U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office,

http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,

U.S. Government Printing Office. Phone 202–512–1800, or 866–512–1800 (toll-free). E-mail, gpo@custhelp.com.

i 

71–452 2012

[H.A.S.C. No. 112–81] 

ECONOMIC CONSEQUENCES OF DEFENSE 

SEQUESTRATION 

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

OCTOBER 26, 2011 
(II) 

HOUSE COMMITTEE ON ARMED SERVICES 

ONE HUNDRED TWELFTH CONGRESS

HOWARD P. ‘‘BUCK’’ MCKEON, California, Chairman 

ROSCOE G. BARTLETT, Maryland 

MAC THORNBERRY, Texas 

WALTER B. JONES, North Carolina 

W. TODD AKIN, Missouri 

J. RANDY FORBES, Virginia 

JEFF MILLER, Florida 

JOE WILSON, South Carolina 

FRANK A. LOBIONDO, New Jersey 

MICHAEL TURNER, Ohio 

JOHN KLINE, Minnesota 

MIKE ROGERS, Alabama 

TRENT FRANKS, Arizona 

BILL SHUSTER, Pennsylvania 

K. MICHAEL CONAWAY, Texas 

DOUG LAMBORN, Colorado 

ROB WITTMAN, Virginia 

DUNCAN HUNTER, California 

JOHN C. FLEMING, M.D., Louisiana 

MIKE COFFMAN, Colorado 

TOM ROONEY, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

SCOTT RIGELL, Virginia 

CHRIS GIBSON, New York 

VICKY HARTZLER, Missouri 

JOE HECK, Nevada 

BOBBY SCHILLING, Illinois 

JON RUNYAN, New Jersey 

AUSTIN SCOTT, Georgia 

TIM GRIFFIN, Arkansas 

STEVEN PALAZZO, Mississippi 

ALLEN B. WEST, Florida 

MARTHA ROBY, Alabama 

MO BROOKS, Alabama 

TODD YOUNG, Indiana 

ADAM SMITH, Washington 

SILVESTRE REYES, Texas 

LORETTA SANCHEZ, California 

MIKE MCINTYRE, North Carolina 

ROBERT A. BRADY, Pennsylvania 

ROBERT ANDREWS, New Jersey 

SUSAN A. DAVIS, California 

JAMES R. LANGEVIN, Rhode Island 

RICK LARSEN, Washington 

JIM COOPER, Tennessee 

MADELEINE Z. BORDALLO, Guam 

JOE COURTNEY, Connecticut 

DAVE LOEBSACK, Iowa 

GABRIELLE GIFFORDS, Arizona 

NIKI TSONGAS, Massachusetts 

CHELLIE PINGREE, Maine 

LARRY KISSELL, North Carolina 

MARTIN HEINRICH, New Mexico 

BILL OWENS, New York 

JOHN R. GARAMENDI, California 

MARK S. CRITZ, Pennsylvania 

TIM RYAN, Ohio 

C.A. DUTCH RUPPERSBERGER, Maryland 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

COLLEEN HANABUSA, Hawaii 

KATHLEEN C. HOCHUL, New York 

ROBERT L. SIMMONS II, Staff Director 

JENNESS SIMLER, Professional Staff Member 

MICHAEL CASEY, Professional Staff Member 

LAUREN HAUHN, Research Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2011 

Page 

HEARING: 

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

APPENDIX: 

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

WEDNESDAY, OCTOBER 26, 2011 

ECONOMIC CONSEQUENCES OF DEFENSE SEQUESTRATION 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

McKeon, Hon. Howard P. ‘‘Buck,’’ a Representative from California, Chairman, Committee on Armed Services .................................................................. 1 

Smith, Hon. Adam, a Representative from Washington, Ranking Member, 

Committee on Armed Services ............................................................................ 2 

WITNESSES 

Feldstein, Dr. Martin, George F. Baker Professor of Economics, Harvard 

University, President Emeritus, National Bureau of Economic Research ...... 4 

Fuller, Dr. Stephen, Dwight Schar Faculty Chair and University Professor, 

Director, Center for Regional Analysis, School of Public Policy, George 

Mason University ................................................................................................. 6 

Morici, Dr. Peter, Professor of International Business, Robert H. Smith School 

of Business, University of Maryland, Former Director of Economics at the 

United States International Trade Commission ................................................ 8 

APPENDIX 

PREPARED STATEMENTS: 

Feldstein, Dr. Martin ....................................................................................... 43 

Fuller, Dr. Stephen ........................................................................................... 52 

McKeon, Hon. Howard P. ‘‘Buck’’ .................................................................... 39 

Morici, Dr. Peter ............................................................................................... 63 

Smith, Hon. Adam ............................................................................................ 41 

DOCUMENTS SUBMITTED FOR THE RECORD: 

The Economic and Fiscal Impacts of DOD Spending on the Commonwealth of Virginia in FY 2008, by Dr. Stephen Fuller .............................. 77 

The U.S. Economic Impact of Approved and Projected DOD Spending 

Reductions on Equipment in 2013, by Dr. Stephen Fuller ........................ 97 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

[There were no Questions submitted during the hearing.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

[There were no Questions submitted post hearing.] 

(1) 

ECONOMIC CONSEQUENCES OF DEFENSE 

SEQUESTRATION 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, Washington, DC, Wednesday, October 26, 2011. 

The committee met, pursuant to call, at 10:03 a.m. in room 2118, 

Rayburn House Office Building, Hon. Howard P. ‘‘Buck’’ McKeon 

(chairman of the committee) presiding. 

OPENING STATEMENT OF HON. HOWARD P. ‘‘BUCK’’ MCKEON, 

A REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED SERVICES 

The CHAIRMAN. The committee will come to order. Good morning. 

The House Armed Services Committee meets to receive testimony on economic consequences of defense sequestration. We are 

joined by a panel of top economists, who will share three distinctive 

perspectives with the committee, the macroeconomic impacts within the United States of further cuts to defense, the regional economic effects, which may vary from state to state, and the global 

dynamics of further cuts to our military. 

The committee has held a series of five hearings to evaluate lessons learned since 9/11 and to apply those lessons to decisions we 

will soon be making about the future of our force. These hearings 

also focus on the national security risks posed by sequestration. We 

received perspectives of former military leaders from each of the 

Services and the Joint Staff, former chairmen of the Armed Services Committees, outside experts, and Secretary Panetta and 

Chairman of the Joint Chiefs of Staff, General Dempsey. 

Today we will change direction and focus on the other side of the 

coin, the relationship between the U.S. military and the economy. 

As a fiscal conservative, I tend to oppose increasing Government 

spending for the purpose of job creation. But I think we must understand that the defense industry is unique, in that it relies entirely on Federal Government dollars. We don’t spend money on defense to create jobs. 

But defense cuts are certainly a path to job loss, especially 

among our high-skilled workforces. There is no private sector alternative to compensate for the Government’s investment. Secretary 

of Defense Panetta has said the cuts on the scale of sequestration 

will result in a 1-percent hike to unemployment and 1.5 million 

jobs lost. 

The Aerospace Industries Association released a report yesterday 

based on the analysis of Dr. Fuller, one of our witnesses today, that 

estimated just over one million industry jobs would be lost based 

on cuts to procurement and R&D [Research and Development] 
2 

alone. When one factors in the separation of Active Duty service 

members and DOD [Department of Defense] civilians, the number 

is quite close to the DOD’s. 

The impact is not proportional across all 50 states. Dr. Fuller’s 

testimony suggests that nearly 60 percent of the jobs lost would 

come from just 10 states. One-third of the jobs lost would fall in 

three states: California, Texas and Virginia. How does this translate to the larger economy? In 2013 alone, growth in GDP [Gross 

Domestic Product] would fall by 25 percent. 

But the economy could be affected further, as the U.S. military 

might no longer be seen as the modern era’s pillar of American 

strength and values. There is risk that some within the international community would try to take advantage of the fragile 

American economy and the perceived limitations on our military’s 

ability to promote global stability. 

In these difficult economic times we recognize the struggle to 

bring fiscal discipline to our nation. But it is imperative that we 

focus our fiscal restraint on the driver of the debt, instead of the 

protector of our prosperity. With that in mind, I look forward to 

hearing from our witnesses today. 

Ranking Member Smith. 

[The prepared statement of Mr. McKeon can be found in the Appendix on page 39.] 

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM 

WASHINGTON, RANKING MEMBER, COMMITTEE ON ARMED 

SERVICES 

Mr. SMITH. Thank you, Mr. Chairman. I appreciate you holding 

this hearing and this series of hearings that we have had to discuss 

the impact of defense cuts, and I think it is particularly appropriate that we have a hearing today that will focus on the economic 

impact of these cuts. I think there are critical issues to consider in 

that regard. The industrial base of this country is critical to our 

economy and obviously defense spending is part of maintaining 

that industrial base. 

So any cuts could potentially impact that. There is also the challenge going forward to our national security of losing key capabilities. There are certain things that the defense budget requires in 

terms of technological and business capabilities that, if we are not 

doing it, those capabilities go away. We have already seen that to 

a large degree in the satellite industry. 

