Yard, but I ate that—but Members on both sides that will never give an administration a second chance when two bases were supposedly privatized and placed, sullying the process for both Democrats and Republicans. That is why this Congress has not been willing to get another round of base closings, and it is needed, and I have said that publicly.

    I want to talk about your point about you think 20 percent is reasonable in terms of cuts for R&D. You are right about the S&T account lines. In fact, they have been cut another $1 billion in the 6–2 and 6–3 account lines by the President's budget request, and that is exactly not the area where the cut should have been made.

    A 20 percent reduction to me in terms of R&D is not acceptable when you look at the fact that I would argue the biggest threats in the 21st century are all R&D intensive. It is ballistic missile defense, very R&D intensive and very costly. It is weapons of mass destruction, very dollar intense and very much R&D intense, and cyberterrorism and information dominance.
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    Those are the three biggest cost drivers, and they are all R&D heavy, and so I don't think we can justify, and I agree with Mr. Pickett in that regard.

    The kind of cuts that have occurred in R&D have been illogical. They have been illogical because the appropriators have been boxed in a corner where they have got to tax accounts to pay for unfunded deployments because they don't have enough money.

    Mr. WELDON. I want to get to my question. You advocate, Dr. Perry, a $60- to $80 billion acquisition account line, which if my math is correct, that means that you advocate a $25- to $30 billion increase in this year's defense budget for acquisition; is that correct?

    Dr. PERRY. No, that is not what I said. That is not what I meant to say. I said that that is a goal we ought to be headed towards. Get there as soon as possible, and I believe that some of that, I don't know how much of it, some of it can be done by improved efficiencies rather than by top line increases.

    Mr. WELDON. How much you would say? Is it $10 billion that you say should be above what the budget calls for that.

    Dr. PERRY. That would be a best estimate.

    Mr. WELDON. You take the President's $15 billion, that is a $25 billion increase?
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    Dr. PERRY. Yes.

    Mr. WELDON. Dr. Perry, where would we be if we had not taken your criticism over the past 5 years and increased defense spending by $41.5 billion over the President's request when each year of those increases by this bipartisan Congress, you publicly stated, along with the President, that we were putting pork into the defense budget that the Pentagon didn't need, when 99 percent of the programs we funded were requested by the service chiefs? They were not add-ons. And Duncan Hunter and I can give you the actual—we have done this analysis. Ninety-nine percent of those add-ons were requests by service chiefs begging us for more money. Where would your request be if we had not put $43 billion of additional funding in over the past six years? Would we be $43 billion above your $25 billion increase?

    Dr. PERRY. It would be higher. I don't know how much higher.

    Mr. WELDON. Thank you.

    The CHAIRMAN. Mr. Bateman.

    Mr. BATEMAN. Thank you, Mr. Chairman. I wasn't here to hear Dr. Perry's testimony unfortunately, so I am going to abstain from asking any questions and thank him for being here and go upstairs and meet with the Chief of Staff of the Army.

    The CHAIRMAN. All right, sir. Mr. Skelton.

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    Mr. SKELTON. Thank you, Mr. Chairman. Thank you again for joining us today, and your wisdom is well received.

    The CHAIRMAN. We appreciate it very much. You have added to our Committee. Thank you.

    [Whereupon, at 4:20 p.m., the Committee was adjourned.]


    The CHAIRMAN. In your view, are the proposed funding levels in the President's fiscal year 2001 defense budget request sufficient to allow the United States to restore critical military capabilities, avoid significant personnel cuts, and modernize equipment in a timely manner? If not, will the requested amount at least partially close the gap that exists between U.S. strategy and resources?

    Dr. GOURÉ and Mr. RANNEY. (Unless otherwise stated all figures are in constant FY 2001 total obligational authority (TOA) dollars.)

    The proposed funding levels in the President's FY 2001 defense budget request coupled with the President's proposal to extend defense spending limits to 2010, if enacted by Congress will be grossly inadequate for supporting the planned QDR force. The QDR force is simply not affordable at the budget levels proposed for the FY 2001–2010 decade by the President. At the proposed budget levels, at some time during this decade, the next President and Congress will be left with little choice, but to make additional personnel cuts, force structure reductions, and spending cuts in defense recapitalization and modernization programs.
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    We estimate the cost of fully supporting the QDR force to be $377 billion in FY 2001. As submitted to Congress in February 2000, the President's military spending plan for FY 2001–2005 will fall $85 billion short in FY 2001, and $575 billion behind what will be needed to maintain a force able to prosecute two regional wars at once.

