[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 111-19]
SECURITY CHALLENGES ARISING FROM
THE GLOBAL FINANCIAL CRISIS
__________
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MARCH 11, 2009
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HOUSE COMMITTEE ON ARMED SERVICES
One Hundred Eleventh Congress
IKE SKELTON, Missouri, Chairman
JOHN SPRATT, South Carolina JOHN M. McHUGH, New York
SOLOMON P. ORTIZ, Texas ROSCOE G. BARTLETT, Maryland
GENE TAYLOR, Mississippi HOWARD P. ``BUCK'' McKEON,
NEIL ABERCROMBIE, Hawaii California
SILVESTRE REYES, Texas MAC THORNBERRY, Texas
VIC SNYDER, Arkansas WALTER B. JONES, North Carolina
ADAM SMITH, Washington W. TODD AKIN, Missouri
LORETTA SANCHEZ, California J. RANDY FORBES, Virginia
MIKE McINTYRE, North Carolina JEFF MILLER, Florida
ELLEN O. TAUSCHER, California JOE WILSON, South Carolina
ROBERT A. BRADY, Pennsylvania FRANK A. LoBIONDO, New Jersey
ROBERT ANDREWS, New Jersey ROB BISHOP, Utah
SUSAN A. DAVIS, California MICHAEL TURNER, Ohio
JAMES R. LANGEVIN, Rhode Island JOHN KLINE, Minnesota
RICK LARSEN, Washington MIKE ROGERS, Alabama
JIM COOPER, Tennessee TRENT FRANKS, Arizona
JIM MARSHALL, Georgia BILL SHUSTER, Pennsylvania
MADELEINE Z. BORDALLO, Guam CATHY McMORRIS RODGERS, Washington
BRAD ELLSWORTH, Indiana K. MICHAEL CONAWAY, Texas
PATRICK J. MURPHY, Pennsylvania DOUG LAMBORN, Colorado
HANK JOHNSON, Georgia ROB WITTMAN, Virginia
CAROL SHEA-PORTER, New Hampshire MARY FALLIN, Oklahoma
JOE COURTNEY, Connecticut DUNCAN HUNTER, California
DAVID LOEBSACK, Iowa JOHN C. FLEMING, Louisiana
JOE SESTAK, Pennsylvania MIKE COFFMAN, Colorado
GABRIELLE GIFFORDS, Arizona THOMAS J. ROONEY, Florida
NIKI TSONGAS, Massachusetts
GLENN NYE, Virginia
CHELLIE PINGREE, Maine
LARRY KISSELL, North Carolina
MARTIN HEINRICH, New Mexico
FRANK M. KRATOVIL, Jr., Maryland
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
Erin C. Conaton, Staff Director
Ann Miles, Professional Staff Member
Roger Zakheim, Professional Staff Member
Caterina Dutto, Staff Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2009
Page
Hearing:
Wednesday, March 11, 2009, Security Challenges Arising from the
Global Financial Crisis........................................ 1
Appendix:
Wednesday, March 11, 2009........................................ 41
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WEDNESDAY, MARCH 11, 2009
SECURITY CHALLENGES ARISING FROM THE GLOBAL FINANCIAL CRISIS
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
McHugh, Hon. John M., a Representative from New York, Ranking
Member, Committee on Armed Services............................ 2
Skelton, Hon. Ike, a Representative from Missouri, Chairman,
Committee on Armed Services.................................... 1
WITNESSES
Cooper, Richard N., Professor of International Economics, Harvard
University, and Former Chairman, National Intelligence Council
and the Federal Reserve Bank of Boston......................... 7
Haass, Richard N., President, Council on Foreign Relations....... 4
Rothkopf, David, Visiting Scholar, Carnegie Endowment for
International Peace............................................ 13
Zakheim, Dov S., Former Under Secretary of Defense (Comptroller). 9
APPENDIX
Prepared Statements:
Cooper, Richard N............................................ 51
Haass, Richard N............................................. 47
McHugh, Hon. John M.......................................... 45
Rothkopf, David.............................................. 67
Zakheim, Dov S............................................... 55
Documents Submitted for the Record:
Annual Threat Assessment of the Intelligence Community for
the House Permanent Select Committee on Intelligence by
Adm. Dennis C. Blair....................................... 87
Witness Responses to Questions Asked During the Hearing:
[There were no Questions submitted during the hearing.]
Questions Submitted by Members Post Hearing:
[There were no Questions submitted post hearing.]
SECURITY CHALLENGES ARISING FROM THE GLOBAL FINANCIAL CRISIS
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House of Representatives,
Committee on Armed Services,
Washington, DC, Wednesday, March 11, 2009.
The committee met, pursuant to call, at 10:03 a.m., in room
2118, Rayburn House Office Building, Hon. Ike Skelton (chairman
of the committee) presiding.
OPENING STATEMENT OF HON. IKE SKELTON, A REPRESENTATIVE FROM
MISSOURI, CHAIRMAN, COMMITTEE ON ARMED SERVICES
The Chairman. Good morning.
Our committee meets today to hear from a very distinguished
panel of experts about security challenges arising from the
global financial crisis.
November 2008, our committee initially set out to hold a
hearing on this topic, but for a variety of reasons, we were
not able to make the schedule work. Consider briefly what has
happened in the intervening months.
The U.S. financial crisis has widened into a global
economic crisis. Our unemployment rate increased from 6.8
percent in November to 8.1 in February. The governments of
Iceland and Latvia have fallen as a result of the crisis and
others are likely to follow. Three of our most important
partners in the Muslim world--Turkey, Indonesia, Pakistan--all
face acute balance of payment crises. And the Director of
National Intelligence (DNI), Admiral Dennis Blair, has
concluded that the crisis represents the single greatest threat
to our national security.
[The information referred to can be found in the Appendix
on page 87.]
The Chairman. In short, we face a world that has been
suddenly transformed and not for the better.
Students of history know that hyperinflation in Germany was
a significant factor in the rise of Adolf Hitler. The economic
decay of the Soviet Union led to the regime change across
Eastern Europe. So we know that economic crises can have
consequences of national security of the highest order.
Here in the United States, our economic strength has been
the foundation of our national power and our national security.
It is reasonable to assume that economics play no less
important a role in the fate of many other nations. At a
minimum, the global financial crisis will exacerbate an already
growing set of political and economic challenges facing the
world.
In country after country, the crisis is increasing citizen
discontent and anger toward their leaders and providing an
excuse for authoritarian regimes to consolidate their power. It
is causing emerging nations to question the Western model of
market capitalism. It heightens the always ongoing tug-of-war
over budgetary resources and international assistance at a time
when millions are being pushed into poverty. It distracts and
strains our allies, generates conditions that could provide
fodder for terrorism. Financial turmoil can loosen the fragile
hold that many countries have on law and order and increase the
number and size of ungoverned spaces.
Perhaps most serious at a time when United States
leadership is sorely needed, our international credibility is
at an unprecedented low.
In my view, our response to these challenges must be to
restore our economy, maintain and enhance our key instruments
of national power, including the Department of Defense, and
take an approach with the world that reestablishes our
credibility and claim to world leadership.
Let me be clear, in today's world a strong national defense
is not a luxury. It is an imperative. I will be interested to
hear our witnesses' views on the likely demand of our national
defense capabilities in the current environment.
Let me pause for a moment. And I see in the audience
friends we met yesterday, parliamentarians from the country of
Pakistan. And we hope you get a lot out of our hearing.
And why don't you stand so we can--would you, please? Our
Pakistan parliamentarians.
We welcome you and hope you have an excellent stay here in
our Nation's capital.
Let me briefly introduce today's witnesses before turning
to my friend, my colleague John McHugh, for opening remarks.
Today, we have with us Dr. Richard Haass, President of the
Council on Foreign Relations and former Director of Policy
Planning for the State Department; Dr. Richard Cooper,
Professor of International Economics at Harvard University,
former Chairman of the National Intelligence Council and former
Chairman of the Federal Reserve Bank of Boston; Dr. Dov
Zakheim, whom I call the real Dov Zakheim--his son is one of
our excellent members of our staff; former Under Secretary of
Defense and Chief Financial Officer for the Department of
Defense--in essence, the Comptroller thereof; David Rothkopf,
visiting scholar at the Carnegie Endowment for International
Peace and former Acting Under Secretary of Commerce for
International Trade.
Gentlemen, we welcome you all. We look forward to your
testimony and your insights on today's topic.
So now I recognize my colleague, the gentleman from New
York, John McHugh.
STATEMENT OF HON. JOHN M. MCHUGH, A REPRESENTATIVE FROM NEW
YORK, RANKING MEMBER, COMMITTEE ON ARMED SERVICES
Mr. McHugh. Thank you, Mr. Chairman. Pardon me.
Let me begin by adding my words of welcome to our
distinguished panelists--some are welcomed back, actually,
being no stranger to this full committee. We deeply appreciate
your contributions, that we are looking forward to hearing you
make today.
Also, Mr. Chairman, I want to add my words of greeting and
deepest hellos again to our Pakistani counterparts. It was a
pleasure, as you and I shared amongst other Members yesterday
to have some lunch with these real champions of democracy. And
it is inspirational for--at least for me; I will speak on my
own behalf--to have the chance to see the struggles and the
courage and the fight for a nation that these good folks
represent. And we are honored by their presence.
Mr. Chairman, I would ask that my statement be entered in
its entirety in the record; and I would note, as always, you--
--
The Chairman. Without objection.
Mr. McHugh [continuing]. You covered much of the waterfront
with respect to the comments I wanted to make. But let me just
say that I certainly join you in your assessment of the
seriousness of this topic today as a national security concern.
You mentioned. As I was prepared to, the DNI, Director
Blair's comments with respect to the importance of this
challenge to our near-term security. And clearly, again as you
noted, Mr. Chairman, we read the newspaper, we listen to the
news, the data tells us--whether through unemployment insurance
or unemployment rates and the fall of the stock market and
other indexes--the very outward and discernible aspects of this
challenge.
But I would suggest the national security implications of
this issue were far less overt, and like you, I am looking
forward to hearing our witnesses develop further DNI Blair's
comments. And perhaps they could discuss with us today other
ways in which the economic crisis will impact upon our
security.
History has proven to us, it seems to me, time and time
again that instability often follows financial crisis. The
intelligence community rightly raises concerns over the
security of our friends, our allies. And the crisis also
invites opportunism by rogue states and terrorist
organizations, as you noted, Mr. Chairman.
So the question I would also like our witnesses to address
today is, what do we do with this intelligence. In other words,
what steps, if any, I suppose, should the Department take to
deal with the risks of this crisis?
My first concern, as it is so often, Mr. Chairman, is
defense spending. Though the top line defense numbers for
Fiscal Year 2010 show a four percent increase in spending, by
moving war costs out of the supplemental and into the base
budget, the reported growth is much less than that. And I would
note, as an aside, I support the end of supplementals and the
masking effects that they have on defense budgets. But we have
to be, I think, very clear and sober with respect to the
mathematical effects of that effort. And that is why I suspect,
in part, Secretary of Defense Robert Gates greeted the budget's
release by saying he would have to make, as he called them,
``tough choices.''
The story is even bleaker in future years when the real
cost of our baseline defense requirements will no longer--
appropriately, but no longer--be masked by supplemental
appropriations. Let's just take the growth of the military as
one example. Supplemental funding bought the Army and Marine
Corps over 50,000 active duty personnel from 2001 through 2008.
The price tag for that growth was roughly $6.8 billion in
additional basic defense costs. Future defense budgets will
have to absorb these costs, and that is why I am concerned what
impact flat-lining defense spending will have on national
security policy in the midst of this global financial
uncertainty.
Missile defense policy offers yet another good example.
Many are calling for deep cuts in these programs, and while I
may understand their perspective, I would argue that strategic
deterrence may be exactly what will be required to bolster our
allies and friends at this time. A weakened global economy is
unlikely to lead competitors and adversaries to increase their
strategic capability as some may hope. In fact, I think it can
be argued that the opposite may be more plausible.
Faced with fiscal constraints, will Iran double down on its
ballistic missile program? The question, it seems to me, merits
our most careful consideration.
In contrast to the 1990s, today we more fully understand
where our security challenges reside: The wars in Iraq;
Afghanistan; the fight against al Qaeda; Iranian and North
Korean nuclear weapons programs; the return of a more
aggressive Russia; the rise of China--all require not just
words but resources as well. Diplomacy, soft power, to be sure,
is a necessary condition, but that effort will ring hollow, in
my judgment, absent a strong commitment on defense. And it
seems to me this will be particularly true during the current
economic crisis.
Mr. Chairman, with that and the rest of my statement
entered into the record, I would once again welcome our
witnesses and say how anxious and happy I am to hear their
comments. And I would yield back to you for the rest of the
hearing.
The Chairman. I thank the gentleman.
[The prepared statement of Mr. McHugh can be found in the
Appendix on page 45.]