We were I think roughly 70 percent of the international market 

for satellites. We are now down to about 25 percent and there are 

certain key capabilities in developing satellites where simply in the 

United States, you cannot find that. And that has a national security implication. We can always, as a country, rely more on domestic U.S. production than we can rely on foreign partners producing 

us those key capabilities for our defense. 

So I think those are key issues. I also believe that the innovation 

that is generated from much of the manufacturing that comes as 

a result of our defense industrial base has impacts on the broader 

commercial economy. I certainly see that in my own district. There 

are a lot of businesses that grew out of Boeing engineers, folks who 
3 

were working on defense industry who had ideas that then spread 

out to the larger economy. 

The improvements that we have made in manufacturing to meet 

defense needs have implications for the private sector economy. But 

at the same time, the debt and the deficit are also key limitations 

on our economy. I don’t think anyone can argue that. The size of 

our debt now and the size of our deficit and its projections out into 

the future are a definite threat to our economic health. 

And we have seen that. Investors are nervous about investing in 

our economy, unsure how we are going to handle our debt and deficit problems going forward. And we need to be mindful of that. 

And we need to be mindful of the fact that defense is 20 percent 

of the overall budget. You cannot look at a budget that is almost 

40 percent out of whack in terms of our deficit and say that 20 percent of the budget has absolutely nothing to do with that. It does. 

You also have to look at other parts of the budget that are important to our economy; infrastructure is the one that leaps to mind; 

education, workforce development. These are all things that are 

also key to our economic development, and devastating cuts in 

those areas I believe would have just as big an impact to our economy as devastating cuts in our defense budget. So we have to be 

aware of that. 

Personally, as this committee knows, I believe that increasing 

the amount of revenue that we have available is critical to this effort. If you are concerned about the size of the impacts of the defense cuts, then you have to be prepared to make sure that there 

is enough money available to make sure that you don’t do that. So 

I believe that balance needs to be struck. 

I also believe that it is a very, very difficult balance to strike. Let 

us face it, we are in a deep hole. None of these options are palatable. These are things that none of us would like to have to do, but 

when you are running a deficit of nearly 40 percent of what you 

spend, you have to face some very difficult choices. So I hope that 

the gentlemen before us will analyze those choices. 

Honestly, look at the budget deficit that we are in and not simply 

look at one piece of it and say, ‘‘Well we can’t do that.’’ Okay, well 

if we can’t do that, what do we do in order to deal both our national security needs and with the deficit and debt challenges that 

threaten our economy as well? So I look forward to the testimony. 

Again I thank the Chairman for holding this hearing, and I yield 

back. 

[The prepared statement of Mr. Smith can be found in the Appendix on page 41.] 

The CHAIRMAN. Thank you. Now please let me welcome our witnesses this morning. We have Mr. Martin Feldstein from the 

George F. Baker Professor of Economics, Howard University, President Emeritus, the National Bureau of Economic Research. 

What did I say? Howard? That is different than Harvard isn’t it? 

Thank you. They both start with an H. 

And we have Dr. Stephen Fuller, Faculty Chair and University 

Professor at George Mason University; Director, Center for Regional Analysis at the School of Public Policy. Actually all three of 

these gentlemen have very long bios—they are all very influential 

people. We are happy to have them here. Dr. Peter Morici, Pro-
4 

fessor of International Business, the Robert H. Smith School of 

Business, University of Maryland, former Director of Economics at 

the United States International Trade Commission. 

Welcome gentlemen. We are happy that you have found the time 

to be with us today and we look forward to your testimonies. We 

will begin with Dr. Feldstein. 

STATEMENT OF DR. MARTIN FELDSTEIN, GEORGE F. BAKER 

PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY, PRESIDENT EMERITUS, NATIONAL BUREAU OF ECONOMIC RESEARCH 

Dr. FELDSTEIN. Well thank you very much, Mr. Chairman. I am 

very pleased to be here. I have been testifying to congressional 

committees for more than 30 years, but this is the first time I have 

had the opportunity to appear before this very important committee, so I welcome it very much. I have a longer statement that 

I would like to submit for the record while reading just parts of 

that to the committee. 

The CHAIRMAN. Without objection all three of your written testimonies will be included in the record, and you can speak as you 

desire. 

Dr. FELDSTEIN. Thank you. 

In your invitation, you asked me to comment on the effect that 

reductions in defense outlays will have on total economic activity 

that is on the GDP of the United States. I am happy to do that, 

but I want to comment first on the larger subject of the national 

security consequences of reductions in defense spending, and then 

I would also be happy in response to questions to deal with some 

of the broader issues that Mr. Smith raised in his opening remarks. 

In considering the appropriate size of the defense budget, it is of 

course important to recognize the immediate threats to the United 

States and to our allies from Iran, from North Korea, from the 

rogue states and from various terrorists groups along with the current and growing challenge in cyberspace. 

But defense spending today must relate to the more distant risk 

from China’s future military policy. Since China has more than 

four times the U.S. population, China’s total GDP will equal that 

of the United States when its per capita income reaches only onefourth of the U.S. level. 

Even if China’s growth rate slows significantly from its current 

level, its total GDP will exceed ours in less than 15 years. And it 

is a country’s total GDP that determines its potential military 

budget. 

Fortunately, the current Chinese political leadership is concentrating on promoting economic growth to raise the standard of living of its people. 

But China is also developing every aspect of its military capability. China’s defense budget will grow with its GDP. It is important, therefore for us to recognize that future generations of Chinese leaders may use its larger GDP to pursue more aggressive 

policies. 

America’s defense policy and our defense budget should therefore 

focus on these future generations of Chinese leaders and should 

recognize the virtual certainty of China’s growing economic power. 
5 

China’s future military spending and its weapons development 

will depend on China’s perception of what the United States is 

doing now and what we will do in the future. 

The United States, I believe should maintain a military capability such that no future generation of Chinese leaders will consider a military challenge to the United States or consider using 

military force to intimidate the United States or our allies. 

China is a resource-poor country so it is now buying oil in the 

ground around the world and land in Africa to feed its people. 

Some countries in the past have used military force to gain secure 

access to such materials. China’s future leaders should not be 

tempted to follow that path. 

It is important also that our allies and friends like Japan and 

Korea, Singapore and Australia see the commitment of the United 

States to remain strong and to remain present in Asia. Their relations with China and with us depend on what they can expect of 

America’s future military strength. 

We can’t postpone implementing a policy of future military superiority until some future year. We have to work now to develop the 

weapon systems of the future. We have to maintain the industrial 

and technological capacity to produce those weapon systems. While 

reducing fiscal deficits is very important the task should not prevent the Federal Government from achieving its primary responsibility of defending this country and our global interests both now 

and in the future. 

Let me turn now to the narrower economic question of how cuts 

in defense spending affect U.S. GDP. 

Since Government spending on defense is a component of GDP, the immediate direct effect of a $1 billion reduction in domestic defense spending is to reduce our GDP by $1 billion, one for one. The 

resulting reduction in pay to military personnel and in compensation to the employees of defense suppliers then causes their spending as consumers to decline. And if defense suppliers expect the reduced level of the spending to be sustained, they will also cut their 

investment and equipment. 

The total effect of a $1 billion reduction in defense spending is 

to reduce GDP by more than a billion dollars, perhaps about $2 billion. 

Under current conditions, reductions in future budget deficits 

and in the resulting future national debt, will also raise the confidence of businesses and households needing to increase business 

investment and increase consumer spending, and that in turn will 

raise current GDP. 

But a similar confidence effect would result from legislated reductions in any form of Government spending so we can ignore this 

confidence effect in comparing the impact of reductions in defense 

spending with the effect of other spending cuts of equal size. 

The effect on GDP of changes in defense spending is larger than 

the corresponding effect of most other potential changes in Government outlays. 

For example, outlays for unemployment benefits are not in themselves a component of GDP. They lead to increased GDP only by 

raising the consumer spending of the individuals who received 

those benefits. While a high percentage of those cash benefits will 
6 

be spent, it will certainly be less than a dollar of spending for every 

dollar of unemployment benefits. 

In some of the consumption purchased with the unemployment 

benefits would otherwise have been paid for out of reductions in 

household saving. A change in unemployment benefits also affects 

GDP by altering the incentive to remain unemployed. Reducing the 

maximum number of unemployment weeks will induce some individuals to find work sooner, thereby raising GDP. 

The overall effect on GDP of reducing U.I. [unemployment insurance] benefits will be the net effect of the reduction in consumer 

spending and of the increase in weeks worked. So the adverse impact on GDP of a $1 billion reduction in unemployment benefits would certainly be less than the direct effect of 

a $1.0 billion reduction in defense outlays. 

I will stop there and just say that I hope that these remarks are 

helpful to you as you consider the important tasks of deficit reduction in protecting our national security. 

I look forward to your questions. 

Thank you very much. 

[The prepared statement of Dr. Feldstein can be found in the Appendix on page 43.] 

The CHAIRMAN. Thank you. 

Dr. Fuller. 

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

GEORGE MASON UNIVERSITY 

Dr. FULLER. Thank you very much, pleased to be with the committee this morning. I have submitted a prepared statement but 

also two reports. 

I undertook a report for an analysis for the Commonwealth of 

Virginia several years ago regarding the economic impact of DOD 

spending in the state. It covered all types of DOD spending; personnel as well as contracting and retirement benefits. 