    Compared to last year's military spending plan, the President's current plan adds $5 billion in FY 2001 and $12 billion during FY 2001–2005. This budget decision represents a small step or payment for reducing the budget shortfall identified by us. Furthermore, we are not surprise to learn that little, if any, of this year's proposed budget increases will go to close the gap that exists between U.S. strategy and resources. DOD instead plans to use $6 billion to pay for anticipated future costs of defense contingencies such as in Kosovo and $3 billion to offset higher fuel costs due in part to the recent rise in world fuel prices, but also to unrealistic economic assumptions about future fuel prices made by DOD. The remaining $3 billion five-year total represents the only real growth in defense programs. According to the President's spending proposal, this $3 billion will be used pay for new initiatives in DOD intelligence programs and science and technology programs. These latest DOD initiatives, if successful—will provide new and different military capabilities than those of the current planned QDR force.

    The FY 2001 DOD budget request offers little changes from the spending plan proposed a year ago. It represents another year of lost opportunity for restoring critical military capabilities and for modernizing military forces during a period of unprecedented economic prosperity. At best, the FY 2001 budget request provides additional fiscal resources to pay for current military deployments and higher fuel costs rather than require the military departments to absorb those costs within their current budgets.
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    The CHAIRMAN. What impact does the President's proposed defense budget have on your overall analysis of the strategy-resources mismatch? Do you believe that the budget request is ''too little, too late''?

    Dr. GOURÉ and Mr. RANNEY. (Unless otherwise stated all figures are in constant FY 2001 total obligational authority (TOA) dollars.)

    The analysis we presented and discussed in our book, Averting the Defense Train Wreck In The New Millennium, and at our appearance before the Committee was based on the President's military spending plan for FY 2000–2005, as submitted to Congress in February 1999. The February 1999 military spending plan included a DOD budget increase of $12.6 billion in FY 2000 and $99.4 billion (nominal dollars) over the five years of FY 2001–2005. The President's February 2000 military spending plan adds another $12 billion over the same five year period. Accordingly, our estimate of the DOD budget shortfall for FY 2001–2005 is reduced by an equal amount.

    As stated in our answer to the first question, we estimate the cost of fully supporting the QDR force to be $377 billion in FY 2001. As submitted to Congress in February 2000, the President's military spending plan for FY 2001–2005 will fall $85 billion short in FY 2001, and $575 billion behind what will be needed to maintain a force able to prosecute two regional wars at once.

    Compared to the President's military spending plan of February 2000, the budget shortfall for DOD military pay and operation and maintenance (O&M) is estimated to be on a nominal dollar basis $8 billion and $75 billion, respectively, during FY 2001–2005. In contrast to the $75 billion O&M budget shortfall, the joint chiefs in February notified the Congress of $84 billion (nominal dollars) in unfunded budget requirements of ''critical importance'' for the same period. (This figure includes some funds for current RDT&E and Procurement programs.) At the same time, the military services' currently estimate that on October 1, 2000 they will have:
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 $1.3 billion backlog in depot maintenance;
 $9.3 billion backlog of maintenance and repair of facilities;
 $16.2 billion budget shortfall to improve conditions of active Army facilities to C–1 status; and
 $16 billion backlog for renovating and replacing government-owned family houses.

    Together, these four areas total $43 billion in backlogs at the beginning of FY 2001 that eventually must be funded in future defense budgets. While personnel cuts may not be imminent, these various budget shortfalls suggest a military department already under significant stress and in possession of diminished capabilities. These conditions will deteriorate even further if defense budgets are not raised significantly in the near future.

    Nearly 86 percent of our projected DOD budget shortfall estimate falls upon the acquisition accounts (RDT&E and Procurement). The budget shortfall for DOD acquisition is estimated to be on a nominal dollar basis $516 billion during FY 2001–2005. We estimate, on a depreciation basis, DOD needs a procurement budget of $130 billion in FY 2001. This compares to the DOD procurement budget request of $60 billion, or $70 billion lower.