The Chairman. Let's begin. Once again, Dr. Haass, please.
STATEMENT OF RICHARD N. HAASS, PRESIDENT, COUNCIL ON FOREIGN
RELATIONS
Dr. Haass. Thank you, Mr. Chairman, for the opportunity to
testify before this committee. And let me applaud you and your
colleagues on holding these hearings.
Let me say at the outset, the economic crisis was not
inevitable. It was just a result of flawed policies and poor
decisions and questionable behavior. The problem lies with the
practice of capitalism, not the model.
But, nevertheless, I believe we need to face the reality
that the perception in many places is otherwise. And that one
consequence of the economic crisis is that market economies
have lost much of their luster, and the United States has lost
much of its credibility in this realm. And this only adds to
the importance that the U.S. economy get back on track, lest
the lasting casualty of the crisis be the perception of modern
capitalism itself.
The impact of this crisis will be varied and profound. Let
me begin with the developed world. Many governments, including
several in Central and Eastern Europe outside the Eurozone,
will require substantial loans. The economies of Japan, much of
Europe, the United States and Brazil are all contracting. World
economic growth will be anemic, if it manages to be positive,
which is increasingly unlikely. There will be fewer resources
available for defense and foreign assistance. That is obviously
the purview of this committee, but I would think the pressure
on defense resources will make it even more critical that our
priorities are determined and are clear.
Developing states around the world may appear to be better
off as their growth, on average, is down by roughly half from
previous years and it is still positive. But this growth is
measured from a low base, and the reduction in the growth in
the developing world has, in many cases, been dramatic. Their
exports are down as demand is down. In the developed world, aid
flows are reduced and investment flows are much reduced. Let me
single out a couple of countries. One is China. Absent renewed
robust economic growth, the chances are high that the
government will react to, among other things, the high
unemployment by clamping down somewhat more on the population,
lest economic frustration lead to meaningful political unrest.
Secondly, I would single out Russia. Russia is quite
characteristic of countries that are dependent on raw material
exports for much of their wealth. The economy there is
contracting sharply after a boom; and again, I believe we can
expect a greater assertion of political control domestically,
and I would not rule out the possibility that Russia's leaders
will look to overseas crises to divert attention.
Iran and Venezuela are two other countries that are heavily
reliant on energy exports. Obviously, their foreign policies
have been counterproductive from our perspective. The good news
here that it is possible that one or both of these countries
will pull in their horns at least for a while.
Iraq, yet another energy-producing country, here the
effects of the crisis are going to be undesirable. There is a
real danger that disorder in Iraq will increase as unemployment
there goes up, as prospects for sharing revenues goes down, and
as the ability of the central government to dispense cash also
goes down.
We have, as you noted, visitors from Pakistan. And I would
simply say that Pakistan's economic performance is down for
many reasons, but one is the reduction in foreign investment
and the reduction in Pakistan's exports. The problem is that
Pakistan has little margin for error. The possibility that it
could fail with all that that would mean for terrorism, for the
future of Afghanistan, and for nuclear stability is all too
real.
Also North Korea is another nuclear arms state whose
stability is worsened by the economic crisis; and I think there
are real questions about the ability of South Korea, in
particular, to intervene economically on a scale that will be
required to potentially stave off collapse.
Another serious issue of the global economic crisis affects
every country, which is protectionism. Some 17 of the 20
governments set to meet in London in early April have already
increased barriers to trade. Negotiated free-trade agreements,
as you know, with Colombia, Panama, and South Korea continue to
languish in the Congress. The President lacks trade promotion
authority essential to the negotiation of complex multilateral
trade accords. Prospects for a Doha global trade pact appear
remote. The volume of world trade is down for the first time in
decades.
I would simply say the costs of this are high--the economic
cost, but also the strategic cost, the subject of today's
hearing. Trade is a major source of political as well as
economic integration. I would suggest that one reason China
acts as responsibly as it does in the political realm is
because of its need to export; and it would--without this
economic integration--it would have less incentive, I believe,
to act responsibly.
Trade is also a principal engine of economic growth. A Doha
Round alone might generate something on the order of $500
billion in economic output to the world, one quarter of which
would be in the United States. To use the language of the day,
trade may be the purest form of noninflationary stimulus
available to the United States or any other government. Exports
are a source of millions of relatively high-paying jobs.
Imports can be anti-inflationary and can spur innovation.
What then should be done to limit the adverse strategic
effects of the economic crisis? Let me quickly suggest five
things the United States should do or consider doing.
First, I would suggest that the United States should do all
in its power to resist the growth in protectionism. This means
resisting buy American provisions in stimulus legislation. On
balance, more American jobs are likely to be sacrificed than
preserved.
I also believe we should resist ``lend national''
provisions that are springing up around the world, and instead,
we ought to look for ways to bring countries into an expanded
world trading system, in particular, bring them into the World
Trade Organization (WTO).
Secondly, we cannot allow recession to become this
country's energy policy. We must continue to look for ways to
decrease U.S. consumption of oil, imported or otherwise,
despite the temporarily lower prices.
Thirdly, the United States should work with other developed
countries and reserve-rich countries to increase the capacity
of the International Monetary Fund (IMF) to assist governments
in need of temporary loans. We cannot afford to have a rash of
essentially failed governments around the world.
Fourth, the aid budget should be protected to the extent
possible. It is needed on a large scale not just for
humanitarian reasons and not simply to build human capital, but
also to substitute for trade, to substitute for investment
flows. Again, absent aid, we are likely to see a larger number
of failing or failed states which will give, among other
things, terrorist groups, drug cartels, and the like greater
room for operation.
Fifth, the upcoming Group of 20 (G-20) summit in London is
an important opportunity to address some of the issues I
mentioned. Europe and Japan, in particular, should be pushed to
take steps to stimulate their economies, but guidelines also
need to be adopted so that stimulus programs do not become
mechanisms for unwarranted subsidies and ``buy national''
provisions that are simply protectionism by another name.
The London summit is also an opportunity to increase IMF
capacity to make loans, to generate commitments to making aid
available to developing countries, and to agree on at least
some regulatory principles for national banking and financial
systems.
That said, I don't think we ought to get too ambitious. We
are not going to have the opportunity in London to remake the
architecture of the international economy, to solve the
problems of countries that run chronic balance-of-payments
surpluses, or to revamp the system of exchange rates.
Let me close, Mr. Chairman, with one final thought. Much of
this hearing is focused on the question of the consequences of
the economic crisis for global security. But developments in
the political world can and will have an effect on the global
economy. In short, things can go in the other direction as
well.
Just imagine for a second the economic consequences of,
say, a Taiwan crisis; or fighting between India and Pakistan;
or an armed confrontation between the United States and/or
Israel and Iran over Iran's nuclear ambitions. And I would
single out this last one. This last possibility of an Iran
crisis is the most worrying geopolitical possibility, I would
think, in the near term. And it underscores the importance of
trying to negotiate limits on Iran's enrichment program lest
the United States and the world be confronted with the unsavory
option of either living with an Iranian near or actual nuclear
weapons capability or mounting a preventive military strike
that, whatever it accomplishes, would be sure to trigger a
wider crisis that would lead to energy prices several times
their current level.
In short, again, it is right that you are addressing the
economic crisis. But it is also important, I think, at the same
time to think about developments in the traditional national
security realm, either in their own right or, again, how they
can affect the trajectory of our efforts to get out of this
economic crisis and restore economic growth.
Thank you. And I look forward to your questions and to
hearing the testimony of my extraordinarily able colleagues.
The Chairman. Dr. Haass, thank you.
[The prepared statement of Dr. Haass can be found in the
Appendix on page 47.]
The Chairman. Now we turn to Dr. Cooper. Thank you so much
for being with us, Doctor.
STATEMENT OF RICHARD N. COOPER, PROFESSOR OF INTERNATIONAL
ECONOMICS, HARVARD UNIVERSITY, AND FORMER CHAIRMAN, NATIONAL
INTELLIGENCE COUNCIL AND THE FEDERAL RESERVE BANK OF BOSTON
Dr. Cooper. Thank you, Mr. Chairman, for having me here.
I would like to start by noting that during the----
The Chairman. Doctor, you will have to speak very closely
into that microphone. The acoustics in here are not very good
on this end. So as close as you can get, we would appreciate
it.
Dr. Cooper. I would just like to recall that the period
2002 to 2007 was an extraordinary period for the world economy,
arguably the best half-decade in history. Growth was high and
widespread, inflation was low in most countries, and this
exceptional performance before the recent crisis may have
created unsustainable expectations about the future,
particularly in young adults who do not recall earlier, less
buoyant periods of economic activity.
Now, the impact of the current global recession on U.S.
national security--I interpret it broadly--is extremely
complex. There are pluses and minuses. Let me start with a few
of the pluses.
It will be easier to recruit and retain desired persons for
the U.S. armed services at unemployment rates of 8 to 10
percent than at unemployment rates of 4 to 5 percent, with
lower signing bonuses.
Second, one year ago, a major source of anxiety in many
countries around the world was the rapid rise and continuing
rise of food prices and of oil prices insofar as it affects
ordinary urban dwellers. With the slowdown in the world
economy, food prices are now way down, not compared with six
years ago, but compared with one, two, and three years ago; and
this is a source of major relief to many countries in the world
who will benefit. The World Bank estimates that over half of
developing countries will benefit from the lower food prices.
Third, the oil revenues of all oil exporting countries,
again, while higher than they were a decade ago, have declined
sharply from the elevated levels of 2007 and early 2008. And
this includes, in particular, the revenues of Russia, Iran, and
Venezuela, each of which in different ways has posed problems
for the United States. All three countries have become fiscally
undisciplined, and all will have to cut their expenditures
sharply in view of their declines in revenue unless they are
willing to countenance a sharp increase in domestic inflation,
which would increase domestic disaffection with their
respective governments.
The decline in oil prices is directly linked to the
slowdown of world economic activity. So in this respect, the
slowdown can be said to benefit U.S. national security.
Concretely, Iran will have to balance more carefully its
financial and material support for outfits like Hezbollah
against pressing requirements for domestic expenditure. So
there are some pluses, but there are also some serious
negatives.
The recession implies a decline in demand and particularly
a demand for labor-intensive products made in many developing
countries. World trade is likely to fall for the first time in
a quarter century this year and more deeply than it fell since
the 1930s. And this contrasts with an annual growth in trade
volume in excess of seven percent over the last several years.
Thus, a major source of new jobs, pulling people from the
countryside into urban areas in many countries will disappear
and perhaps go into reverse. There will be disappointed
migrants and millions of workers laid off.
For example, it is said that in China already 20 million
migrants have lost their jobs. These are internal migrants
mainly in low-skilled manufacturing and in construction, both
of which have declined sharply. And, in addition, several
million newly graduated students will have difficulty finding
jobs in the current economic environment.
The Chinese authorities are greatly concerned about the
eruption of social unrest and have already taken a number of
steps to head it off, for example, by providing loans for self-
employment by new college students and by improving life in the
rural areas.
It is worth noting that in the oil exporting countries of
the Persian Gulf, the impact of the decline in new jobs will
fall mainly on foreigners, rather than on residents, since most
of the work in the private sector in those countries and much
of it in the public sector is performed by temporary migrants
from other countries.
Now the recruiting ground for terrorists and for criminal
gangs is typically among idled, disaffected, alienated young
men. They are not typically from among the poorest people of
the world, but from people that, by world standards, would be
considered ``lower middle class,'' if one can use that
categorization. The recession will increase the numbers of such
people, but probably not massively unless the recession becomes
much worse than is now generally expected.
Some countries are more vulnerable than others. Pakistan
has already been mentioned. Large numbers of Pakistanis work in
the Gulf Area. Some may lose their jobs, returning to Pakistan
and depriving that country of their extensive remittances.
The most important effect of the financial crisis and the
subsequent recession may be the least tangible: a serious,
worldwide erosion of confidence in American competence, a
confidence that was previously carried, almost a sense of
invincibility. The rest of the world typically placed more
confidence in American competence than Americans deserved, as
most Americans knew better. But the events of the last six
years have brought American competence under severe doubt,
starting with the post-combat phase of the war in Iraq, which
the United States is generally, around the world, viewed as
having bungled.
This, was reinforced by the perceived debacle over the
handling of Hurricane Katrina; and now the subprime mortgage
crisis at the heart of the seemingly invincible American
financial system has led to a wider financial crisis and, now,
a global recession, and that further undermines confidence in
American competence. This crisis clearly started in the United
States, not in some emerging market or, as in 1992, in Europe.
This loss of a perception of invincibility may embolden
existing hostile groups to try, through some dramatic act, to
bring the system of American capitalism, now vulnerable,
crashing down for good. And I think that is probably the most
serious immediate threat to come out of the current financial
crisis.
Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
[The prepared statement of Dr. Cooper can be found in the
Appendix on page 51.]
The Chairman. Now our old friend, Dr. Dov Zakheim.