[The information referred to can be found in the Appendix on 

page 77.] 

It was undertaken because the state was beginning to be concerned about changes in defense procurement policies and spending 

policies within the state and it is a very important part of the economy. So it provides some insight about what would happen if you 

take that spending away. 

I also, just as you mentioned Mr. Chairman, released a report, 

it was released yesterday on the impacts of reduced spending for 

aerospace and military equipment acquisition. 

[The information referred to can be found in the Appendix on 

page 97.] 

Dr. FULLER. So I would just summarize some of those impacts. 

They follow in character the same kinds that you would see at the 

national level, changes in GDP, but in this case, state and local 

economic activity would be affected, changes in unemployment, 

changes in personal earnings. 

Summarizing what I found at the state level, and this would be 

just for Virginia, but it would be characterized of other states that 
7 

have some dependency in their economy on defense spending, and 

this would be for fiscal year 2008. 

The GDP effect or gross state product effect in Virginia, DOD accounts for 15.6 percent of total economic activity in that state. It 

also supported almost 903,000 jobs within the state, that is, roughly 19 percent of total employment in the Commonwealth of Virginia 

was related directly or indirectly to DOD spending, supported 

about $44 billion in taxable personal earnings. And we also looked 

at the fiscal impact. DOD businesses and military bases and personnel do demand some services from the state, but they also generate taxes. And the net effect in the state was $1.1 billion. 

So as we look at the Commonwealth of Virginia, even, you know, 

just several years back—but it certainly hasn’t changed dramatically, maybe become even more important as the rest of the economy has retracted over the recession. 

DOD clearly is a very important source of economic activity, personal earnings, jobs and fiscal benefits if in the absence of that 

spending, the state’s economy would have been 15.6 percent smaller. It would have had almost 19 percent fewer jobs and it would 

have faced a budget gap of $1.1 billion in fiscal year 2008. 

That gives it some perspective—I think, perhaps, more relevant 

as you drill down in the analysis that I have just completed for the 

Aerospace Industries Association. I was asked to examine the impact of reduced spending in fiscal year 2013 for the acquisition of 

aerospace and military equipment, just a segment of the DOD 

budget. 

The number that I examined includes some reductions that have 

already been approved and some that could possibly evolve totaling 

$45.01 billion. The effect of this is this rolls through the economy. 

It starts with a decrease in sales of about $164 billion. So for every 

$1 decrease in the purchase of military equipment by DOD, it 

would generate an additional $2.64 in sales losses in other businesses. I will explain that a little bit further. 

If you take those sales losses as they roll through the economy, 

it would cost the economy. And by my calculations 1,006,000 jobs; 

these are full-time, year-round equivalent jobs. Only about 35 percent of those are in the aerospace and military equipment manufacturing sectors. In fact, only 125,000 of those are manufacturing jobs 

specifically to the production of these products, these military hardware. 

The other 65 percent are jobs on Main Street. They are jobs that 

are supported by the payroll spending of workers in the aerospace 

and military manufacturing industry. Their payroll and the payrolls of the other companies that work for those industries, so it is 

the primes and their entire supply chain, their spending supports 

jobs everywhere. Just like your spending and my spending for coffee or for water or for a mortgage or for our automobiles. 

And by taking their payroll out of the economy, the payroll losses 

would total something on the order of $60 billion. Taking that out 

of the economy would cost the economy over a million jobs. That 

would add a 0.6 percent to the unemployment rate. Current unemployment rate is 9.1 percent right now; it would raise that to 9.7 

percent if this happened this year as opposed to in fiscal year 2013. 
8 

There are also non-wage income reductions. So, sales of products 

and services to the aerospace and military equipment manufacturing sector would decline; also sales within the remainder of the 

economy. There would be less lettuce being purchased. It just rolls 

right on through the economy. Another $27 billion lost there. 

If you roll these up into one number, GDP, it would result, at least just from that $45 billion decrease in 1 year, would generate 

$86.5 billion in lost GDP, so, roughly 2 to 1 as we just heard. Given 

the state of the economy as projected for 2013, that would constitute about 25 percent of the anticipated growth. So, without that 

cutback we would have 25 percent more GDP growth than without 

it. Slow the GDP growth rate that is now projected for 2013 from 

2.3 percent to 1.7 percent. 

Now, these numbers could change. But it has a measurable effect. These numbers and these losses affect every state in the country because the suppliers of goods and services span all of the 

states, not just the actual prime or their immediate supply chain. 

Ten states would represent roughly 6 percent of these losses. Ten 

states being led by California, Texas and Virginia. But these 10 

states would lose 600,000 jobs, or could lose, if that reduction occurs as I have analyzed it. 

So, the economic impacts can be measured. There is one other 

type of impact that I can’t measure, but we know takes place. 

Many of the companies that supply goods and services to DOD contractors are quite small. 

They are specialized. And when they lose part of their work they 

go out of business. They just can’t downsize 25 percent and still 

stay in business. They can’t shift their market to a different consumer. Their base is quite narrow. And so the impact on business 

failure is just one of those kinds of corollary effects that we know 

happens. 

We have seen it around military bases that have closed or 

changed or downsized, sort of the BRAC [Base Closure and Realignment] effects. We see it here in D.C. on Georgia Avenue where 

businesses have lost some of their consumer market, and they have 

just had to close down because they couldn’t stay in business at 

that scale of work. So, there are some collateral effects, I think, 

that need to be considered. 

I ran over my time. I am glad to answer questions. Thank you. 

[The prepared statement of Dr. Fuller can be found in the Appendix on page 52.] 

The CHAIRMAN. Thank you. 

Dr. Morici. 

STATEMENT OF DR. PETER MORICI, PROFESSOR OF INTERNATIONAL BUSINESS, ROBERT H. SMITH SCHOOL OF BUSINESS, UNIVERSITY OF MARYLAND, FORMER DIRECTOR OF 

ECONOMICS AT THE UNITED STATES INTERNATIONAL 

TRADE COMMISSION 

Dr. MORICI. Thank you, sir. Like Professor Feldstein I have been 

coming up here for—is it working? 

The CHAIRMAN. Yes. 

Dr. MORICI. Like Professor Feldstein I have been coming up here 

for several decades. But this is the first time that I have been to 
9 

this committee. And I am honored to have this opportunity to 

speak to you. 

The United States faces, after the wars in Iraq and Afghanistan 

are concluded, much broader security challenges than it faced a 

decade ago. The most significant of these is the whole issue of 

cyber defense and China. 

We now have on the global stage a country that does not share 

our values and institutions, that is much more capable of growing, 

and growing in ways that are attractive to other nations in the 

world. And we need to consider that in evaluating what kind of defense capabilities we will need going forward. 

It is important to recognize that after World War II the United 

States gave the world a clear prescription for prosperity and peace, 

and that was free markets and democracy. And we were quite successful in constructing a system that defines globalization, the 

rules of the road, that strongly supports the notion of free markets. 

For example, the World Trade Organization dramatically constrains, at least in theory, the behavior of governments as they 

treat participants in global commerce. It constrains Government 

policies from tariffs to Government procurement to conditions imposed on foreign investors to import and export. And you know, we 

now have to ask ourselves the question: Can the United States survive in a world of its own creation? 

This body of law that we have created that defines the rules of 

the road is quite sympathetic to American institutions, the way we 

raise our children, the way we play the game. So, we are very comfortable competing under those terms. 

China offers a very different model. They have an autocratic government that is very efficient. We are mindful of governments in 

the 1930s for directing industrial development. And it just simply 

doesn’t share our democratic values, let us not kid ourselves. And 

China has ambitions in the Pacific, which it has outlined, and probably ambitions more globally owing to its need for natural resources that it has not yet admitted to. 

So, it is very important to recognize the interplay between the 

security challenge and the economic challenge. China offers the 

world a different model for economic development, and if we don’t 

meet the China challenge both economically and from a security 

perspective, then we can expect the rules of the game to change because more nations in the world will find what China does attractive. 

The WTO [World Trade Organization] and other international institutions are a consensual system. That is there is no overarching 

authority that says they have to abide by these rules. They can 

change them as they go along. And frankly, China has said someday China will make the rules. Those rules will be very different 

in a world where more countries, you know, think that China’s 

model of economic development is attractive and effective. 

China has effectively exploited the system that we have created. 

There has been much testimony in many committees to that effect. 

It is a subject of national debate. For example, China’s exchange 

rate policy and so forth. 

The failure of the United States to address that forthrightly and 

with substantive actions has two important consequences. One is 
10 

that it reduces our credibility with nations around the world. We 

are increasingly violated. Whether it is exchange rates or rare 

earth minerals, the United States is violated. 

And it is not one administration or the other. This has been an 

ongoing process for many years. But also it increases China’s influence and it makes it easier for China to project power in the future 

and to project its values. 

Now, certainly it is important to recognize the reason we are 

having these discussions today is because we don’t have enough 

money. And one of the reasons we don’t have enough money is we 

simply haven’t been growing. Each successive recovery for many 

years now has not been as strong as the previous one. And over 

time we have developed a very large trade deficit. 