    Congressional approval of the FY 2001 budget request will enable DOD at last to achieve on a nominal dollar basis its procurement goal of $60 billion established five years ago. The President's latest military spending plan also provides thereafter for additional growth in procurement spending. By FY 2005, the DOD procurement budget is expected to grow to $70 billion on a nominal dollar basis; or $66 billion on a constant FY 2001 dollar basis. Notwithstanding current expectations about higher annual defense procurement budgets, it is important to note the President's current spending plan is $7 billion (or 2 percent) less than what was proposed a year ago for the five years of FY 2001–2005. It also buys fewer aircraft, ships, submarines and tracked combat vehicles and therefore continues to add to the future procurement ''bow-wave.''
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    Beyond FY 2005, DOD finally admits that still higher annual procurement budgets will be needed, as the Secretary of Defense acknowledged on several occasions during Congressional budget hearings this Spring. Senior DOD leaders are reluctant, however, to disclose publicly the exact amounts or how they intend to pay for these higher spending levels, given the administrations current long-range vision about government spending priorities. However, at the first DOD budget press conference on the FY 2001 budget request, the DOD Comptroller stated that additional annual increases of $15 billion to $18 billion will be needed by the end of the next decade. These remarks suggest annual DOD procurement budgets in the range of $75–90 billion. It is important to note, however, current DOD projection are predicated on the attainment of less than steady-state procurement rates for most of the FY 2001–2010 decade, and on unrealistic expectations and estimates about future weapon system procurement costs, for example: $40 million unit cost of joint strike fighters or $750 million unit cost of DD–21 destroyers. Revisions regarding the first will lead to still higher future procurement budget levels as previous and planned deferred purchases eventually must be bought in order to sustain the inventory levels envisioned by the 1997 QDR. Revisions regarding the latter also will lead to still higher future procurement budget levels as the military services are forced to adjust upward their cost estimates to reflect actual industrial base and market conditions.

    As it did during the past eight years, DOD plans to weather projected annual budget shortfalls by postponing and deferring again purchases of new equipment. The situation grows more acute, however, as current military equipment is now old and is approaching the end of their expected individual operational service lives. Today, ''old equipment'' requires more and more of the annual procurement budget because of the need to maintain and ensure current operational and safety standards, and the need to provide for service life extensions until next generation military equipment can be procured and delivered. This situation is especially evident in the DOD procurement budget request for FY 2001. Many Americans are surprise to learn that in FY 2001 the military services' plan to spend $60 billion, and will buy just 191 new vehicles, 183 new aircraft (rotary and fixed-wing, active and reserve), 7 ships, and 1 submarine. Of the $60 billion DOD procurement budget for FY 2001, $47 billion (62 percent) will be used to fund in-service equipment modifications, operational and safety improvement programs, spares and repair parts, and purchases of support equipment needed for existing inventory assets that already are old and growing older.
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    Finally, we estimate that during FY 1993–2000 the military departments postponed purchases of, or chose not to buy, a total of 2,905 aircraft, 25 ships and submarines, 6,828 tanks and fighting vehicles, and 705 artillery. As a consequence of these actions, future annual production rates and therefore defense procurement budgets will need to be considerably higher, if the QDR force is to be maintained and its production backlog eliminated. For example, to recover during a two-term presidency from the DOD procurement holiday in the 1990s, DOD would need to increase annual production rates:

 From 578 to 941 for aircraft (63 percent)
 From 8 to 11 for ships and submarines (38 percent)
 From 1,039 to 1,994 for Army tracked combat vehicles (92 percent)

    This is the procurement legacy of the current administration - a legacy that may require two or more decades to overcome. If true, the President's latest defense budget request is indeed ''too little, too late.''

    The CHAIRMAN. How does your analysis differ from the assessment of the Congressional Budget Office and other experts? Why does your analysis offer such a starkly different view of the strategy-resource mismatch than other analyses?

    Dr. GOURÉ and Mr. RANNEY. (Unless otherwise stated, all budget figures in this answer are expressed in constant FY 2000 total obligational authority (TOA) dollars.)

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    We have found it very useful in developing defense budget forecasts and preparing affordability assessments to distinguish between the funding needed to support fully a postulated military force (the demand for funds) with the funding that will be available (the supply of funds) during the same period. We also believe it is useful to categorize budget forecasts and affordability assessments on the basis of whether or not they approach the subject from the demand-side, supply-side, or both. We employed both methods in the analysis presented in Averting the Defense Train Wreck In The New Millennium.

    In general and from the demand perspective, the budget forecast model, used to produce the budget forecasts presented and discussed in the CSIS-MSTI study, often produces long-range budget projections very different from those prepared by DOD, the military departments and others, which routinely and consistently underestimate future procurement budget demands. These underestimations occur because long-range procurement budget plans of DOD, the military services and others often are based on:

 Approved DOD acquisition programs only; they therefore represent a partial or incomplete estimate of budget demands. Replacement programs or modernization programs not currently approved or simply deferred because of lack of funds by DOD acquisition executives are considered to be nonexistent and consequently cost free now and in the future;

 Overly optimistic assumptions about total procurement costs, production volume, delivery schedule, production rate, and production unit cost for major defense programs;

 Unrealistic assumptions about the costs of acquiring additional technological capability or performance for new advanced weapon systems; and
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 An erroneous assumption that less visible procurement end-items do not experience increases in costs over time.