Dr. Zakheim.
STATEMENT OF DOV S. ZAKHEIM, FORMER UNDER SECRETARY OF DEFENSE
(COMPTROLLER)
Dr. Zakheim. Chairman, I hope I am not that old. But thank
you. And thank you, Mr. McHugh. It is so good to be back in
front of this committee and actually appear with such
distinguished colleagues.
The Chairman. Excuse me, the witness is going to have to
really just talk right into it.
Dr. Zakheim. Can you hear me better now, sir?
The Chairman. That is a lot better. Thank you.
Dr. Zakheim. All right. I will start the clock over. It is
a pleasure to be here.
Thank you, Mr. Chairman, and thank you for your kind words.
And, Mr. McHugh, it is good to be back again before the
committee, especially with such a distinguished panel of
experts.
Like you, I am deeply concerned that the financial and
economic crisis that has affected our country in particular and
the international community generally poses a major threat to
American national security interests. That threat is likely to
manifest itself in a number of distinct ways.
First, it is going to create major pressures, already has,
on the defense budget, most notably the acquisition--that is
procurement in Research and Development (R&D) accounts;
Second, it is likely to result in a further contraction of
defense spending and, therefore, operations, as well, and
modernization, on the part of key allies and friends;
Third, it could prompt nations that are ambivalent about
their relationship with America, most notably China and Russia,
to act in a way that is deleterious to our own American
interests;
Fourth, it could prompt even more hostile behavior on the
part of nations such as Iran that already don't really like us
at all; and
Fifth, it could further destabilize states that are already
vulnerable to internal unrest.
Finally, it could spur further international criminal
behavior that could undermine internal American stability. I
have addressed each of my--each of these concerns--in my
written testimony, which I request be inserted in the record.
For now, I want to concentrate on the impact of the
economic crisis on the defense budget and, as time permits, to
add a few remarks about the implications of the crisis for
other states.
The defense budget is already under pressure as a result of
this crisis. Real growth in defense spending, if the
supplemental is included, is about 1.4 percent because next
year's supplemental is lower than the plan total of
supplemental expenditures in fiscal year 2009. These figures
represent a sharp drop in the growth of annual defense spending
over the past eight years, which averaged 4.3 percent in real
terms.
The lower rate of defense budget growth will manifest
itself most sharply in the acquisition accounts--procurement
and R&D. It has been by means of spending funds from these
accounts that America has been able to assure itself of long-
term military superiority regardless of the capabilities of a
potential foe. When these accounts were assaulted, as they were
in the late 1970s, not only did our leading adversary, the
Soviet Union, become far more reckless, invading Afghanistan;
but others, like Iran, also exploited what they perceived to be
American weakness and introversion. If we go through another
such reduction, can we say with confidence that in one or two
decades' time no powerful adversary will act upon the
perception of American weakness and threaten one of our vital
interests?
It is a truism that since World War II virtually every war
we have fought was unforeseen. It is equally true that we have
consistently structured our future force posture on the basis
of a war that we had recently fought or were still fighting.
I worry that we are falling into the same trap now. The
result could well be, as in Korea or Iraq, many years of
bloodshed and lost treasure until we righted ourselves; or as
in Vietnam, outright failure. The opportunity cost of
reductions in planned acquisition budgets are, therefore,
exceedingly high and, if not reversed, will far outweigh any
supposed short-term benefits from budget savings.
Cuts in procurement, in particular, will have more
immediate repercussions as well. They are going to result in
the loss of jobs, in particular for skilled blue collar
workers, engineers, and physicists--the very people who earn
far less than $250,000 a year, and at whom the Administration
is targeting its recovery plan.
Moreover, it is most likely that as jobs dry up, firms will
apply the traditional ``last in, first out'' principle; in
other words, those who have benefited from the most up-to-date
education and training will be lost to the nation's vital
defense industrial base. And it is ironic that even as our
young engineers will find themselves unable to contribute to
our national security, the United States will continue to train
foreign students, such as those from China, in the engineering
and hard sciences, enabling them to go back to their countries
and help their countries modernize their military.
Members of the committee might also consider that the
impact of a flattening of acquisition spending will be unevenly
distributed around this country. Those states with major
defense industrial activities, including hard-hit areas in
Michigan, the Northeast and the South will suffer more than
other parts of the country. This couldn't be what the
Administration intends as it pours hundreds of billions of
dollars into job creation programs.
Finally, because the Administration is ratcheting up the
national debt so severely, once the economic turnaround does
occur and there is a growing demand for dollars and a resulting
rise in interest rates on government paper, the cost of
servicing that debt will rise dramatically. Budget deficits
will increase sharply as a result, and the government will be
forced to cut back on discretionary programs.
Well defense accounts for more than half of the entire U.S.
discretionary budget and has been increasing its percentage of
discretionary spending in the past eight years. It is going to
be the most likely target for real cuts, which is not merely a
flattening of the growth rate in order to manage the ballooning
deficit, but actual cuts. The impact on our national security
spending will be profound and negative.
In her testimony before the House Budget Committee on
January 27th, Alice Rivlin, my former boss when I was at the
Congressional Budget Office (CBO), underlined the difference
between a short-term stimulus and what she called--and I am
quoting here--``a more permanent shift of resources into public
investment and future growth.'' She also said, again a quote,
``The first priority is an anti-recession package that can be
both enacted and spent quickly to create and preserve jobs in
the near-term and not add significantly to long-run deficits.''
The defense budget offers several ways to meet her
prescription. Vast spending, job-creating programs include:
reducing deferred maintenance; accelerating ship overhauls and
aircraft and ground vehicle rework; advanced procurement of
subsystems to make units like warships--such procurement would
preserve the second and third tier industrial base, which is
most vulnerable in the current downturn--and finally; expanding
and accelerating military construction (MILCON) and family
housing programs. Of these three elements, only the third is
part of the $787 billion stimulus package.
There is considerable merit in the $7.4 billion for
military construction and operations and maintenance (O&M) in
military facilities for family housing, military hospitals, and
the homeowner assistance program.
But the stimulus should and could go further. Additional
plans to support both rework and overhauls, as well as advanced
procurement, will create and sustain critical jobs in hard-hit
areas.
I don't want to overrun my time.
You have heard from my colleagues some of the difficulties
that apply to the allies who, for many years, have not spent as
much as they could and now are not in a position to spend as
much as even they would like. From countries that we clearly
have ambivalent relationships with--Russia, by the way, has
just announced, its deputy defense minister announced, that
regardless of the economic crisis, they are going to modernize
their strategic nuclear program and their anti-satellite
program.
Historically, we have seen you can have a basket-case
economy and still be a military threat. North Korea is an
example. And, by the way, when we talk about adversaries like
North Korea, remember that it doesn't really cost Iran that
much to support Hezbollah or to support Hamas, and for that
matter, its economy has been unbalanced since 1979 and it still
has developed a nuclear program.
So the restrictions that are imposed on us, given our goal,
are not the same as the constraints on potential adversaries--
and real adversaries--because their objectives are different
and because their approach is far more asymmetrical.
Let me finally say a word about unstable states or--Dr.
Richard Haass mentioned some of that. Remember also, Mexico may
be in that category, as well, and we need to worry very much
about what goes on there. Again, our contingencies have rarely
been foreseen, and there are a lot of unstable countries in
this world about which we have to worry.
So let me conclude by saying, the national security
implications of this crisis are both broad and profound. They
will affect our alliance relationships, our interactions with
major states whose intentions towards us remain unclear. They
will affect the behavior of unfriendly states and the stability
of weak and failing states. Most importantly, the economic
crisis could have a major and deleterious impact on our
national defense budgets and, therefore, our national security
posture, which would complicate and, in fact, exacerbate
relationships we have worldwide.
Nevertheless, the ultimate impact of the crisis on our
national security posture remains in our own hands. We can
forge ahead with defense modernization, we can protect the jobs
of our young engineers and skilled blue collar workers, we can
continue to signal our determination to fight for our values
and freedom.
The budget is policy and the policy choice is ours. Thank
you.
The Chairman. Thank you, Dr. Zakheim.
[The prepared statement of Dr. Zakheim can be found in the
Appendix on page 55.]
The Chairman. Mr. Rothkopf, please.
STATEMENT OF DAVID ROTHKOPF, VISITING SCHOLAR, CARNEGIE
ENDOWMENT FOR INTERNATIONAL PEACE
Mr. Rothkopf. Thank you, Mr. Chairman, Mr. McHugh.
The Chairman. Again, get very, very close. And turn it on.
Mr. Rothkopf. I will do both those things.
Thank you, Mr. Chairman, Mr. McHugh and members of the
committee, for inviting me here today.
It is worth looking, as we consider this issue, as we do
with many issues nowadays, back to September 11, 2001, and
remember that the reason that we were attacked on Wall Street
was that terrorist enemies considered that to be a symbol of
our national strength. Naturally, we followed after the
terrorists and we took our eye off of the source of that
natural strength in this country.
The damage has not just been done to our markets or our
401(k)s, but to our national security for many of the reasons
that we have outlined here today. We have been weakened, we
have been distracted, and at the same time, a host of new
problems have been created as a result of the damage done here.
I would argue that there are two kinds of core challenges
that we face from a national security perspective. The first of
these is what I might characterize as a great hollowing out of
the forces upon which we depend to stabilize. In other words,
we have heard about the forces that are likely to have us
spending less money on defense in the United States. Related to
those are forces that will distract us from attending to issues
associated with security. But our allies are going through the
same thing.
At the same time, there has been enormous crisis of
confidence with regard to the international institutions which
have been such a stabilizing force. Whether those institutions
are the European Union (EU), the International Monetary Fund
(IMF), the World Bank, the United Nations (UN) system, all of
those institutions are now being weakened for economic reasons
and being doubted because of this sweeping crisis of confidence
in our institutions.
At the same time, there is a rise of new threats, threats
that are associated with this crisis and come in a variety of
flavors. Let me very briefly outline some of those and then
come to a set of priorities and recommendations.
The first set of threats that we are going to face are what
might be characterized as the destabilizing internal effects of
the crisis in countries around the world. This is, countries
have rising unemployment, and the International Labor
Organization (ILO) estimates that in 2009 unemployment as a
result of this crisis worldwide may hit 50 million or may
exceed that.
This causes unrest. Dwindling budgets reduce the ability of
governments to deal with that unrest and then you have a kind
of domino effect as viable states become weak states, and weak
states become failed states; and we know what the creation of
failed states leads to both in terms of the creation of new
threats and in the creation of regions to harbor threatening
nonstate actors like terrorists.
Another set of issues are associated with destabilizing
bilateral or regional effects of the crisis. One--which Dr.
Zakheim touched upon a minute ago--which is a serious one for
us, is, if Mexico loses control of a number of states to narco
cartels, as it seems to be doing, and that creates further
unrest in the country, we have an immigration crisis in the
United States. This holds true elsewhere in the world as well.
Also, historically, opportunistic politicians have sought
to lash out at favored enemies across borders to distract from
domestic issues. We have seen that in Russia, whether it is in
the context of Georgia or in the context of the recent baiting
of Ukraine, which could grow much more dangerous.
And then there are, as I mentioned earlier, the
destabilizing global effects of the crisis. Richard Haass made
this point well, first, and it was repeated several times.
Protectionism is corrosive and undercuts the kind of
international relationships upon which we have historically
depended and, I might add, the kind of interrelationships upon
which we need to depend going forward simply because our
resources are going to be limited. We are going to need to find
ways to improve burden sharing if we have less capability
internally.
In terms of individual cases, in terms of the destabilizing
group, or countries about which we should be specifically
concerned, some have been mentioned here. Pakistan, Ukraine,
Turkey, Egypt, Iran, Russia, Venezuela, Argentina, Indonesia,
the Philippines, China, and North Korea are all countries where
internal forces associated with this crisis could produce
either a backlash internally, political crisis internally, or
crises that spill across borders.
In the issues between nations, I mentioned Russia; and in
the interest of time I will skip forward, and we can come back
to that or you can review it in the remarks that are in the
record.
On the risks on a global scale, I would say that we are at
a moment where virtually every international institution we
have either is facing renovation or requiring reinvention. The
IMF, the World Bank, the WTO, the nuclear nonproliferation
regime, we are going to have to create a new institution with
regard to global climate issues; and the United Nations (UN)
also comes into question. This could be a moment for
reimagining the international system, and I agree with Richard,
it is not all going to be fixed on April 2nd. But over the
course of the next several years, one of the legacies of this
Congress and this Administration could be to reinvent that
system.
At the same time, there is a very real threat that concerns
about budgets, an inward turn on the part of political leaders,
and tensions across borders as a result of these things could
lead to further weakening of those institutions, which will
take away the ability that we might have to share burdens and
to resolve problems before they become crises. This is a
legitimate threat.
Now, very quickly, let me go to a prioritization of how you
might see these threats and the response to them because
clearly one of the big issues that you face as a committee and
that the government faces is a series of asset allocation
decisions because we have limited assets.