Economists will tell you that one of the reasons we can’t get out 

of this funk is because we have got this big trade deficit. Well, the 

trade deficit really just adds up to two forces: The big deficit with 

China, which is the result of its unanswered mercantilist policies; 

and the deficit we have on oil, which we have imposed on ourselves. 

If we had chosen to address these problems, we simply wouldn’t 

be in the funk we are in, we would have more GDP, we would have 

more tax revenues. And the problems that we face, while still 

large, would not be nearly as large as they are today. 

There are a lot of myths about the budget problem and about the 

defense challenge from China, which I think bears some attention. 

One is that defense is the problem. Defense is only a very small 

part of the problem. 

Over the last 4 years Congress has decided to expand spending 

by $847 billion, of which defense was you know only a small portion. And of that $847 billion, only $62 billion was needed to account for inflation, according to the budget deflators published by 

the President in his annual budget report. 

So, clearly we are spending a lot more money; 11 percent of it 

was for defense. The rest of it is other purposes. Why, I don’t know. 

The myth persists that somehow or other there is going to be a big 

peace dividend. 

I know that Congress has allocated monies for the wars, and that 

is not part of this discussion. But apparently one of the ways we 

have paid for the wars is by not paying attention to the aging of 

our force structure, the quality of our fighters, their age, their 

bombers—things of this nature. You are all familiar with those 

things; the size of our fleet. We simply have less capability other 

than ground troops, and the capability is much older and it needs 

to be modernized. 

I ask you, how can we ask sons to fly the planes their fathers 

flew? That is going on today. How well would we fight a war 

against a cyber-attack with 15-year-old computers? But yet we are 

going to defend our country with 25-year-old jet planes. I find it 

preposterous. 

The myths persist that China will not be able to challenge the 

United States any time soon in terms of the size of its defense 

spending, because at current exchange rates, that only comes to, 

you know, about 17 percent of the U.S. budget. 
11 

But China’s currency is dramatically undervalued. If we use purchasing power exchange rates, then its defense spending is 27 percent. At the pace at which it has grown over the last couple of 

years, and given the projections that we have for the base budget 

without sequestration, China could easily be at about 60 percent of 

our spending in 10 years. 

Now 60 percent is still less, but it doesn’t have to maintain a 

fleet in the Mediterranean. It doesn’t have to maintain a fleet in 

the North Atlantic. It is not watching the Persian Gulf. It doesn’t 

have troops stationed in Korea. All it has to worry about is securing the resources that it needs and projecting power in the Pacific, 

which is its stated goal. 

It is going to be very difficult for the United States at current 

spending levels to match China if they can devote all of their 60 

percent to those purposes and we are so spread out. Our needs are 

growing, and it is silly to think that there is some sort of peace dividend out there that is going to permit us to spend significantly 

less. 

Another problem that we have is this misperception that American technology is so superior that we can rely on that, that somehow or other we are going to think our way out of this problem. 

I don’t see that happening simply because the pace at which industry is moving from the United States to China and becoming 

much more sophisticated there, I mean, Boeing is operating there, 

General Electric is operating there. 

They are becoming participants in the Chinese economy in two 

very troubling ways—and I don’t mean to single out those two companies; they are just nice examples—and that is they are becoming 

clients of Chinese mercantilism. 

So whenever we talking about doing something about it, there is 

an army of lobbyists up here. I don’t know why China has litigation 

in this town. Caterpillar does a perfectly good job for them when 

it comes to the currency. Likewise, they want to participate in the 

Chinese economy. They want to prosper. 

So it serves their interests to help the Chinese develop their 

technology. And, you know, there are limits to the extent to which 

we can avoid technology transfer of a vital national security nature. 

The Chinese will be able to develop it on their own quite soon. 

Look at my engineering school, or the engineering school at any 

university in the country. Look who goes to school there. The Chinese will have the resources they need to do this. 

If we permit Chinese mercantilism to go unchallenged and we 

permit the projection of Chinese power in the Pacific to dwarf 

American naval and other capabilities, then what choices will countries like Malaysia, Indonesia, the Philippines and India have to 

make about the economic development models they choose? 

And what will that mean for the character of consensual institutions like the World Trade Organization? Remember, that organization will evolve over time, and the rules will change. The United 

States will be isolated or more isolated, especially when you consider the state of our allies in Europe and their economic condition. 

It will be more—the world as we know it is a very comfortable 

world for U.S. commerce and that will change. I agree with all 
12 

these numbers. Basically, if you cut defense spending by $1 billion, 

you are going to get a multiplier effect of one-and-a-half to two. 

One hundred thousand dollars per job, it is very easy to figure 

out how many jobs you are going to lose. But more fundamentally, 

we are going to live in a world that is more hostile to our economic 

and democratic values. 

It is going to be more difficult for us to succeed economically in 

that climate. We are just not attuned to it. So unless we defend 

these values now, we will live in a world that is just not suitable 

to American success. And that is not a world I choose for my grandchildren to live in. 

[The prepared statement of Dr. Morici can be found in the Appendix on page 63.] 

The CHAIRMAN. Thank you very much. 

After the last election, Congress received a clear message. The 

primary concern of the American public is the economy. Americans 

want their government to get spending under control, reduce the 

Federal deficit and adopt policies to stimulate job growth, particularly in the private sector. 

We got that message. But we can’t ignore the fact that while cuts 

to the military might reduce Federal spending, they harm national 

security and they definitely don’t lead to job growth. 

You have outlined a variety of economic consequences of further 

defense cuts, yet this is something we seldom hear about in the 

news. It has kind of been left up to our committee to explain these 

facts to other Members of Congress and to the members of the public. 

At least two estimates, Secretary Panetta’s and Dr. Fuller’s, put job losses at over $1 million should sequestration occur. In arriving 

at those numbers, did you use the cuts that the chiefs are already 

working on? 

I had a meeting with Admiral Mullen shortly before he retired. 

And he said they had given instruction to the Joint Chiefs to cut 

$465 billion over the next 10 years. That is already in motion. That 

is already happening. That is already part of the equation. The sequestration of $500–$600 billion would be on top of that. 

Did you take those numbers, Dr. Fuller, into account in your 

study? 

Dr. FULLER. My analysis included the first tranche of that for fiscal year 2013 that was specified in the Budget Control Act. That 

portion is about $19 billion in reduced acquisition outlays for aerospace and military equipment, just that $19 billion is included in 

the number that I use. 

And I added another $25.5 billion to it, which would be the 

amount if sequestration that the proposed or possible sequestration 

continued. But it was just for that 1 year. 

The CHAIRMAN. Just for the 1 year, the 2013. The number that 

is out there in the public from that deficit reduction is $350 billion. 

But based on what happened in the C.R. [Continuing Resolution], 

and the starting point that you choose, and the budget request of 

the President and our budget passed last year, there are a lot of 

different starting points. But I am using that $465 billion, which takes into account the $78 billion that Secretary Gates talked about cutting, and the $100 
13 

billion that he asked for from the chiefs earlier, to inefficiencies, 

when he said they could still keep it to use for other things. But 

when he came back, he said, well, they couldn’t keep $24 billion of 

it. That had to be used for other expenses. 

So if you add those numbers to the possible sequestration, you are talking, over the next 10 years, almost $100 billion a year. So 

it is a big, big number, and I appreciate your comments on that. 

And it seems like you have addressed those and how it is going 

to affect our job loss, how it is going to affect our economy, and 

then how it will affect us in our defense posture and our economic 

posture going forward throughout the world. 

I recently visited with the ambassadors from Vietnam and Singapore, and they were very concerned. The Vietnam Ambassador said 

China is claiming the China Sea, which would make us landlocked, 

and that would tie in with what you talked about, Dr. Morici, about 

the China Sea and that area. 

Yes? 

Dr. MORICI. Well, consider this: If China can project several hundred miles into the Pacific, Japan is within its sphere of influence, 

and it is the third largest economy in the world. We are supposed 

to guarantee Japan’s security. 

The CHAIRMAN. And Taiwan and other countries in the area. 

Dr. MORICI. The thing about it is—what I hate to think about is 

Japan’s industrial establishment—consider the situation we are in 

right now, because of the threat of another recession in Korea. Korea’s shipbuilding industry is extraordinarily important to that 

economy. 

And it is facing, because of the slowdown in global commerce, a 

very short order book going forward. It has got to figure out what 

to do with those shipyards. 

Now it might be beyond the control of the United States in a 

similar situation, 6, 7, 8 years from now, from those churning out 

ships for the Chinese Navy, or just merchant marine ships for 

China. And then they can turn their shipyards to other less useful 

purposes. But more than that, we are in a little bit of the Greek 

problem here. 

Whether we talk about cutting health care or education or defense, unless we find some other way to stimulate the domestic 

economy, it is going to have multiplier effects and make the pie 

smaller and the tax revenues available to us less. So we will be 

back here again after the next election, and 2 years after that. 

And we will be—we are kind of in a slow-motion version of 

Greece. They do it every 3 months; we are going to do it every 2 

or 3 years. We have to cut, then there is less, then we cut again. 

Unless we find a way to stimulate the domestic economy, the only 

way out of this box is to deal with the largest drain on domestic 

demand, and that is the trade deficit with China and the deficit on 

oil. 