    In addition, some organizations and analysts prefer to based their projections and assessments entirely on supply-side measures. The $10–20 billion procurement budget shortfall estimate identified by former Secretary of Defense William J. Perry in his appearance before the Committee on February 8, 2000 and the $26 billion procurement budget shortfall estimate developed by the Center for Strategic and Budgetary Assessment (CSBA) are excellent current examples of supply-side budget analyses.

    In the case of the former secretary of defense, Dr. Perry arrived at his estimate by the following logic: The DOD procurement budget for FY 1989 ''was reasonable to the force we had then.'' After adjusting this amount by 30 percent to account for the 30 percent reduction in force levels that took place in the 1990s, this yields a procurement budget ''more like $70 billion,'' or $10 billion higher than the President's budget request for FY 2001. Dr. Perry arrived at the $80 billion estimate, or $20 billion budget shortfall, by applying the same rationale to the average spending level of the eight years of the Reagan build-up.

    In the case of CSBA, it disclosed in its February 7, 2000 background paper that DOD faces average overall annual budget shortfalls of $26 billion over the next five years (FY 2001–2005) and $50 billion over the next 20 years (FY 2001–2020) on the basis of a comparison between the current government long-range budget projection and a CSBA derived historical budget trend.

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    Dr. Perry and CSBA, in our view, have chosen to focus primarily on the supply of money (budget). Such assessments fell us more about the likely availability of money in the future for DOD procurement, and less about the costs of any postulated force, or more importantly the output (number and types) that can be produced from those future budget streams. Simply stated, the size of one's wallet does not tell us very much about the costs of stuff we wish to purchase, or how prices of stuff are changing and in which direction. Once we know the costs of stuff, however, the size of one's wallet will tell us how much we can afford and therefore the overall size, composition and technological quality of military force.

    The assessments offered by Dr. Perry and CSBA also did not provide any facts or analysis to support their individual claim that a simple extrapolation of past DOD budget trends into the future will result in budgets that ''fully support'' the QDR force. Without an analysis of the demand side of money (i.e. weapon systems costs) it is not clear how Dr. Perry or CSBA can conclude the QDR Force will be fully supported, or not.

    As an alternative to higher DOD procurement budget levels, Dr. Perry advocates that good DOD management, good relations with Congress, better and streamlined defense business operations, greater use of commercial practices in defense acquisition, and the establishment of a defense acquisition system centered on ''getting more unit equipment for every dollar spent'' will suffice. There is nothing new in this policy prescription.

    After eight years, the anticipated savings or productivity improvements suggested by Dr. Perry have simply not materialized in any significant manner in DOD. Yes, there have been defense success stories. But, they are isolated events and still few in number. They do not indicate or foretell of large-scale change in DOD management, business operations and practices, or most importantly defense costs. The problem, in our view, is defense procurement budgets levels are simply too low in relation to the size of the QDR force.
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    We enclose for the record as Appendix A a copy of our press release and written detailed reply sent to CSBA on February 22, 2000 about their criticism that the CSIS ''train wreck analysis'' is ''off track.''

    In terms of the question about Congressional Budget Office (CBO) assessment, CBO last year estimated, using a similar estimating technique, but we suspect different assumptions, DOD would need annual procurement budgets of $90 billion to maintain on a steady-state basis the QDR force. In comparison, we estimate, on a depreciation basis, DOD needs in FY 2001 a procurement budget of $121 billion.

    As we pointed out in our testimony, the $90 billion estimate, according to CBO testimony, ''assumes that DOD will keep its major weapons longer than it has in the past.'' In citing this figure, most people prefer not to disclose that the CBO senior analyst further stated, ''If DOD was unable to extend service lives as it plans, the (CBO) estimate would be much higher'' and therefore would be closer to, but probably still less than, our estimate of $121 billion in FY 2000.

    We observe that any estimate about the future procurement cost of any postulated military force is sensitive to the number and quality of the assumptions, changes in which could raise or lower that estimate. For each inventory item, four variables are critical to the estimation process:

 The inventory level to be maintained for each major DOD end-item

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 The expected service live of each major DOD end-item

 The future price of each major DOD end-item

 The future prices of minor DOD procurement accounts

    On the basis of the published CBO reports and written testimony, we have little information on which to reach specific conclusions about why the two procurement estimates are different except for the assumption about average age discussed earlier.

    As Mr. Ranney stated in his testimony, ''while it may be useful to understand better the differences between the CBO estimate and ours, it is really the gap between actual DOD procurement budgets and estimates of procurement budget needs prepared by us, CBO or others that merit serious attention and closer scrutiny by this Committee.''