The number one issue here, if we are going to address the
national security issues caused by this crisis, is to address
the economic and political constraints placed on the United
States of America, to address our economic crisis here and also
to maintain a forward-looking and -leaning political stance
internationally.
Another of the threats--the remaining set of threats that I
think need to be prioritized would include the economic and
political constraints placed on the European Union (EU), China,
and other potentially stabilizing actors; the crisis of
confidence in institutions worldwide and the threats to the
international system; the exacerbation of critical threats
associated with proliferation of weapons of mass destruction--
failed states become conduits for networks of nonstate actors;
this can make that problem a lot more difficult to deal with--
the consequences of protracted crisis for the world's weakest
states and the threats to weaken weakened states directly,
impacting U.S. national interests--of which Mexico, I think, is
a good example. Haiti is another example in this neighborhood.
As a consequence of this system--or this series of
challenges that we face, we might want to prioritize our
recommendations for response as follows:
We need to be strategic about marshaling and maintaining
U.S. resources. This includes fiscal restraint and restoring
thought to fiscal restraint. Being indebted to overseas nations
weakens us; we lose leverage internationally. We are going in
the wrong direction on that.
We also need to rethink defense budgeting. Dr. Zakheim has
talked about this, and I will not.
Maximizing the means of leveraging U.S. power, which means
maintaining critical institutions and alliances is going to be
key, given the restraints on us.
Leading a coordinated proactive global effort to reduce or
eliminate or contain threats, beginning with economic threats,
is going to be another priority.
Maintaining a credible deterrent against bad actors. We are
going to be tested. We are already being tested. You have this
incident with the U.S. ship off the coast of China. You have
had statements by Iran about their nuclear program. You have
had statements by the Russian Government that are somewhat
provocative. This continues around the world.
If we seem to be back on our heels, if we seem to be
reluctant to engage, if people perceive weakness as a
consequence of this crisis, they will take advantage of that
weakness.
We need to recognize the likelihood of crises emerging
beyond the Iraq and Afghanistan and Pakistan conflicts. That is
where our focus is now, but as has been indicated here, whether
it is in Mexico or whether it is in the Ukraine or whether it
is the central part of Africa in battles over vital resources,
we are going to have serious problems in other regions to which
we have not devoted attention, planning, or sufficient
resources.
Finally, we need to fight the temptation to turn inward,
and we need to remain focused on issues abroad. That is hard to
do, and there are mixed signals right now about how the United
States is going to deal with those impulses to turn inward and
balance them with the requirement that we stay focused on a
world that has grown considerably more dangerous as a
consequence of this crisis, which is nowhere near ending.
There are very likely to be another set of downturns later
this year, whether it is related to the consumer credit crisis
in the United States or the collapse of a number of emerging
economies around the world, that will destabilize markets
further.
I know that the stock market going up 378 points yesterday
left everybody here a little cheerier, but I wouldn't read too
much into that. The stock market is not linked to events in the
real world, as we have learned over the course of the past
several years.
So I am happy to answer your questions and get into any of
the issues over which I have skimmed. Thank you very much.
Mr. Ortiz. [presiding.] Thank you so much.
[The prepared statement of Mr. Rothkopf can be found in the
Appendix on page 67.]
Mr. Ortiz. This has been an eye opener to many of us. This
has been very, very interesting testimony; and it just goes to
prove that the world is in a hell of a shape right now,
economically.
But, you know, maybe from each of you could answer this
question. Do you believe the crisis will increase or reduce
security threats to the United States in the short term? And
what about when we look at the long-term aspects of it, maybe
you can touch a little bit on that.
Anybody that wants to go first, no problem.
Dr. Haass. It was that famous strategist, Yogi Berra, who
said that predictions are always difficult, particularly about
the future.
This is no exception, but I would suggest, on balance,
there is more downside than upside here. Yes, there are some
pockets of upside: the fact that the Iranians and the
Venezuelans are paying a price, given their budgeting and their
expectations of high oil prices and so forth.
So, yes, there are pockets of upside: the fact that certain
poor countries which are dependent upon imports of fuel and
food and other commodities, their import bills are reduced--
yes, another upside.
But, on balance, this will hurt us and others more than it
will help us.
It will increase the number of challenges in several ways.
One is, just objectively, it is going to create a larger number
of weaker and potentially failing and failed states. And as has
been pointed out, those are the potential places where
terrorists, criminals, those involved in the drug trade tend to
congregate. In a global world, what happens anywhere does not
stay there. So we can expect greater problems, if you will, a
messier--a messier world.
Second of all, we ourselves are likely to have fewer
resources to bring to bear. And by ``we,'' I mean not just the
United States, but the developed world. We are going to be
concerned with our own situations; but investment flows will go
down; there will be pressure on the resources available for
foreign assistance programs; there will be pressures on the
resources available for defense programs.
So if you add up a situation where challenges are likely to
increase and available resources are likely to be pressured,
again it reinforces, to me, the likely future of a somewhat
more disorderly world, overall.
Dr. Zakheim. I am inclined to agree. Problems are going to
be very much of a kind that are not really the sorts we are
used to. This always tends to be the problem in the end.
Let me give you an example of what I mean. The last couple
of years, China has been buying up American firms--spent over
$6 billion in 2008 doing that. Now the Chinese have moved their
holdings of U.S. Treasuries from longer-term to shorter-term.
It gives them a lot of flexibility. It allows them to hedge.
They are not going to bring the economy crashing down.
There is a much better way to do it: Keep buying up companies.
What does that mean when you have a country that is
ambivalent about us and that just announced it--at its Party
Congress--that it absolutely rejects moving to the kind of
system we have. It thinks our system is a failing system.
Buying up our companies, it is that sort of problem that we
have not fully thought through.
We have heard about a bunch of failing states. And nine
times out of ten, it is the one state that we didn't think
about that we wind up sending our troops into. How many people
thought about Somalia? How many people thought about
Afghanistan, for that matter?
So if we are not prepared and we are restraining our own
defense capabilities; and other countries will have new and
different strategies to cope with their problems, as we will
with ours--I suspect Western Europe will see coping with their
problems as cutting back even more on defense.
And how many of our major allies--I am not talking about
the minor ones--but how many of the major ones spend three
percent of their Gross Domestic Product (GDP) on defense? Not
very many at all. How many do you expect to spend as much as
they are spending now in the next 10 years? I wouldn't bet on
it. That puts a greater burden on us at the very time that we
are going to have to contract our capabilities somehow.
So the ramifications--the second-, the third-, the fourth-
order ramifications are such that we can't really predict
except to say, it doesn't look good.
I agree with Richard Haass.
Mr. Rothkopf. I think Richard has said that it is dangerous
to predict and that it doesn't look good, and Dov has said it
doesn't look good and it is dangerous to predict; and from that
I am going to derive a prediction, which is that it doesn't
look good.
You know, things are going to get worse before they get
better. And we have only seen the economic tsunami emerge. It
is going to hit political villages. And, you know, it takes a
lot of different ways--with deference to the delegation here
from Pakistan, you know, there is a saying in Pakistan that no
government in Pakistan has ever survived an IMF bailout.
You know, sometimes the solutions that we bring to
countries create political tensions that themselves create
problems.
So over the short term, we are going to have to deal with
the fact that governments in Eastern Europe and Central Europe
are insolvent; that the Government of Mexico is losing control
over key states within that country; that Africa which, you
know, was desperately poor and fighting for its survival
before, is going to get worse, and this is going to happen even
as we identify resources within that continent that are
important to us and are important to the Chinese. And it is
going to be linked, and other growing economies, and it is
going to be linked to resource conflict.
And I think that we also ought to consider, because your
question addressed the longer-term consequences of this, that
one of the great sources of American strength for as long as
any of us can remember was the easy availability of capital on
Wall Street--our ability, when we had an idea, to turn it into
an action. If the changes on Wall Street, which are
structural--they will be regulatory, but they will also be
attitudinal and cultural--produce a contraction there and less
of a willingness to lend for a protracted period of time, that
is going to weaken us in a fairly substantial way.
At the same time, when we come out on the other side of
this, it is quite likely that emerging economies will recover
faster than we do. Because of this crisis, less money is going
right now into oil production, which was a bottleneck before.
So what happens when demand goes up? The price of oil goes
right back up on the other side of this crisis, and oil-
producing nations start building up big reserves of cash that
they can use to buy political influence around the world.
And so there may be a shift in sort of geoeconomic power
that has got longer-term consequences to this and that we need
to be very aware of because that kind of economic power is the
foundation of our national strength.
Dr. Cooper. I also agree with Richard Haass's able summary.
It is hard to believe that with 50 million more unemployed
people in the world than last year that is good for U.S.
security.
I would suggest, however, that the main threats to U.S.
security will come via greater instability in other countries,
rather than through willful actions by the governments of other
countries. I think that is the main thing that we have to be
concerned about.
I do want to put a nuance on what Dov Zakheim said about
China, at least the report that I read did not say that the
Chinese rejected the American system. It said that the Chinese
rejected the American systems of contested elections and
democracy. The fact that they are investing in our companies
is, in a sense, a vote of confidence in our system. And I have
to say this is the wrong--I don't have to tell this group--
anyone who looks at campaign financing in this country has got
to think that there is something not quite right with the
American electoral system.
Zhu Rongji, no longer an official of China, was very clear
that he thought the financing of contested elections was at the
core of difficulty of the American political system. But that
is a much narrower statement than rejecting the American
system. The Chinese do not reject the American system. In fact,
they have been shaken by the financial crisis. But the fact
that they invest so much in the United States is a vote of
confidence.
Mr. Ortiz. Mr. Chairman, if I could just have a follow-up
question.
The Chairman. The gentleman is recognized for a follow-up.
Mr. Ortiz. You mentioned and this is a trend that we are
beginning to see, foreign countries coming in, buying
companies, doing joint ventures, what can we do to be prepared
in the long term. I mean, what are the security problems that
we might have, if any? Maybe you all can touch a little bit on
that?
Dr. Cooper. My general stance is one that is supportive of
foreigners buying American companies. By the way it is
completely reciprocal; Americans buy a lot of foreign
companies. One the trends in the last quarter century has been
tremendous amount of cross border investment, both ways,
Mexicans in the United States, American firms in Mexico, et
cetera, et cetera, et cetera. And I don't exclude the Chinese
in this process.
We do have legitimate concerns, I think, about two
dimensions, one is militarily sensitive technology. And we have
a process which is designed to screen out foreign investments
that might represent a source of leakage of that technology.
And as far as I can tell, the process works reasonably well.
The other concern I think is that foreign governments where
they own firms at least have the possibility of engaging in
non-commercial activity, leave aside the military as a separate
area, in non-commercial activity. We actually have not seen
anything of that, but it is a potential that I think we have to
keep our eye on because it is a possibility. This of course
goes particularly to state-owned firms of which there are many
in China, but I will remind you there are many state-owned
firms still in Europe also. So I think we have to have our
antennae out and from time to time make noises about the
illegitimacy of using commercial channels for political
objectives. Of course, the main guilty party on that score is
actually the United States worldwide. We use American firms to
execute American foreign policy.
Dr. Zakheim. I agree with Dick Cooper about foreign direct
investment, and the key really is how you protect against it
being exploited. By the way, China's investments haven't always
been good. They invested in Bear Stearns, the one year
anniversary of Bear Stearns' collapse. There are some holes in
the CFIUS system which is what we are talking about, the
Committee on Foreign Investment in the United States that we
need to all think about. One is, how do you handle joint
ventures? Second of all, you have got issues and I have only
heard about this anecdotally, but it is something perhaps this
committee might want to look at. If someone is affiliated with
some criminal organization and the criminal organization has
connections to a government, and we know that there are quite a
few places like that. The impact on a company is stultifying.
And after all is said and done, no chief executive officer
(CEO) wants to have somebody who is a member of his board who
is packing a pistol and they are terrified of this, and there
are ways to get around CFIUS rules and still be able to get
people into companies like that. And by definition, criminals
don't play fair. So there are some issues to really consider
about this.
I agree by the way that China has invested in our economic
system, and when I was speaking about our system, I meant our
political system, not our economic system. But we do have to
watch this carefully. And I think that there are some areas
where right now hedge funds, by the way, were another one, but
they are less of a problem right now. They could reemerge where
the system we now have doesn't cover every eventuality.
Mr. Rothkopf. We also need to be careful here of the risks
of that an overreaction to this can create. We have seen
examples in the past few years, whether it was the China
National Offshore Oil Corporation (CNOOC)/UNOCAL example, or
the Dubai Ports example, where it became politically expedient
to react against something which was not actually dangerous.
And you know over the course of the past few months, we have
seen the United States systematically abandon a whole set of
the market principles which we have been preaching to the world
for a number of decades. And the result has been that
opportunistic politicians around the world have started to say,
look, they threw it out the window, we don't have to play by
these rules.