There was a time when we had to have the deficit we have on 

oil. We no longer have to have that. And it will not be resolved by 

whiz-bang electric trains from nowhere to no place in Illinois or by 

electric cars. It will be resolved by developing the oil and gas we 

have, because those other technologies are only going to come online so quickly. 
14 

Now we can either develop them or not, but we can get no environmental benefit. But with regard to China, there is the whole 

issue of if we do not address the currency problem and its other 

mercantilist activities, we are making our defense problem impossible, because we simply won’t be able to afford to deal with it. 

The CHAIRMAN. Thank you very much. 

Mr. Smith. 

Mr. SMITH. Thank you, Mr. Chairman. 

In terms of confronting the broader deficit problem—and there is 

a bunch of different ways to go at this—and, certainly, I agree; 

some of you have commented about things that were done in the 

past that, you know, led us to where we are at, and we can all have 

a robust debate about what all of those were. But we are where we 

are. 

Dr. MORICI. Yes, right. 

Mr. SMITH. So, you know, if we could skip that for the moment, 

what would you recommend going forward in terms of confronting 

the deficit? How much do we have to reduce it by, because that is 

certainly a legitimate point of debate, whether or not we should, 

you know, be focusing on reducing the deficit by, I don’t know, $4 

or $5 trillion, or whether or not a lesser amount makes sense? 

And then once you pick your figure by how important it is to reduce the deficit by how much, given that what I gather from your 

testimony, you don’t even think that the $460 billion in defense 

cuts that are currently proposed should happen. So that is off the 

table. 

What would you propose at that point—and if we could be specific on the spending, because then I like to say everyone is sort 

of, you know, is against the Federal Government spending in the 

abstract. It is in the concrete that people tend to get a little mealymouthed about it. 

So if we could lay out the specifics of what we should cut in the 

budget, or what you think should happen with revenue and where 

the deficit is at going forward, because that is what the ‘‘super 

committee’’ [Joint Select Committee on Deficit Reduction] is wrestling with. 

Dr. Feldstein, do you want to start? 

Dr. FELDSTEIN. Well, I will take a crack at that. We are heading 

according to the CBO [Congressional Budget Office], as you know, 

to a debt-to-GDP ratio that will be about 80 percent and rising 

more or less without limit if we don’t do something. 

The key driver of that is, of course, the entitlement spending. 

Since I don’t run for office, I have the luxury of saying we have to 

do what the Bowles-Simpson Commission said, we have to bring 

under control the growth of Social Security and of the Governmentfinanced health programs—Medicare and Medicaid. 

What is the target? The target ought to be to stabilize the debtto-GDP ratio at the kind of levels that we have had for decades in 

the past, about 50 percent. And that means getting the deficit 

down to about 2 to 3 percent of GDP. 

We don’t have to balance the budget, but we do have to get the 

deficit down to about 2 or 3 percent of GDP. So we need large 

enough cuts in spending and/or increases in revenue to get us to 

that goal. 
15 

Mr. SMITH. Do you believe that we need the increases in revenue 

as part of that equation? 

Dr. FELDSTEIN. I do. I think we can get increases in revenue 

without raising marginal tax rates—— 

Mr. SMITH. By reforming the code? 

Dr. FELDSTEIN [continuing]. By reforming the code. And I think 

the directions for doing that, there are various options, but I think 

putting a cap on the maximum amount that each individual can 

get in tax benefits by various so-called tax expenditures, putting a 

cap on that, letting people continue to have all of the deductions 

and exclusions that are in the code, but putting a dollar cap relevant to their adjusted gross income on that would produce a lot 

of revenue and allow us to reduce marginal tax rates at the same 

time. 

Mr. SMITH. That makes a great deal of sense. 

Gentlemen, do you want to weigh in? 

Dr. MORICI. Yes, I agree with Professor Feldstein, I have to say, 

about the deficit-GDP ratio, and the need for tax reform. There are 

a lot of different ways we can go about it. But he is basically talking about flattening—not a flat—but flattening the tax rate. So it 

makes sense to me; makes a lot of sense. 

In terms of where we can cut spending, one of the things I have 

recently written—and as you know, I publish widely in op-eds and 

all this sort of thing—is that if you look at what the United States 

Government is proposing to do for its people, it is not outrageous 

as compared to successful countries in Europe, namely Germany, 

Holland and, say, what Japan does in terms of the amount of 

health care and so forth. 

The real problem is we are terribly bad at it. We spend 18 to 19 

percent of GDP on health care. The Germans spend 12. But, you 

know, let us not fool ourselves. This is not a public versus private 

issue. 

You know, whenever you talk about really reforming health care, 

as opposed to doing what happened last year, and that is just vote 

for more benefits and spend more money, when you really talk 

about reforming it, it is always cast in terms of, well, are we going 

to continue to have a private system, a good old American system? 

Or are we going to have one of those socialistic government-run 

systems? 

Well, the fact is, the Germans finance 80 percent of health care 

through a private system, through reimbursement. There is a wide 

variety and many dimensions to health care systems that are used, 

and some are successful and some are not. Ours is private, and it 

is unsuccessful. It just simply does not deliver the benefits. 

If we started to look seriously at, for example, how the Germans 

manage the pricing process for drugs and patenting, we could save 

a lot of money on drugs. They spend $400 a year. We spend $800 

a year. They are healthier than us. Something is wrong. 

They also don’t have commercials of ladies jogging to sell 

Boniva®, and guys running to the bathroom. They don’t spend all 

that money. We do. And that is silly. 

But we need to start looking at that, and we need to stop fooling 

ourselves among conservatives—and I am a conservative—that we 

can do this without government intervention, because we simply 
16 

don’t have a private system when we have 55 percent of it funded 

by the Government. It is setting prices. 

Likewise, let me not say that hospitals should be put on a diet, 

without saying that universities should be put on a diet. 

If we look at how we educate people today, the amount of time 

that it takes to produce a doctor or a Ph.D., it is silly. The Europeans just do it better. 

Also, if we look at the amount of research that is going on in 

American universities, and what it generates—I mean, you know, 

things of that nature. We could spend a lot less on education, but 

you are going to have to make people who are constituents of Members of Congress on both sides unhappy. 

Mr. SMITH. Absolutely. 

I want to let some other folks—some of my other colleagues get 

in here. I would like to have a further conversation with you about 

China at some point, and, you know, what our realistic options are 

for confronting their rise; because they are going to rise. 

Dr. MORICI. But we want to get on a better set of rules. 

Mr. SMITH. Right. Right. 

I yield back. Thank you. 

The CHAIRMAN. Thank you. 

Mr. Bartlett. 

Mr. BARTLETT. Thank you. 

If every afternoon when we left here we broke all the windows, 

which would then be placed overnight in preparation for the next 

day’s work, this could create a lot of jobs. For those who provide 

the energy, to turn the sand into glass, for those who haul the 

glass here, for those that installed it, and then all those secondary 

industries, the dry cleaners, the grocery store and so forth. 

Would this have a long-term positive economic benefit? 

Dr. MORICI. I could think of better ways of spending your money 

that smacking windows and replacing them. If you improved your 

roads, you wouldn’t be destroying something in the process to replace it. You know, that is like saying let us knock down the 

George Washington Bridge and rebuild it to create jobs. Why not 

repair all the broken bridges and make the traffic move better? 

Mr. BARTLETT. Your answer indicates, then, that there is a fundamental economic difference between jobs in the sectors of our society which consume wealth and the sectors of our society which 

create wealth. 

Dr. MORICI. I don’t think I said that, sir. I said there is a difference between destroying something to create a job and improving something that is broken. 

Mr. BARTLETT. Okay. We could also create a lot of jobs if we simply had people dig ditches and then fill them up again. 

Dr. MORICI. Same principle. 

Mr. BARTLETT. Or haul stones from—— 

Dr. MORICI. Same principle. 

Mr. BARTLETT [continuing]. Site A to site B. Yes, sir. 

Dr. MORICI. Same principle. 

Mr. BARTLETT. Okay. I think your answer is implying that you 

believe that there is a fundamental difference in the sectors of our 

society that consume wealth and those that create wealth, from a 

purely economic perspective. 
17 

Dr. MORICI. I think if—— 

Mr. BARTLETT. If we ignore the fact that we have got to have a 

military and it is going to be too small, I think, with these cuts, 

if we totally ignore that, and we just look at jobs, aren’t jobs in our 

military in the sector that consumes wealth? 

Dr. MORICI. All jobs consume wealth. All jobs consume resources. 

We have judges. Judges consume wealth, but they provide a framework for commerce—contract law. 

A safe world provides highways for commerce; places for boats to 

go unimpeded. And the projection of American power for the last 

75 years has been responsible from democracy almost being extinct 

in 1939 to prospering in the world, and for the spread of market 

institutions which has created great wealth—that has a certain 

overhead. 

Mr. BARTLETT. So then there is no—— 

Dr. MORICI. The foreign services—the same thing, sir. We could 

say the same thing about diplomats. 

I don’t know where we are going with this. 

Mr. BARTLETT. We are making the point that we may continue 

on this committee that national security is enormously important; 

that a military—adequate—is enormously important. But, today, I 

thought we were talking simply about economic effects. 