If we start being protectionists on this front, we will
engender precisely the same kind of reaction overseas. It will
limit the ability of our companies to grow, it will limit our
ability to create jobs, it will limit our influence
internationally.
Mr. Ortiz. Thank you, Mr. Chairman.
The Chairman. Mr. McHugh.
Mr. McHugh. Mr. Chairman, I don't know if I have said this
in 17 years on this committee but I would commend all of the
written testimony to my colleagues, it is a fascinating
collection of very interesting and I think timely and,
important thoughts. I thank all four of you gentleman for
putting the time into compiling them.
Dr. Cooper, you said on the very last line of your written
as well as your spoken testimony, ``This loss of invincibility
may embolden existing hostile groups to try through some
dramatic act to bring the system of American capitalism now
vulnerable crashing down for good.''
That is a very profound and dramatic statement. And I
didn't want the politicians of Washington, D.C. filling out
your thoughts. Could you perhaps expand a bit on what type of
hostile groups you may be thinking about and what kind of
dramatic act you may have had in mind?
Dr. Cooper. Well, one need not speculate in this area, one
can just think of history. 9/11 was a dramatic act designed to
hit the heart of American capitalism. They also tried to hit
the White House, but the heart was the towers in New York. And
I can well imagine folks sitting in probably Pakistan now or
Somalia thinking the system is much more fragile than I, for
example, think it is, and one more dramatic act like that is
enough to bring it crashing to its knees.
And I think our intelligence system needs to have its
sensors doubly out to pick up any tendency of that. My own view
is that while the financial system has proven itself to be much
more fragile than most people thought a couple of years ago,
the fundamental economic system is actually very robust and we
are just going through a bad patch which we have been talking
about. But that optimistic view of mine may not be shared
universally around the world.
Mr. McHugh. So obviously, then, you see a potential link
between this crisis and particularly the world's view of the
United States role in this crisis and increased national
security challenges?
Dr. Cooper. That is correct, yes.
Mr. McHugh. Which brings me over to Dr. Zakheim's testimony
and he spoke of this, but it is also in his written testimony
when he talked about the 1970s when the acquisition accounts,
procurement and research and development accounts, of the armed
services were somewhat put into suspension. And he makes the
conclusion that as that happened, not only did our leading
adversary the Soviet Union become far more reckless, invading
Afghanistan, but others like Iran also exploited what they
perceived to be American weakness and introversion.
The question I have extrapolating both from Dr. Cooper's
statement and Dr. Zakheim's observation is that as I theorized
in my opening comments there is at least a calculation we need
to do as to the adventurism of others vis-a-vis our national
security as we consider our defense accounts. Is that a fair
statement?
Dr. Zakheim. I certainly would agree, on the question of
the impact of the acquisition in the 1970s, I was actually
chatting with a friend of mine who reminded me that in the
1970s, after the Vietnam war there were an awful lot of
engineers running around without jobs because they had been
laid off in the cutbacks.
And one of the sort of statements that a lot of people made
in those years was well, they can convert to the civilian
sector. And you may recall it didn't really happen. People
stopped taking engineering courses. People dropped out of
engineering and we felt the impact of that for a long time. In
fact, we may still be feeling the impact of that, look at our
math and science scores and look at the value of math and
science in this country. So it seems to me that if we move
ahead without taking this into account, there is almost like a
double-whammy. We hurt ourselves, the world sees we are hurting
ourselves. It then takes advantage of the fact that they
perceive that we are weaker and it becomes a very, very vicious
cycle.
Mr. McHugh. Any other comments from the other panelists?
No. Let me, if I may, Mr. Chairman, you know what, we have
taken a lot of time. Let me yield back and we have got a lot of
other very interesting colleagues here, and I look forward to
their comments as well. Thank you gentlemen.
The Chairman. Thank you very much. Let's turn to the
history books for a minute. What lessons can we derive from
past economic crises that we can apply now? Of course, the
immediate answer is Weimar Republic, open the door to a fellow
named Adolf Hitler and his followers.
Are there other lessons of history where crises brought on
authoritarian rule or severe problems akin thereto? Who is the
historian with you all?
Dr. Haass. We are probably all amateur historians here. I
would think when it comes to looking at history and its
relevance, we have to make sure we choose the right history. I
am not particularly concerned, sir, for the foreseeable future
about the rise of challenges to the United States on the scale
of Nazi Germany or imperial Japan. Another way of putting it, I
am not particularly concerned for the foreseeable future that
the economic crisis we are seeing will have that destabilizing
effect on great powers, or that sort of hyperaggressive,
hypernationalist foreign policy.
I would think that the historical parallels are much more
in the direction of middle-size and weaker states. And the
sorts of scenarios that I would think about that are relevant
we have seen in recent years are, say, the Somalias and the
Balkans where periods of extensive and deep economic hardship
wore down societies, created weak or failing states, massive
internal and then external refugee flows, led governments to
more populist approaches and so forth.
So it is less, again, that the United States is going to
face a China or Russia or anyone else on a massive scale akin
to the 20th century. But instead, it is much more consistent
with the disorderly future of medium- and small-size states,
either breaking down internally, which in a global era can
create all sorts of challenges to us given the nature of
globalization as a giant conveyer belt; or medium-size states
which given their access to weapons of mass destruction could
cause terrible local or even global possibilities.
And here, the most worrisome scenarios, again, I would
think, are breakdowns of authority in a place like Pakistan, an
Indo-Pakistani relationship that gets seriously off track. And
obviously, the challenges that are posed by countries such as
Iran and North Korea. North Korea can be a breakdown of
authority. Iran which is not a single, simple government; I can
imagine scenarios where its nuclear program could lead to a
conflict which again could lead to disruption of energy
supplies or conceivably even a situation where Iran would hand
off materials. So I think the parallels, if you will, are less
great-power 20th century parallels, more so some recent
parallels or even going back farther in time, 19th, 18th
century to situations where you had local pockets of
instability.
Mr. Rothkopf. Let me, if I may, just build on what Richard
said because I think the right way to look at this in the
context of history is also to note how it is different from
what has happened in the context of history. And what we have
got here is the first global economic crisis of the global era,
requiring a global response. And the jury is out about how well
we respond to that globally, combining with Richard's point
that we live in an era in which the threats are more likely to
come in weak states, and this is a crisis that is likely to
lead to a proliferation of weaker or failed states and those
two things taken together have a fairly profound consequence
that makes this different from the past.
The third is that while I agree with Richard's point that
this is not likely to produce the kind of immediate great power
conflict that you saw coming out of your Weimar analogy, you
are likely to see coming out of this a fairly significant shift
in the powers that we consider to be major powers in the world.
And we have already seen this as in this crisis we have moved
from deliberations from the G8 to G20. You have seen it in the
past 12 months as the BRIC countries, Brazil, Russia, India and
China, have actually gotten together on a regular basis
politically at the head of state level and at the foreign
minister level to coordinate their policies and try to assert
themselves as key players.
It is very likely that the world that emerges on the other
side of this will be a world that has a different array of
leading powers in it than the one we are accustomed to.
Dr. Zakheim. I take a slightly different tack. First of
all, I think it is fair to say that the crisis in the 1930s was
global. You had a lot of colonies in those days, but otherwise
it was global. But there are two medium-sized countries that I
think ought to make us pause and think. One is Mexico, medium-
size country, but of course, it is next door and that changes
everything.
So if oil prices turn around and go all the way up, that
might help, but I don't know what the relationship is between
when they go up and the problems they are having right now with
drug lords and the killings, Ciudad Juarez and everywhere else.
They have had a decline in manufacturing. People had started to
come back to Mexico which affects remittances. So that country
is in a very difficult situation, plus it is very sensitive
about us. We cannot just go in there and tell them what to do.
So this is a major challenge for us.
The other middle-sized country, and this goes to your
question about history, there was a country that went through a
revolution on the slogan of peace, land and bread. It was
called Russia in 1917. It was a middle-sized country, it was
not the world's leading power by any stretch of the
imagination. It was getting clobbered by the Germans actually
in World War I. And it did not become a threat to the United
States for 28 years. Between 1917 and 1945 they were no threat
to us, we recognized them in 1933 and we fought alongside them
for 4 years. So what might be a middle-size power today might
not be a middle-sized problem, it might be a major league
problem in 25 years' time. And which country that might be,
heaven only knows.
The Chairman. Thank you, any further comments?
Dr. Cooper. Mr. Chairman I don't know how serious you are
about historical analogies, and as Richard says, we are all
amateur historians, but I thought somebody, at least in the
historical context, should mention the French revolution.
France was in a serious economic crisis in the 1780s. It had a
revolution which started out being entirely domestic, but it
was very, very dramatic, and it very rapidly became a world
war. We don't call it a world war, but it actually was focused
in Europe, but there were battles all around the world between
France, Napoleonic France, and the other countries. But I would
emphasize the very strong differences today between our
situation and our understanding about how to manage
macroeconomic crises. Certainly then in the 18th century, but
even in the first half of the 20th century. Macroeconomics as a
subject did not exist in 1931. It was invented as a result of
the Great Depression. Our understanding is not perfect, but it
is much, much better than it was in former times.
The Chairman. I thank the gentleman. Mr. Bartlett.
Mr. Bartlett. Thank you very much.
Dr. Haass, our chairman's opening comment caused me to look
again at the caution that you give in your closing paragraph of
your written testimony. Enormous stimulus measures here at home
coupled with equally unprecedented increases in the current
account deficit and national debt make it all but certain that
down the road the United States will confront not just renewed
inflation, but quite possibly a dollar crisis as well.
I have been concerned, sir, that our profligate spending
will not be satisfied with borrowing, because the money just
won't be there to borrow. And so the Fed will simply print the
money. My wife and I went through Europe in 1973 and I seem to
remember that in Italy, the new Lire was worth 1,000 old Lire.
That means your $10 bill today is a penny in our new currency.
I would like each of you to tell us what you think the
possibility is that this kind of thing could happen in our
country. And if it does, what are the positives, and I can
think of one. The national debt as monetized will just
disappear, there may be no others. And what are the negatives?
What would this do?
Dr. Haass. I will say one of two things since you mentioned
my statement and then I will quickly defer to Richard Cooper,
who is one of this countries most distinguished economists. I
am not particularly worried about hyperinflation on the
historical scales you have mentioned. What I am worried about
is a situation where doubts gradually grow around the world
about the wisdom of continuing to accumulate massive holdings
of dollars.
And the United States obviously has and will continue to
have for decades a need to import large numbers of dollars in
order to finance our various deficits and our debt. At some
point, we may find ourselves with the need to raise interest
rates in order to persuade those who were holding dollars to
continue to send them our way.
The need to raise interest rates before we were fully out
of a recession would be a disastrous choice for the Fed or the
U.S. Government to have to make. Ideally, this would be
sequenced. We would find ourselves well on the road to
recovery, some inflation would kick in, and then we could
exercise the tools to deal with inflation that we are fairly
familiar with. Again, the nightmare is that we would have to
consider raising interest rates before recovery is underway,
and that is a truly unattractive choice which we want to avoid.
It is one of the reasons that I think we need to look very hard
at the content of stimulus packages to make sure what we are
doing is essential and gives us the stimulus we would like to
think that we obviously need. But secondly we need to look at
parts of our economy to openly reign in spending. I do not
believe there is any sustainable policy answer to avoid the
sort of situation you have been talking about without a serious
restructuring of our approach to entitlements. If we are going
to be serious about containing Federal spending, if we are
going to be serious about getting this budget of ours back on
track, regardless of what we feel we need to spend in the way
of stimulus, it has to involve above all Medicare and, to a
lesser extent, Social Security reform.
Dr. Zakheim. Again, I find myself in agreement with
Richard. I think one of the keys, and this goes to what Dick
Cooper just said about macroeconomics, is that everybody plays
the same game around the world. One of the great threats and
worries is that they won't. We won't play the game if people
don't listen to Dick and we close our trade doors. Everybody's
going to retaliate. It goes against everything that we set up
in 1945. That does not, in any way, conflict with watching how
people invest in us. On the contrary, it means if you have the
right safeguards, you can actually foster more investment. But
if we don't trade or don't foster investment, if the European
Union (EU) starts to crack up and there is talk about that,
then it becomes much more difficult to manage this globally,
and then you really start running into problems.
We are still the world's reserve currency, we are still the
most powerful economy. What we do is going to influence what
others do.
Dr. Cooper. I think, Mr. Bartlett, I don't know exactly
what you had in mind, but I think that the prospects of very
high inflation in the United States are remote. It is
absolutely true that the liability side of the Federal Reserve
System has gone up, more than doubled in the last six months.
And by traditional standards that might be thought to be
potentially very inflationary, but of course it went up because
we are not living in a traditional period of time. The demand
for highly reliable assets on the part of public has just
shifted way to the right. I mean it has gone way, way up. And
the Fed, I think, properly responded to that by increasing the
money supply. The Fed needs an exit strategy, I know the staff
of the Fed is working on an exit strategy as we return to
normal, the Fed has to work that back down again, but the
staffs of the Fed are thinking about that already. Although
unhappily we are not anywhere near close to that at the present
time.
So I think the prospect of, you mentioned Italy, of sort of
a 1,000 to 1 conversion for the United States any time in my
lifetime is remote in the extreme.
Now, on the question of global imbalances, I have written a
paper on that which is not especially for this committee, but
if you are interested, I can give it to the staff. But the
bottom line of that paper is I think these global imbalances
are entirely explicable in terms of two factors, one is
globalization of financial markets and the other is demographic
developments.
We are living through a demographic revolution. We don't
notice it because demography always moves slowly from year to
year. But Europe and East Asia both are in serious demographic
decline. And among the rich countries, the United States stands
out as an outlier. Our birth rates have declined but they
remain markedly higher than in other rich countries. And in
addition, we have immigration which we are still, I think, very
good at bringing people in and making their kids Americans.
On both counts, the U.S. stands out on demographic grounds.
When you work through the economics of those two things, what
do you get? Large surpluses in the rapidly aging societies,
Germany, Japan, China. And you get large deficits in the
secure, robust economies like the United States. Now, this was
all, of course, before September of 2008. Our deficit is going
to go way, way down this year. But my forecast is that it will
come back as the recovery takes place for these basic long-term
demographic reasons. By long-term, I don't mean forever, but
for another decade or so.
Mr. Rothkopf. We tend to be concerned about sudden dramatic
shifts because they make headlines and they make people
nervous. But I think long, slow shifts are also worth noting.
And it is almost impossible to imagine a circumstance in which
a country like the United States building debt at the rate that
the United States is building debt has a strong currency any
time soon. And I think that some inflation seems highly likely.
I think a weaker dollar for the foreseeable future seems highly
likely. And that then leads to a question, because this debate
or this question has come up in the press over the course of
the past couple months. And one of the common retorts is well,
we are the only reserve currency in the world, we are the only
port in the storm. Look at how people have come in here now.
That will always be the case.
Well, we have all lived long enough to know that things
that we have assumed would always be the case, whether it is
the gold standard, or that there would never be a common
currency in Europe, or that there would always be a Soviet
Union don't always remain the case. That doesn't mean that
suddenly the new, new Lire will become the reserve currency of
the world. In fact, I think the odds of that are pretty close
to zero. But it does mean that it is quite possible that the
dollar's traditional place in the vaults of central banks
around the world is likely to decline. And that is likely to
have quite an impact on our influence internationally.
The Chairman. I thank the gentleman. Dr. Snyder.
Dr. Snyder. Thank you, Mr. Chairman. All your written
testimony today and your statements I was reminded of, I
believe it was in November 2007, when Secretary Gates made his
speech at Kansas State in which our Secretary of Defense called
for dramatic increases in both numbers of personnel and in
dollars for the State Department and U.S. Agency for
International Development (USAID). His point being that we have
gotten too lopsided in the instruments of national power to
achieve the policy objectives that we want to.
Several of you discussed in your statements our defense
budget. It seems to me it would be it would more appropriate to
be discussing this in terms of a national security budget.
During this time of belt tightening, in which we all recognize
it is a time of figuring out where our priorities are, we need
to be sure that we are not going to continue the problems that
Dr. Gates was talking about which was to shortchange USAID and
the State Department to our detriment as a national power. So
any comments you might have on that aspect of looking at an
overall national security budget, not just a defense budget.
Separately, I met yesterday with our friends from Pakistan.
And one of the concerns they had was in their view some three
years ago or so there had been some promises made from this
country by the Bush Administration in terms of some development
dollars. They feel like those monies have not been forthcoming.
It seems like the world is pretty good about making promises at
national aid conferences and then not following through. Given
what is going on, it seems like this is even a better time for
us to make sure that we as a nation and we as a world community
do indeed follow through on what we say we are going to do with
regard to foreign aid and development.
Any comments you have on anything I said there until my
time runs out. I note the clock is not on, Mr. Chairman. I hate
to point that out, but it might be a good time to--thank you,
go ahead.
Dr. Haass. Let me just say one thing, protecting aid levels
is obviously going to be difficult given that it is
discretionary and those aspects of budgets are going to come
under pressure, though obviously where we can, particularly for
humanitarian reasons, I believe we should and to help some of
these states get through these difficult times. But I don't
believe we should or can have an aid-centric foreign policy,
either when it comes to the United States or others.
Far more valuable than aid flows is trade, if you really
want to help poor countries in Africa, allow them to export
into the United States. It creates more jobs and is much less
prone to corruption and far more efficient than any amount of
aid flows.
If you want to think about national security spending, I
agree we need to increase capacity particularly on the civilian
side for nation-building or state-building. Again, we should
not lose sight that probably the single most important thing we
can do to improve national security would be to reduce our
dependence on import oil and our use of oil. That would have a
tremendous--we don't think of it as the national security
budget, but if you take a national security writ-large point of
view--we have to get beyond, I think, spending levels, be it
Defense, State Department, foreign aid, what have you.
Trade and energy issues, again, we don't think of as
narrowly national security, but a greater openness on trade and
a reduced use of oil would probably be two things that, if you
will, are off-budget, that would probably do more to contribute
to national security over the next decade than any amount of
dollar to dollar spending we would do on aid or anything else.
Dr. Snyder. I will make a comment and move to other people.
Dr. Gates' comments in November 2007 remember was in the
context that we had been expanding trade and trade agreements
and things were going well economically. I think his point was
we still even in the face of robust, positive trade policy and
I have been a supporter, he still thinks it was important to
dramatically increase funding for USAID and the State
Department.
Dr. Zakheim. I certainly agree with what Mr. Gates said. I
think the Administration has made a good start by reorganizing
the National Security Council (NSC) to recognize that Treasury
and Energy and Commerce are all part of our national security
approach. And I think that is right. There is a huge imbalance
and it starts actually on Capitol Hill, not in any
Administration. The State Department has loads of authority and
Defense has loads of dollars. And when I was coordinator for
Afghanistan, I felt that restriction severely. There were all
kinds of things I wanted to do, I had the money to do it but I
had no authority to do it. This was back in 2003 and 2004, I
was the defense coordinator and Richard was the overall
coordinator. And as a result of that, things did not get done
at all, and I think we are paying the price right now.
There is another question though, and Richard mentioned it,
and that is state-building. And we really need to ask
ourselves, even with these capacities which we clearly have to
get in terms of the civilian side, how much of state-building
do we really want to do? It is not a matter of being
isolationists, it is a matter of looking at the record. Our
regard at state-building isn't exactly great. There are times
when we are forced to do it, I think in Afghanistan we were
absolutely forced to do it. But the record: Somalia; Haiti; you
can go back Haiti in the 1930s; Nicaragua; over and over again.
We flatten countries and then we rebuild them, that is fine,
but that is only Germany and Japan. And so we need to think
carefully about that before we commit resources, which, by the
way, right now on the civilian side, we don't have, and I agree
with you and Mr. Gates on that.
Mr. Rothkopf. I was the Haiti economic recovery coordinator
in the Clinton Administration, you can hold your applause. And
as a consequence of that experience I agree with Dov's
assessment that we don't have capability here yet. Most
frequently, the mission that the United States has been asked
to do since the Second World War has had an emergency economic
intervention component. Nobody wants to do it in the United
States Government. We don't have the ability to do that. And
there are a host of issues on the economic side that would
benefit from a look at whether we can do them better, whether
that is a Goldwater-Nichols on the civilian side of the U.S.
Government, which I think is a good idea, or other kinds of
restructuring.
But to go very briefly back to the response that Richard
offered, I agree with what he said. I think there is one area
that we have got to look at very, very closely in the very near
term, and that has to do with the replenishment or
recapitalization of international financial institutions. Given
our limited resources we are going to have to find ways to
leverage our investments up, while the IMF and World Bank and
the regional development banks are ill-constructed in some
respects and will need some possible reshuffling in terms of
their ownership structures, they are the only available
mechanisms to leverage up.
There are estimates right now that if things go bad $138
billion will be needed by the 49 poorest countries in the world
as a consequence of this, and it could go as high as a trillion
dollars. The World Bank is having a hard time raising $10
billion right now. So if we don't support that, we are inviting
deterioration.
Dr. Snyder. Thank you.
The Chairman. I thank the gentleman. Mr. Jones.
Mr. Jones. Thank you very much, I want to thank you and Mr.
McHugh and the gentlemen for being here today. This has been
very, very educational and also very helpful. I represent the
third district of North Carolina, home of Camp Lejeune Marine
base, the Outer Banks some of you might be familiar with.
The income of the people in my district, I think I am close
to it, the average income of a family of 3 or 4 is somewhere
around $38,000-$40,000, gross, not net. Frequently I get the
question of the fact that we are, and you touched on this many
times, this is a debtor Nation. We are a Nation that owes China
$800 billion and they buy financial notes and certainly they
don't want to see us fail. But when you look at history of the
great nations of the past, that this is just one example,
England, at one time, thought it could go into Iraq and make it
some type of a nation. They decided that wasn't worth the
effort.
Mr. Obama, and I wish him well, I am one of the Republicans
who wish him well, unlike some that feel the other way that are
on the radio, I wish him well because we need to rebuild
America. I understand he is saying that we are going to send
17,000 troops to Afghanistan. I know as a fact, most members of
this committee know as a fact that our military is worn out. I
won't say the military is broken, but it is worn out.
Does there come a time for a country, not to become an
isolationist but for a country to just say within itself, so to
speak, it wouldn't be within itself, but let me use that as a
word, that we cannot continue to police the world. We are
borrowing money every day, we are wearing out our military. And
yet I think some of these countries like NATO, they have not
stepped up as of today to help us in Afghanistan. They have not
done that.
Is it to the detriment for the future for a nation to say
within itself, its leadership, that we have got to have a
period of time to rebuild our self. Because every day that we
continue to borrow money from foreign governments to help other
countries, and I don't think we can become an isolationist, I
really do not. But there has to come a time that the percentage
of investment, in my humble opinion, has to be reduced because
we can't even fix our own streets. And the money that Mr.
Obama, the stimulus package, I hope it works, I didn't vote for
it, but I hope it works, but I will tell you that what I see
happening to this country concerns me more than what is
happening in other countries. Again, I don't want to be an
isolationist, but we need a time-out to fix America and stop
trying to police the world.
Mr. Chairman, that is my question.
Dr. Haass. Can I respectfully disagree with you, sir? We
may want to have a time-out from the world, but the world
doesn't grant times out. We can blow the whistle, but the world
won't stop playing to push the metaphor.
Mr. Jones. Mr. Haass, real quick. I want you to finish on
that. Why in the world won't North American Treaty Organization
(NATO) send its fair share? Why doesn't England, why don't
these other countries just join us in all these fights and in
taking care of the world?
Dr. Haass. I'll come back to the NATO issue in the second.
When we get involved in the world we do it not just as a
favor to them, but as a favor to ourselves. The reason that we
care about say Afghanistan's achieving some level of stability
is not necessarily as a favor to them or out of simply
humanitarian concerns, but we learned the hard way in 9/11 that
a lack of stability and a lack of central control in
Afghanistan could have repercussions for us here in the United
States that to me is a fact of globalization.
I think though where I don't disagree with you, we have to
set limits on what we do. We can't necessarily define success
in places like Afghanistan or Pakistan or Iraq as creating what
Bob Gates called a Valhalla or others would call a shining city
on a hill. Sometimes success has to be defined quite modestly
as simply the avoidance of failure or state collapse. We may
have to content ourselves with simply propping up to some
extent weak states to avoid state failure rather than trying to
create strong states which I think would take too much in the
way of resources.
It does argue for policies based upon training, state-
building and all of that so we don't have to do it all
ourselves. The question of what allies and others are willing
to do for us, I share your frustration, but my reading of
history and my sense of where these other countries are is we
are going to continue to be frustrated, that they are not going
to do all that they can and should. That is the nature of their
economy, it is more important. It is nature of their will and
their domestic politics. So at times we will have do more than
our share simply because it is in our interest to get it done.
Dr. Cooper. Mr. Chairman, once again, I agree with what
Richard has said. But what I want to add is it doesn't have to
be either or. We can do both and. We are a fabulously rich
country, both by our own historical standards, the standards of
my parents and my grandparents, for example, and by
international standards. And what most Americans don't
appreciate is, we have company in Japan, of all the rich
countries we are the most lightly taxed, by a long margin.
Switzerland which is hardly a country by normal standards, the
Swiss tax themselves more than we do. If we decide we want to
do something domestically, for heaven's sakes, let us do it and
let us pay for it through higher taxes. And that is where this
body becomes very important. We can do both.
Mr. Jones. Thank you, Mr. Chairman.