Dr. MORICI. Well, the point is that if you denigrate the economic 

system, so it is hostile to American economic institutions, the 

United States will not be able to compete competitively, and our 

GDP will be decidedly smaller 25 years from now than it would be 

in a more favorable environment. 

Mr. BARTLETT. I have no argument with what you are saying. 

Dr. MORICI. Okay. 

Mr. BARTLETT. But I thought today we were simply talking about 

economic effects—— 

Dr. MORICI. Well, the economic effects of cutting—— 

Mr. BARTLETT. And I must confess that although I am not an 

economist, I am concerned that about every 12 hours we have another $1 billion trade deficit. That is more than a $1 million-aminute trade deficit. 

You know, if we could increase our economic growth by simply 

increasing the activity in a service-based economy, then if we all 

took in each other’s laundry for $100 a load and cut each other’s 

hair for $100 a haircut, we would have an enormously increased 

economy, would we not? 

Dr. MORICI. Well, no, eventually you will run out of money, because you have to import oil to generate the electricity to run the 

restaurant. 

Mr. BARTLETT. So you are making my point that unless you have 

people in that sector that is creating wealth—— 

Dr. MORICI. I share your concern about—— 

Mr. BARTLETT [continuing]. Forever spend wealth. 

Dr. MORICI. Exactly, and I share your concern about the trade 

deficit. That is why I say that we cannot afford the defense that 

we need unless we resolve that problem, because the economy will 

grow too slowly. 

If we could cut the trade deficit in half, using the same multipliers, if we could cut it in half, we could increase U.S. GDP by a 
18 

very sizable amount, and create about 5 million jobs over the next 

several years. It would have a preponderant effect on unemployment, and the economy would grow much more rapidly. But that 

requires addressing China and having a favorable set of rules in 

the global economy. 

Mr. BARTLETT. And if we don’t, disaster awaits us. Thanks 

very—— 

Dr. MORICI. Exactly. I think it is in the last paragraph of what 

I submitted. And I was trying not to be too emotive, but basically 

I say that if we do not move in the direction that we need to move 

in, you know, America will become isolated and dramatically weakened. 

Marginalized, it will resemble Italy or Greece—charming and 

quaint, but hardly able to independently sustain its standard of living or ensure its own security, or worse bankrupt and at China’s 

doorstep for a bailout. 

We are on the path to becoming Greece. Greece did the very 

same thing. It borrowed from foreigners to sustain its standard of 

living. Right now, we are borrowing from foreigners to finance our 

military and our health care. 

Thank you. 

The CHAIRMAN. Thank you. 

Ms. Sanchez. 

Ms. SANCHEZ. Thank you, Mr. Chairman and thank you gentlemen for being before us today, although this has got to be one of 

the strangest hearings that I have had to endure on this committee, to tell you the truth. 

You know, I always look at sitting on this committee as something from a strategic standpoint. I mean we have to look forward 

into the future and try to figure out with our military experts what 

the world will look like and what we need to address issues that 

may come up. 

And we have been working on that for the last 15 years that I 

have been on this committee. We have not only done that type of 

planning but we have done things like transformation, where we 

decided we would get a lot of our troops out of Germany and bring 

them back home. I know that when we did that and we increased 

the size of Fort Bliss and my colleague Mr. Reyes’s area and over 

these last few years, he has had about a $6 billion infusion and 

building more base and constructing—they are about to start constructing a hospital and housing and bringing our troops and their 

families home here. 

And I think the multiplier effect, which I know we just got a lecture from one of you on, it is pretty big on construction, and so I 

think that his economy has gotten better because we moved out our 

troops, a large majority from Germany and brought them here. 

You know when I looking at my operating area, one of you guys 

talked about the small contractors I have in my area. You know, 

they have not had business for the last few years because those 

monies for real systems have been cannibalized by the Afghanistan 

and Iraq operating costs of being over halfway around the world 

fighting a battle we just really don’t seem to get anywhere with. 
19 

And they have had to remix their customer base. So those that 

have survived so far know how to do that. They are just not in defense anymore. 

And then I think about the day maybe a couple years ago when 

I heard on the news that a gallon in Afghanistan costs me $400 

to move my troops, and I couldn’t believe it, and I went to the head 

of the appropriations defense committee and he looked at me and 

he said that is absolutely true. 

Now in California we scream when it is $4 a gallon. So I ask myself if we weren’t in Afghanistan or we weren’t in Iraq and I only 

had to spend $4 for a gallon of gas in California, where would that 

other $396 go? So I think it would be invested right here in the 

United States. 

I think Roscoe Bartlett was correct when he said when we are 

at war and we are not getting anything for it, we are really not 

getting anything for it, we need to figure out, it is not that difficult 

to figure out where to get the money to bring some of this defense 

spending down. 

I think the monies come from getting out of Iraq and Afghanistan. I think what we did before when I talked to the former Comptroller for George Bush, Mr. Walker, he said 70 percent of the deficit we created during those 8 years, 6 of them under total Republican control up here, the White House, the House, the Senate was 

because we didn’t raise revenues. 

So you can’t have it both ways. You know, you just can’t. We 

have to decide what military we need for the future. We have to 

decide that we are not winning in places, and we need to get our 

troops home and there is some fat to be cut. 

But I would agree with you, Mr. Chairman, $465 billion is a lot 

to put on the table. I am not too thrilled about putting much more 

on there. But I think we are much better capable here on this committee to figure out how to make those cuts than to have a macroeconomic impact come and tell me what I already know. The more 

money I keep here in the United States, the better off I am going 

to be at seeing people go back to work. 

So I don’t know what this hearing really was called for, but I 

agree with you. We have put a lot on the table. We don’t want to 

put much more on. But I think the sooner we get out of those wars, 

the better off we are. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The purpose of this hearing is to find the economic impact of these cuts that we are seeing from defense from 

economic experts. 

I am going to yield a couple of seconds to Mr. Bartlett to respond 

to what you said he said. 

Mr. BARTLETT. Perhaps because I am a scientist, I have a penchant for wanting all facets of an issue to be on the table. So I frequently end up the devil’s advocate. It may be sometimes difficult 

to differentiate my personal positions and my devil’s advocacy positions. 

Thank you. 

The CHAIRMAN. Thank you. 

Mr. Forbes. 
20 

Mr. FORBES. Thank you, Mr. Chairman. Thank you, gentlemen, 

for your expertise and for being here. 

I just want to kind of bring us back to the jurisdiction of the committee. We have the rules of the committee and they are basically 

on defense policy, ongoing military operations, the organization and 

reform, the Department of Defense and it is not just this hearing. 

Over and over again, we have folks on this committee that don’t 

want to talk about those aspects. They don’t want to talk about 

them unless they can talk about increased revenue, which is the 

kinder and gentler way of saying increased taxes or entitlements, 

kinder and gentler way of talking about Social Security or Medicare of spending, which is our stimulus programs, but the purpose 

of this hearing is because when we make defense decisions, it 

comes down to two things: Is this a strategic benefit and secondly, 

what is the economic cost of doing it? 

On the strategic benefit, it comes down to risk and as one general told me yesterday, the number of people who come back from 

a particular mission. 

And I just take issue, I don’t think that is breaking windows and 

replacing them by digging ditches. When I am talking about trying 

to fight to reduce the risk, I am talking about fighting to make sure 

I have more people come back than otherwise would come back. 

And that is important for this committee to do, and it is a big difference, and I disassociate myself with that line of discussions. 

But the second thing is we should be looking at the economic cost 

of making any kind of decisions we are making. 

So on the one hand we are told we are told you are going to save 

all these dollars and what you gentlemen are here for today and 

I thank the chairman for doing this, is to say are we really saving 

all those dollars or is there going to be a cost on the other side that 

is going to offset some of those dollars? 

And Professor Fuller, when I look at your studies, you looked at 

R&D costs and procurement costs, that is what you have, but I 

don’t think you even took into consideration O&M [Operations and 

Maintenance] and reduction of active duty forces and reduction of 

civilians. 

But just based on your study, you look at a state like California 

on the one hand we are saying we can save all these monies, but 

if we do this, we are talking about cuts that are going to equal 

three times the largest employer in California. 

When you look at Virginia, it is six times the largest employer 

in Virginia; Texas, it is over one time the largest employer in 

Texas; Florida, larger than the largest employer in Florida; in Massachusetts, over two times the larger employer in Massachusetts; 

in Maryland, the largest employer in Maryland, gone; in Pennsylvania—the largest employer in Pennsylvania almost; in Connecticut, three times the largest employer in Connecticut; in Arizona, three-and-a-half times the largest employer in Arizona; and 

in Missouri, you are talking about roughly three times the largest 

employer in Missouri. 

We need to put those costs on the table when we are saying okay 

over here you are going save all this, we need to let all these states 

and people know we are not saving it, we are just passing it on to 

you because basically you are going to lose a lot of jobs in making 
21 

this decision so you just need to say does it make economic sense 

to try to save a dollar here if you are going to lose two dollars over 

here. And I thank you guys for your study that helped us at least 

evaluate that. 

Now Professor Fuller, have I misrepresented anything your study 

has said? 

Dr. FULLER. No, not at all. I think it is important to recognize, 

as you pointed out, that this is just a part of the budget. It is just 

equipment and so it doesn’t include personnel, it doesn’t include 

gasoline, it doesn’t include the purchases of goods and services 

needed to operate. 