The Chairman. Thank you. Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman. I would like to thank
the panel for making a very persuasive case that we have to
strike a balance between reducing the possibility of strife in
the world by encouraging global growth, I think that point has
been made very, very well, and making sure that we are in
possession of adequate resources to make sure that when strife
occurs we can handle it. I think those are complementary, not
conflicting goals. I agree with Dr. Haass on that.
Dr. Zakheim, I want to explore with you the resource side
of the equation. And on page three of your testimony, you talk
about the defense budget being under pressure. I want to read
what you say. Real growth in defense spending excluding the
wartime supplemental is but 1.7 percent. If the supplemental is
included in the growth, the spending is some 1.4 percent. And
then you compare that to the 4.3 percent real growth of the
last eight years.
I am going to ask you in a bit about how you are accounting
for supplementals and whatnot. But if my back of the envelope
calculations is correct the annual difference between 1.4
percent real growth and 4.3 is just shy of 3 percent, 2.9
percent, which in terms of our present top line is about $15
billion a year. You are worried about that $15 billion delta
and so am I.
Isn't one of the places we should look to deal with that
delta, the waste in the procurement system, there is very
authoritative information that indicates that of the major
weapon systems recently acquired, they had $295 billion in cost
overruns. By my calculation that would buy us, what, 20 years'
worth of the delta that is there had we done that correctly. I
mean, what would you suggest to someone who has occupied the
Comptroller's position during that time. What would you suggest
as ways that we could fund that difference between what you
evidently think we need and what has been proposed by making
these procurement reforms?
Dr. Zakheim. Well, I agree with you that there is a lot of
spending in the acquisition accounts that probably could be
done a lot better. There are all sorts of panels, the Defense
Science Board has a panel right now that I am on that is
looking at that. Jack Gansler, who chairs that one, just
chaired a major one for the Army.
One of the difficulties we have is that any fixes we make
are not going to have real short-term impact. Part of problem,
and this comes out of the Gansler Commission Report is that our
acquisition corps, the people who actually do the contracting,
do the buying, are not as well trained as they used to be. And
the ones who really know what they are doing are older and
retiring. And the younger ones don't have the right experience
and the right training.
Mr. Andrews. I read that report and I understand it is made
very persuasively. And I don't mean my question at all to be
combative, but I would like you to answer it. Why didn't we
spend some of that 4.3 percent annual real growth on training
the acquisition corps so they would have the tools to make
these purchases better? What did we do with the money in the
last eight years?
Dr. Zakheim. For a start, the money that doesn't include
supplementals went to fight the wars, number one. If you look
at what we actually bought, we are buying less per unit than we
did years ago, that is why the Navy has shrunk to 200 some odd
ships. Whereas 20 years ago when I was at the Pentagon, it was
at 600.
Mr. Andrews. In your comparison between the 4.3 and 1.4 do
you take into account policy change where we are disengaging
from a combat role in Iraq?
Dr. Zakheim. Oh, sure, that brings you down to 1.4 because
your supplementals are going to decline. Therefore relative to
previous years, you would see a decline.
My concern though, is that we know very well that the
supplementals did two things, one that people didn't like and
one that people didn't know about. The part that they didn't
like was there was a lot of procurement in the supplementals,
and it didn't, therefore, cover real programs of record and
every year you had to keep the procurement going, that is just
not a good way to procure. The part people didn't know about is
they didn't really cover all the operations and maintenance. So
you had a lot of O&M money moving around inside the defense
budget to cover the operations themselves. You can't predict
what is going to happen in an operation. We do a budget today
for something that we are going to be spending in 21-months'
time.
Mr. Andrews. I hear you. I guess my only point would be in
sort of challenging your hypothesis about the 2.9 percent
spread, I am much more confident that the difference in policy
in Iraq and aggressive procurement reform effort could close
that delta rather sooner than you think, and your hypotheses
that we are somehow underbuying resources is not true.
Dr. Zakheim. Again, the supplementals do take account of
what is going to happen in Iraq. And we all hope that we will
only need 50,000 or less, I am not arguing with you there. But
if you are going have real procurement reform and you are
dealing with the personnel side of it, you can't do it quickly.
Mr. Andrews. I hear you. Thank you very much.
The Chairman. The gentleman from South Carolina, Mr.
Wilson.
Mr. Wilson. Thank you, Mr. Chairman. And thank all of you
for being here today, this is such a serious issue and one that
affects so many different countries. I am particularly happy to
see Secretary Zakheim here. I appreciate your service, I
appreciate your family's service to our country. Additionally,
I appreciate your efforts in Afghanistan and Iraq.
I am particularly interested as a cold warrior in the
success of the countries of Central and Eastern Europe. It has
been so inspiring to me to see countries that were frozen in
time, that now have dynamic economies, functioning democracies,
but I am concerned as to the financial crisis and how this
could affect their ability to continue to grow. In particular,
last August I visited in Bulgaria, I am the co-chair founder of
the Bulgaria Caucus. And I was there 20 years ago to see the
phenomenal advance economically of that country and
additionally, I visited Romania several times to see what a
dynamic country that is, too. For any of you, what is the
consequence from Poland to--or from the Baltic states to the
Black Sea?
Dr. Zakheim. I'll start, first of all, thank you so much
for your kind words, I really appreciate it, and there is
someone else in this room who does too I think. These economies
are clearly vulnerable, they are not all alike. And they are
all different--to different extents--vulnerable not only to
their internal issues, but also to how Russia deals with them,
whether we are talking about gas or other things like the
Estonians faced.
In the first instance, I suspect it is the EU that will try
to do whatever it can, and there are tensions within the EU
itself. So this goes back to Richard Haass' point and Dick
Cooper's point, that we really need to work together with the
EU on this. I don't see how the kind of issue that concerns
you, which is a very legitimate issue because these are new
NATO allies and it goes to the heart of what NATO is about as
well. I don't know how that gets dealt with unless we and the
EU have some common plan to work together. Most of the big
economies outside obviously Japan and Canada and one or two
others--and China, are in the EU. So it is very, very important
that we work together.
Dr. Cooper. I would just echo that these countries are very
vulnerable at the present time. They have grown very, very well
during the last decade. And a lot of that growth has been on
the strength of private capital inflows from all over the
world, mainly from western Europe, but including American
firms, including Japanese and Korean firms. In today's
circumstances that capital flow will diminish very sharply.
They all have current account deficits. Hungary has already
gone to the International Monetary Fund, Latvia, I guess, has
applied to the International Monetary Fund. And I agree very
strongly with Dov that we can rely on the international
community but it needs to have the full support both of Europe
and of the United States to make sure that these countries do
not falter seriously. They are quite vulnerable. I have the
current account deficits of the major ones, they are all above
three percent, Czech Republic, Hungary, Poland. And the smaller
ones have bigger current account deficits so there is an issue.
Dr. Haass. Congressman, we had a meeting the other day at
the Council on Foreign Relations about this. And I would say
there was not quite consensus, but a lot of people thought the
single most concrete outcome and important outcome of the April
2nd G-20 meeting in London could be a commitment to
significantly increase the scale of resources available to the
IMF to tide countries over to deal with the balances of
payments shortfalls to basically replenish the IMF
significantly.
The Chairman. I thank the gentleman, Mr. Marshall.
Mr. Marshall. Thank you, Mr. Chairman. I don't mean to bait
and switch here, but the topic is appropriate to the longer-
term problems that are facing the United States. It seems to me
and to many others that the long-term budget deficits that we
have been running now for decades present a real threat to our
future security simply because they present a threat to our
economy and our economy drives our ability to adequately defend
ourselves and assist the rest of the world in defending itself
from threats. I would like your comments about this long-term
systemic issue that we face, and particularly about the
proposed budget that you all have read about from the
Administration, and whether the Administration's budget
appropriately takes into account how we are going to address
the long-term budget shortfalls, the long-term deficits, the
long-term increase in debt of the country, as that constitutes,
it seems to me, a very substantial long-term security threat to
the country, and it is a financial threat, so I am pretty close
to the subject matter of this particular panel. And you are all
experts, and you all thought about this, and I would like your
opinions about the proposed budget.
Mr. Rothkopf. If it is all right, I will start out with
that. You put your finger on a critical issue, and it was
really the issue I started off with here, which is that the
wellspring of our strength is a functioning, healthy U.S.
economy. And that if we don't get our fiscal house in order, it
will weaken our dollar and it will weaken our economy. We need
to address that. We have had a hard time this year balancing
the short-term needs of stimulus with the longer-term needs of
dealing with 11, 12, 13, you count it, trillion dollars of debt
in this country. And I don't, to be honest, think that any U.S.
budget of the recent past has dealt with this problem
sufficiently, has focused on balance.
Richard Cooper made the excellent point that we are going
to need to tax in order to address this problem, even as we
need to cut spending. And Richard Haass earlier put his finger
on the point that until we deal with health care expenses in
the United States, which is the elephant in the room on this
thing, we are not going to be able to deal with that. There are
projections that have been done that show that if you simply
take entitlement spending, and defense spending at pre-war
levels and carry them out to 2017, and you take our revenue,
there is not money left for anything else. And we can't wait
until 2017 in order to resolve that issue.
Mr. Marshall. And I am familiar with all that. By the way,
I have read all of your testimony, heard your testimony and
found it very helpful. It is consistent with what we have been
hearing from other experts. Those are the immediate threats.
The longer-term security issue that is presented by the economy
is what I would like you to address. And then specifically the
President's proposed budget, which is a budget that projects 10
years' worth of spending and revenues.
Mr. Rothkopf. Well, in terms of the longer-term threats, I
mean, it is inevitable that you guys are going to sit in this
room over the course of the next four years and you are going
to grapple with your obligation to cut the defense budget of
the United States, because it is the one big moving part in
this budget. And once we get to the other side of this crisis,
there is going to be pressure to do that in a way that no one
in this room has experienced before. So cutting the defense
budget is going to have that kind of a consequence on our
ability to address issues overseas. And similarly, the
contraction of our resources for soft power pursuits, whether
it is aid or to fund international institutions, is going to
have a similar effect in the United States' role----
Mr. Marshall. I appreciate it. I am going to run out of
time here. I want to, if it is possible, to get comments on the
proposed Administration budget from the other panelists.
Dr. Cooper. I am not going to comment on the budget because
I am not familiar enough with it. Let me just say that I think
the fundamentals of the U.S. economy--I know it is funny to say
that in the spring of 2009--are very, very sound. We can handle
lots of debt. We can handle growing debt. We have one huge
unsolved political problem, the one Richard Haass mentioned,
which is medical expenses. Medical science is advancing so
rapidly, Americans think that they have a right to anything
once it exists and that somebody else should pay for it. We
need to have a serious discussion in this country, and no
politician and most of the public don't want it, about death,
because death is becoming an option, but it is very expensive
to prolong life in the older years. That is a huge unsolved
problem. If we solve that problem, the rest of the problems are
all manageable. They are all manageable, and our economy is
strong enough to handle it.
Dr. Zakheim. I'd agree that the fundamentals are sound. I
am not going to get into life and death issues, but I do think
that precisely because the economy is sound, we need to think
about investing today in the defense area in order to be
stronger over the long term. This isn't either/or. But, for
instance, when I was just asked about acquisition. If we don't
train our people, if somebody can join the civil service with a
masters degree and not take another course in physics or
mathematics or systems analysis or anything for 40 years before
they retire, there is something fundamentally wrong, and that
is why you have some senior civil servants who don't know how
to use computers as well as their grandchildren. That is a
problem. That is an investment. That is something we need to do
now. We couldn't do those kinds of things or some of the things
I wrote about in my testimony if we didn't have sound
fundamentals. But we do. And so, therefore, I think we can do
it.
Dr. Haass. We have essentially reached a point where we
have exercised all of our monetary instruments. We can't lower
interest rates any more effectively. We are going to have to
continue to spend. So we are going to, in the short run, have
to increase stimulus. For all I know, there will have to be
another package. In that sense things are going to get worse as
a necessary price of getting out of the deep recession we are
in.
The challenge, though, is that while we do that--and 30
more seconds of that. Part of what makes it so complicated is
it is impossible to know in advance exactly what will be the
consequences of certain kinds of spending, and we are
literally, as I watch it, in the position of throwing a lot of
things against the wall and hoping some things stick and have
the impact that we want.
But at the same time, while we experiment with stimulus
packages, there is no reason we can't address some other
things, whether it is Medicare reform or things that would
reduce our need to use energy or whether we can get growth out
of other things other than stimulus like trade. So we have got
to address other policy things.
But I think, in the short run, the requirement of getting
out of the economic situation we are in requires probably the
running enormous deficits and increasing the Federal debt for
the next couple of years. I don't know any way to avoid that.
But, again, we could do everything else at the same time, in
terms of, you know, we could start introducing regulatory
reform, entitlement reform, energy and security reforms and so
forth which, in the long run, I think will address your
concerns.
The Chairman. I thank the gentleman.
Mr. Coffman.
Mr. Coffman. Thank you, Mr. Chairman.
Dr. Haass, you had mentioned something about North Korea
and that you were concerned due to the current global economic
climate that North Korea might, in fact, be further
destabilized. But isn't North Korea a fairly insular nation? It
certainly doesn't have a market-based economy. Is it the aid
flows you are concerned about it? What is it that might
destabilize North Korea?
Dr. Haass. I am not necessarily known for my modesty. But
when it comes to North Korea, I begin with it simply because it
is arguably the most opaque country in the world. And any
analyst looking at North Korea is constrained by that reality.
But it seems to be clear that something is going on that is
different there, that there is something going on with the
political leadership that has increased the odds of instability
and various forms of transition from the current leadership.
Parallel to that, we are seeing the North Koreans getting
somewhat more bellicose even by their fairly bellicose
standards. The big governor, if you will, on the trajectory of
North Korea has been two things. One has been China, its
willingness to stay engaged sufficiently so North Korea does
not collapse. The Chinese do not want to have the refugee flows
and I think the uncertainties on the peninsula and don't
necessarily want to see a united Korea that looks a lot more
like Seoul than Pyongyang. And the other part of it is the
South Koreans, that they have been, to a lesser extent the
Japanese but mainly the South Koreans have been a source of
resources again to stave off collapse. Because as much as they
would like unification in the abstract and in the future, they
are worried about something that is convulsive and what that
would mean in terms of refugee flows and simply the strains it
would place upon their economy.
All I am suggesting is, in particular, the South Korean
ability to pump resources in is, I believe, is going to be
constrained given their economic contraction. If it is not in
double digits already on an annualized basis, it likely soon
will be. And I think it just adds to the dynamic of uncertainty
in North Korea. That is my only point.
Mr. Coffman. Thank you.
I was having, in our relationship with the issues of the
People's Republic of China, I was having a meeting several
years ago with a senior diplomatic official from Taiwan. And I
asked him what his greatest concern was in their difficulties
that they were having with mainland China, and his response
was, I am concerned that if they have an economic downturn,
that that will create greater friction between our two
countries. Could any of you comment on your view of his
assessment, if given, if in fact--and this was three years
ago--that an economic downturn in China would in fact maybe
raise the specter of conflict with Taiwan?
Dr. Haass. I for one don't think it would appreciably. It
is a little bit from the Chinese point of view--I know there
are analysts who think that. It is a bit of the wag the dog
theory, that in times of economic hardship, governments often
look to foreign ventures to divert attention. But I would
simply argue that China is too economically integrated with the
world and needs the ability to export, needs the ability to
import funds and so forth to keep its unemployment levels down.
I do not believe that absent the major--that the Chinese would
perceive as a provocation or a change of status on the part of
Taiwan--I do not believe they would risk increasing their
economic isolation dramatically. So, on my short list of crises
that keep me up at night, given the economic situation we are
in, that is not high on my list to be honest.
Dr. Zakheim. I agree with that. China right now is the
source of a lot of Taiwanese investment. They have moved closer
to each other. This is a politically driven conflict, and I am
not even sure that China sees Taiwan as an overseas adventure
anyway. They have argued the whole time that they are not; they
are part of China. The trends actually look pretty good right
now, and I would agree that that is not the one that keeps me
up at night.
Mr. Coffman. Thank you.
Mr. Chairman, if I could, one more question.
And that is, what would be the net impact if America were
to much more aggressively move towards energy independence, and
energy independence as being defined as no longer importing
foreign oil, what is the impact in terms of the economic and
national security of this country?
Dr. Haass. Well, you will forgive me, but the phrase energy
independence is a nonstarter. The United States is not going to
be energy independent in our lifetimes, and short of a major
technological breakthrough. It need not be energy independent.
What it needs to be is energy secure. What that means is
considerably reduce use of oil. What energy security, though,
would do for us would it would throw--it would reduce the flow
of funds to unsavory regimes, particularly Iran and Venezuela.
It would dramatically reduce the balance of payment pressures.
It would ease some of the problems we talked about here on the
dollar. Reduced use of energy would obviously contribute to
progress towards climate change issues and so forth. So it is
one of those issues that would help us in multiple domains
simultaneously.
But independence can't become the yardstick because it
really is beyond reach, and it ought not to discourage all the
things we can and should do that are within reach.
Mr. Coffman. Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
We have three votes. I respectfully ask that the gentlemen
stay for a few additional questions and those that are here and
have not asked questions, please return. Someone else will be
presiding. I understand I have to manage a bill on the floor.
So as soon as the three votes are over, and Mrs. Davis, if you
are in a position to return and preside for me, I would
appreciate it.
Mr. Coffman, I appreciate your being ranking again.
We have a few minutes, and we can ask you to ask your
questions now. But my request is, when I have to preside or
handle a bill on the floor, would you be in a position to
preside for me?
We will get someone else then. Go ahead with your
questions, please.
Mrs. Davis. Thank you, Mr. Chairman. And just quickly,
following up on the issue of oil, we know that Iraq's revenues
are going down considerably. I mean, it is more than half what
it was. Do we believe that they will have the ability to really
provide the services for their people that are required with
that reduction in revenue, and how are we factoring that into
our work in Iraq?
Dr. Zakheim. Well, you know, part of the problem in Iraq
for quite some time was that the money was actually flowing out
of Iraq into the wrong places. As long as there appears to be
some decent management of Iraq's revenues, they are going to be
able to provide services. And remember, the oil, the oil
production itself still is nowhere near its capacity.
So you have really two ways of dealing with this. One is to
increase production, which would obviously recover some of the
losses. Secondly, it is to be more efficient about how their
resources are used and less corrupt about it. And finally, one
other thing, it very much depends on what they were assuming in
terms of their budgets. We know Russia assumed $70 a barrel. So
they are being hit. No one, as far as I can make out, assumed
$80 or $90 a barrel. So it may not be as bad as you think.
Dr. Haass. But it will be bad. It is going to be
extraordinarily hard with oil in the mid $40s to get the
investment to increase production. And even if you got the
investment, it would take years before it kicked in. You still
don't have the arrangements for revenue-sharing in Iraq. And
what it will do is decrease the ability of the central
government to essentially use money, quite honestly, to
purchase loyalties. So when you add up the plusses and minuses
in Iraq, I would put this on the negative side of the ledger.
As happy as we are that energy prices are going down, this is
actually one of the places where there is a price to be paid
for that.
Mrs. Davis. Thank you.
And also quickly, you all mentioned Mexico in one way or
another. And I am wondering how you see, then, the impact of
the government of the growing war with the cartels and what
role, if any--you mentioned, you know, there are obviously a
limited amount of help and assistance that we can provide, and
yet it is a growing threat, and those of us who live very close
to Mexico, of course, are concerned about that reality.
Dr. Zakheim. Well, the government made one major decision
in Mexico, which was to use the Army, which is far less corrupt
than the police were and actually less vulnerable than the
police are. We have all heard the horror stories about police
being killed and police chiefs not wanting to take jobs and so
on. So that is a major factor.
Beyond that, how much we can do is really a function of how
much Mexico wants to let us help them. We cannot, I don't
think, just go to them and say, here is what we think you ought
to do. It is just much too sensitive a relationship. On the
other hand, if it is done right, if we cooperate closely with
the Mexicans pretty much on their terms, I think that would be
a different story precisely because they did make that decision
to use the Army and that was a huge decision to make.
Mr. Rothkopf. I think what you are going to see is some
effort towards some Merida 2.0 where we are going to be asked
and will end up spending considerably more money assisting them
because they will ask for some kind of assistance. You will
also see a lot more activity on our own border. I mean, you did
see the Governor of Texas send 1,000 National Guard troops to
the border of Texas last week to address this issue, and you
are going to see more like that.
But one other thing that you should expect, and I have
started to hear this rumbling out of Mexico, is an argument
from them that this is due to the demand in the United States,
and to the degree to which, you know, we want to help this
problem, we are going to have to reinvest in controlling demand
for drugs from Mexico in this country.
Mrs. Davis. In addition to arms as well.
Thank you, Mr. Chairman.
The Chairman. Thank you very much. We have one additional
member, and maybe we can wrap this up before we go vote.
Mr. Sestak.
Mr. Sestak. Thanks, Mr. Chairman.
When I heard the DCI [DNI] speak about instability in other
nations being the nearest near threat to us, for the Armed
Services Committee, what brought me to mind was Tajikistan, for
example, and all the 'stans where hundreds of thousands of
young Muslim men work in Russia, and now Russia is having a
challenge, so they are coming home. They are young. They can't
afford to get married. They are Muslim. They are right next to
Afghanistan. Things are a little amok there.
So as I hear that $25 billion is needed for nations if a
number of the developing nations aren't going to go into
default, and I understand that $270 billion to $800 billion,
depending upon who you want to read, is going to be the
government shortfalls of developing nations, what is it, sir,
if I might ask you, because I have three quick questions, that
the U.S. Government cannot do now or is not doing now to
address that security issue? Not the giving the money, like 0.7
percent that the World Bank is talking. But what can we do as
an example of that one example, of what I gave? Because that to
me is what Blair was really talking about, Admiral Blair.
Mr. Rothkopf. Well, I think it is a central issue, and I
think that it is going to end up being development assistance
primarily from international financial institutions, and, you
know, if I were going to pick one place in the world for the
incident that Dov was talking about, that we don't expect it
and we are not terribly well prepared for, it would be
somewhere in Central Asia for precisely the reason you are
talking about. So maintaining relationships there, maintaining
base capacity there is also related to that because I think
this is where the----
Mr. Sestak. How about USAID? Does it--developmental
assistance, Vietnam days had 15,000 Foreign Service officers,
5,000 in Vietnam. Today it has less than a 1,000. Is that
something we need to look at, or do we just continue to
contract out to RTI International, or what are those--I am
asking, what can we do to address this developmental
assistance? Because I honestly think that is what we can do in
this government of ours.
Mr. Rothkopf. I think we can expand it a lot. Before the
crisis hit, there was a lot of discussion in the transition
about, should there even be a new agency there? We are not
going to have that.
Mr. Sestak. Should it be Cabinet level?
Mr. Rothkopf. I think that there--I actually think that the
better approach is some kind of Goldwater-Nichols on the
civilian side that creates the ability to mobilize people in
all the relevant agencies, including trade agencies, Overseas
Private Investment Corporation (OPIC), U.S. Export-Import Bank
(Ex-Im Bank), Commerce, USAID, Treasury, across the board
because I think all of these places have a role to play.
Mr. Sestak. Let me move over, if I could, on the defense
budget to the question that was asked. To some degree, I have
looked at the supplementals like crack. I mean, when we had in
those supplementals, helicopters that hunt submarines and a
Joint Strike Fighter (JSF) aircraft that is not going to be
online until 2013, we have got a real problem weaning ourselves
off of that. But when I look at the defense budget, it has
risen from 7 percent in 2001 to 21 percent at the end of 2006.
So it is probably about 26 percent of Overseas Development
Assistance (ODA) funding overseas. So that is probably $9
billion to $10 billion. Why don't we just kind of--we kind of
gave that to you for some of Iraq's money, didn't we? Why don't
we just take that over and move it on over to USAID?
Dr. Zakheim. Well, first of all--actually, when I was
Comptroller, I moved some money over there. I had to do it via
the Office of Management and Budget (OMB). Part of it, again,
is the authorities. We don't have the authorities. And----
Mr. Sestak. Should we effect that--is that a good move to
move that--I mean, Congress can do that.
Dr. Zakheim. I think, Congressman, that there is a lot of
sense in looking at this as a comprehensive whole. I think that
is what Mr. Gates was talking about. Frankly, we could avoid
sending our troops to lots of places if we had people in our
civilian agencies that got to them first. So--I don't know the
numbers though.
Mr. Sestak. My take is, I hear what Mr. Gates has said and
the chairman, but words are words. It is not what is the
defining coin of the realm here, resources. If it is to be a
comprehensive whole, and I am not looking at fixing our
financial system, the experts will do that in Finance and Ways
and Means; should we really look at, not because it used to be
4.5 percent increase in Department of Defense (DOD), but can we
prevent our men and women from going overseas in a better
investment of moving moneys over to USAID?
Dr. Zakheim. I agree, but it is an issue of authorities.
Mr. Sestak. Which we can legislate.
The Chairman. Gentlemen, thank you very much.
Mr. Sestak, I suppose that was it.
Gentlemen, we appreciate it very, very much. It has been
excellent, one of the best hearings we have had in this
committee. And we will adjourn and proceed to the floor to
vote. Thank you.
[Whereupon, at 12:20 p.m., the committee was adjourned.]
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A P P E N D I X
March 11, 2009
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PREPARED STATEMENTS SUBMITTED FOR THE RECORD
March 11, 2009
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DOCUMENTS SUBMITTED FOR THE RECORD
March 11, 2009
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