Mr. FORBES. Which is going to make a much greater impact. 

Dr. FULLER. This is roughly 45 percent of the $100 billion a year 

that it could be sequestered. 

But I think the important issue with this paper and the kind of 

work that I do is just to identify that there is an economic consequence. 

Somebody has to evaluate better—— 

Mr. FORBES. And that is what the Chairman has been kind 

enough to let us do before we make a decision in the (?). 

And Dr. Feldstein, one of the things that you have correctly 

pointed out is as we reduce our spending, doesn’t that have an impact on the reduction in defense spending with our allies around 

the world and it encourages China, I think by your testimony to 

spend more, which means if we try to come back later, we are 

going to have to spend more money to have a lower capability visa`-vis China. 

Can you just elaborate on that just a bit? 

Dr. FELDSTEIN. Yes, I—— 

Mr. FORBES. Your microphone. 

Dr. FELDSTEIN. The point that I wanted to emphasize in the first 

half of my testimony was the fact that China inevitably is going to 

have a larger GDP than ours, will have a larger capability of 

spending on defense, and that we have to be prepared in advance 

to stop them from taking advantage of that to try to intimidate the 

United States and our allies. 

So I think that is very important, and it is not something we can 

postpone. 

Can I make another related point? 

We are talking about cuts in defense spending, but we are talking about it in an environment in which the economy already has 

a 9 percent unemployment rate and many others who are on parttime work, so we are making worse the weakness of the American 

economy by cutting spending in the short run. 

In the long run there are different issues. But in the short run 

we are making it worse and what I have advocated in the past in 

writing was that we ought to ask the military services if they can 

move forward in time some of the replacement and repairs and inventory rebuilding that is going to happen anyway in the future. 

Mr. FORBES. And my time is up. Mr. Chairman, I just want to 

thank you for having this hearing so we make these decisions with 

the information and not blindly making them and thank you gentlemen for your expertise. 

The CHAIRMAN. Can you be very brief? 
22 

Dr. MORICI. Very brief. 

Going forward, when we talk about what our allies can do, I 

think that realistically speaking what is going on in Europe, the 

only places we can look for real significant assistance in meeting 

security challenges—and this is going to be very difficult for you 

to deal with—is Germany and Japan, because everybody else is 

pretty flat out. 

The CHAIRMAN. Thank you. 

Mrs. Davis. 

Mrs. DAVIS. Thank you Mr. Chairman. Thank you all for being 

here. I agree. I think part of the difficulty is here that there are 

a lot of different perspectives on this issue, and it doesn’t feel as 

we are getting all of that. What I was interested in hearing is that 

I think that there are a number of things that you have mentioned 

which tend to go along the line of stimulus spending. 

I agree. I mean in some ways it would make a lot of sense if the 

military would identify those machineries, equipment, carriers, et 

cetera, that really could be put on a fast track, and that we could 

spend in those areas. But at the same time we are talking about 

that, it almost appears as if, you know—if we just tripled or quadrupled the defense budget, all of a sudden we would have a lot of 

stimulus spending. 

And I don’t think we would agree that that makes any sense. So 

we need to think more in—we try to do that in this committee— 

think in terms of a whole-government approach from time to time, 

and in what areas we can actually find greater growth or development that really mitigates the defense budget; and whether we 

could be helping ourselves along if we spent more in some areas. 

That means we don’t have to spend quite so much on defense. 

Can you comment on that? Would you like to? 

Dr. FELDSTEIN. Yes, I think you hit the right word—‘‘fast track.’’ 

That is the idea that I was suggesting is not to increase total defense spending over the next decade, but to take some things that 

might be done in 2014 or 2015 and tell the military to hurry up 

and do it now when we have got a lot of unemployed resources. 

Hopefully a few years from now the economy will be back at full 

employment and we won’t be able to do that. But now when we 

have got so many unused industrial resources, would be the right 

time to do some of the replacement and some of the repairs and 

some of the inventory rebuilding that will have to be done later. 

So it doesn’t add to the total debt over the next 5 years; doesn’t 

add to total defense spending over the next 5 years. It just pulls 

it forward to a time when we have a lot of slack in the economy 

and would give a boost to aggregate spending. 

Mrs. DAVIS. Yes, sir. Do you want to comment? 

Dr. MORICI. And I am not a defense expert, which I freely acknowledge. I mean my background is in international economics; 

international relations; international agreements. But it seems to 

me that in the post-Afghanistan era the nature of American force 

structure is going to have to change dramatically because we are 

going to be largely facing a naval challenge and a cyber challenge 

with China. 

And that doesn’t mean we don’t need any ground forces at all, 

but I don’t know that we are going to need 100 maneuver battal-
23 

ions any longer. We may need less. I don’t know how that all works 

out, but within even the same pie, I mean the fact that our fleet 

is shrinking is very troubling to me when China is launching aircraft carriers. 

Mrs. DAVIS. I think what is difficult is sometimes setting those 

priorities. We try and do that. We use the QDR [Quadrennial Defense Review]. We use a whole number of other factors, but trying 

to set those priorities of what we truly need to plan for the next 

war, which is obviously a difficult one to do. 

Dr. MORICI. I don’t know that there is a next war as much as 

there are going to be interesting confrontations about who gets to 

sail where. 

Mrs. DAVIS. Yes. Yes. One of the other things that you have 

brought up along stimulus spending, I think is roads, bridges. We 

know Simpson-Bowles of course dealt with infrastructure as well as 

it dealt with decreases in defense spending. You have mentioned 

Simpson-Bowles and that being not necessarily a model, but at 

least a jumping-off point for talking about the situation that we are 

in today. 

Do you feel that they went overboard when it came to defense 

spending within their recommendations? 

Dr. FELDSTEIN. I do. They said $100 billion of domestic and $100 

billion of defense. So that was not the kind of carefully thoughtthrough analytics of how much we need for defense. It was just 

saying, ‘‘Here is a way of doing something that appears on the surface to be fair.’’ But that isn’t what our defense planning ought to 

be about. It ought to be thinking through what our needs are. 

And again I just keep emphasizing your words about ‘‘fast track.’’ 

Doing something sooner in spending in defense that has to be done 

eventually makes, to me, an enormous amount of sense in an economy that has so much slack, so much unused resources, and won’t 

forever. We are going to get back to full employment. 

Mrs. DAVIS. Thank you. Thank you Mr. Chairman. I—— 

Dr. MORICI. Just 10 seconds? The context of thinking about 

China and the Pacific has changed dramatically in just a few years. 

The notion was we didn’t really have to worry about them because 

their defense spending was small just a few years ago. So I think 

that you need to look at the context in which recommendations 

were given and the context that we are in now. 

The CHAIRMAN. Thank you. 

Mr. Wilson. 

Mr. WILSON. Thank you, Mr. Chairman, and thank all of you for 

being here today. And I appreciate that what you are focusing on 

is facts. And I want to commend one of our colleagues, Congressman Randy Forbes, who has produced a memorandum that I hope 

the American people have the opportunity to see. It is ‘‘Strong Defense, Strong America’’ and, Dr. Morici, it hits right on point about 

Army Brigades since 1990—they have decreased from 76 to 45; 

Navy ships from 546 to 288; bombers from 360 to 154. 

There has been an extraordinary reduction in our capability, and 

the American people need to know this. This is at forbes.house.gov/ 

strongamerica. And in dealing with facts, Dr. Morici, in your statement that you provided, there were some startling facts I believe 

the American people need to know. 
24 

And that is, in 2007, there were two wars. We had the tax cuts 

in place. The deficit was $161 billion. But in 2011, the deficit was 

$1.3 trillion and you further explain there was an $847 billion increase, but people need to know that the increase of the defense 

budget was 11 percent of the $847 billion. These facts, really the 

American people are not aware. 

Then we get to a myth, and I would like for you to explain this 

myth. You say that there is a belief that the United States spends 

too much money on defense and winding down the wars in Iraq 

and Afghanistan will create a peace dividend. And you indicate 

that is a myth. Can you explain that to us? 

Dr. MORICI. We have been through this before. We went through 

it with Vietnam. You did appropriate monies over and above your 

base of about—what is it, $573 billion—$575 billion to fight the 

wars? And you look at defense spending. It is seven-something, not 

five-something and that is the war budget. 

However, those extra appropriations were monies that could 

have been spent in other ways. And one of the things that has happened over the last several years, as you have pointed out, is our 

ability to project power has shrunk. We have fewer planes, fewer 

boats, things of that nature. But also that things have gotten old 

and we are going to have to make sizable investments as we reconfigure what we have to address the challenges we will have that 

are different. 

But we are going to have to do an awful lot of modernization. I 

simply don’t think you would like to be operating with 15- or 20- 

year-old computers. I don’t know why we should be flying 25- and 

30-year-old fighters? They do get old after a while. 

Mr. WILSON. Additionally, you indicate that it is very important 

that we stimulate the domestic economy. Well, we are all quite interested in that. And I appreciate that you raise the issue of domestic energy production. I would also like to point out last week 

I was in Alberta, Canada. That every dollar spent by the United 

States, and Canada is our leading importer of oil to us, every dollar 

or 90 cents is spent back in the United States, including in the District, buying tires—Michelin. 

So it is positive. Can you explain again about stimulating the domestic economy? 

Dr. MORICI. There is a little bit of difference between financing 

energy development in Alberta and funding it in Nigeria, okay? 

But, essentially, if we could free up domestic oil and gas development that will provide the same kind of stimulus as road construction, but it would be private money. It wouldn’t increase the deficit; 

it would reduce it because it would generate tax revenues. 

It is the same stuff. It is steel. It is cement. It is all the good 

stuff that people like, you know, when they do those things. Likewise if we did something substantive about the trade deficit, it 

would create manufacturing jobs. It would create tax revenue and 

it would reduce the deficit. You know, there are things we can do 

to stimulate the private sector right now. And that would not cost 

you any money. And they would have the same kind of effect as 

stimulus spending and make your life easier. 

Mr. WILSON. And more jobs in Alberta, more jobs in America. 

Mr. Feldstein, the multiplier effect from military spending, can you 
25 

explain the difference between military spending as opposed to 

other public spending? 

Dr. FELDSTEIN. Military spending is a direct component of GDP. 

So every dollar that is spent on military procurement or military 

salaries is another dollar of GDP directly. In contrast, if you spend 

money on, say, transfers to state and local governments, that is not 

immediately or directly a component of GDP, so it doesn’t add to 

GDP directly, only when those states and localities spend that 

money. 

Now if they spend every dollar of the transfer, well then it would 

be like defense. But typically they will use some of that money to 

replace money that would be funded out of rainy day funds or by 

raising taxes and so you get less than a dollar to start the process. 

And so that is why defense spending has a bigger multiplier, has 

a bigger impact on GDP then spending on other things. 

Mr. WILSON. Thank you all very much. 

The CHAIRMAN. Thank you. 

Mr. Johnson. 

Mr. JOHNSON. Thank you. 

Defense spending has a bigger multiplier than spending, say, on 

grants to state and local governments, with a specific purpose to 

retain the employment of teachers and police officers, firefighters 

and other public service workers? 

Dr. FELDSTEIN. If every dollar that gets transferred to a state is 

used for that purpose—— 

Mr. JOHNSON [continuing]. For that purpose? 

Dr. FELDSTEIN [continuing]. Then it is the same as defense. 

Mr. JOHNSON. And—— 

Dr. FELDSTEIN. If they would have paid out of—— 

Mr. JOHNSON. And I understand that. You are assuming that the 

money would be spent for purposes other than what the Federal 

grant or the Federal allocation to the state would require. 

But let me move on because I think we have heard talk of Government stimulus of the economy; Government spending on defense. And, of course, the purpose of defense spending is to secure 

the nation, as opposed to stimulate the economy. But it does have 

that incidental impact, and that is undeniable. 

Isn’t it a fact that when you spend money for infrastructure; 

when the country invests dollars in infrastructure—roads, schools, 

and the like—broadband extension—those things create jobs as 

well? Is that correct? 

Dr. FELDSTEIN. Absolutely, yes. 

Mr. JOHNSON. And so it has the same impact—domestic spending 

for infrastructure has the same impact as defense spending? 

Dr. FULLER. I would like to disagree a little bit—— 

Mr. JOHNSON. Hold on. I will let you all come in. But what we 

are talking about here, basically, is a philosophy of Government 

spending. If you are going to spend on defense and it has a purpose 

of—or it has an incidental effect—— 

Dr. MORICI. There is a difference, sir—— 

Mr. JOHNSON [continuing]. Of stimulating the economy—— 

Dr. MORICI. No, there is a difference—— 

Mr. JOHNSON. Hold now. 
26 

Dr. MORICI. No, no, no, it is not a philosophical difference. It is 

a technical difference. 

Mr. JOHNSON. I have got the mike. 

Dr. MORICI. Okay. 

Mr. JOHNSON. And I am entitled to my view of things, and I am 

entitled to ask questions based on those views. You may disagree, 

and I think that there is room for disagreement. We just simply 

need to, in this Congress, have more of a will to discuss the issues 

instead of just say, ‘‘No.’’ 

You know, I don’t think there is anybody who wants to just say 

no to defense spending. We can’t ride around in 30- and 40-yearold planes and operating on DOS operating systems on our computers with 20-year-old hardware. No, we can’t do that. We have 

to continue to invest in our military. But since we have, kind of, 

bordered upon, here, talk of economic stimulus, if you will, I think 

that this is an appropriate philosophical issue for us to address. 

And you apparently disagree with me as far as the effect of domestic spending, domestic spending for infrastructure. 

Dr. MORICI. Yes, sir, I do. And can I explain why? 

Mr. JOHNSON. Okay, please. 

Dr. MORICI. I understand there is a genuine philosophical difference in this room, in this Congress, in this country, between the 

desirability or the positive systemic effects of defense spending 

versus the positive systemic effects of education spending or to 

keep firefighters on the job and so forth. I acknowledge that. 

However, there are technical differences that are not ideological 

or philosophical in nature. When you spend a dollar of Government 

money on widgets—let us keep this neutral—if the widget manufacturer gets all of his materials in the United States and employs 

entirely U.S. labor, it will have a higher multiplier effect than if 

the widget manufacturer uses imported steel. 

And there is a difference in that defense spending tends to have 

a greater domestic content than does a construction project. We use 

a lot of imported materials in construction. So there is that kind 

of measurement issue. 

Mr. JOHNSON. I mean, what is the difference between the materials that we would use in domestic spending as opposed to—— 

Dr. MORICI. Well, for example, suppose—— 

Mr. JOHNSON. We would use the same steel from the same 

source—— 

Dr. MORICI. No, actually, there are 700 different kinds of steel 

made in the United States. Construction steel tends to be more 

commodity steel, basically folded cold-rolled steel that you see in 

two-by-fours. You can import bridges. 

The kind of steel—— 

Mr. JOHNSON. And is it American companies that are the ones 

that have moved those operations—— 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. And, Dr. Fuller, I represent the Eighth District in Georgia. Specifically, Robins Air Force 

Base is the largest industrial complex in Georgia, and a lot of good 

men and women are working there, taking care of the warfighter. 
27 

Where would Georgia fall in that list of job losses, in the top ten? 

Are we in the top ten? 

Dr. FULLER. It is not in the top ten. But, in this case, these top 

ten are just in the manufacturing and production of aerospace and 

equipment, so it didn’t include personnel. 

Mr. SCOTT. Okay. 

Dr. FULLER. And that would change that list, if we were talking 

about military personnel or civilian contracting by DOD. 

Mr. SCOTT. If you have those numbers, I would like to see those 

numbers. 

First of all, I voted against the sequestration and the potential 

for it. And I think, maybe, the point that I would like to again 

make is that, when we spend money through the Department of 

Defense and we are purchasing equipment, that, by definition, creates manufacturing jobs, doesn’t it? 

Dr. FULLER. Enormous job impact. I mean, and that is one of the 

differences with this kind of spending and some of the other kinds, 

when you are talking about that the employment multipliers are 

higher because some of those employment multipliers are driven by 

payroll. 

Mr. SCOTT. Yes, sir. 

Dr. FULLER. And that just spreads out across the economy. But 

the supply chain is very broad and very long in military-equipment 

manufacturing. 

Mr. SCOTT. And so is it a fair statement to say that our challenge 

as America is that our GDP is not growing anywhere close to as 

fast as our competitors, both in industry and our potential military 

competitors in the future? 

Is it fair to say that that is our real problem right here and why 

we are having all of these discussions? 

Dr. FELDSTEIN. Well, there is a short-run problem and a long-run 

problem. And in the short run, we are growing at about 2 percent, 

and that is not enough to begin to absorb all the excess unemployment. 

Mr. SCOTT. Yes, sir. 

Dr. FELDSTEIN. So that is a serious problem. 

In the long run, we are not going to grow as fast for the next 

decade or two decades as China or India or other countries that are 

still very poor on a per capita basis and will be catching up with 

us. 

But as I emphasized in my testimony, in both of those cases, 

their populations are much larger. 

Mr. SCOTT. Yes, sir. 

Dr. FELDSTEIN. And therefore, long before their per capita income even comes close to ours, their total GDP and therefore their 

ability to support a defense budget will be much larger than ours. 

Dr. MORICI. Yes, may I? It is important to recognize a distinction 

between the quantity and quality of growth. With China growing 

at 9 percent a year and the United States growing at 2 percent, 

the U.S. position is being fundamentally degraded. And the two 

lines cross sometime in the next decade, and the best defense posture—that is just not a good situation to be in. 

However, if we address the trade deficit with China; if we balance trade with China and develop their own oil and gas, then not 
28 

only would we be growing more rapidly, but we would be doing it 

by manufacturing more, by undertaking more R&D, so the quality 

of U.S. growth would be very good, and we would be able to maintain for a very long time our technological edge. 

We have a lot of assets in the United States that are underutilized, and are on the verge of atrophy. For example, Congress, in 

its wisdom, created the land grant universities. So we have a plethora of engineering schools in the United States. 

Mr. SCOTT. I am getting very short on my time—— 

Dr. MORICI. Okay, but you see what I am—it is the quality of 

growth as well. If we grow at 4 percent, we are not just going to 

grow double; we are going to grow better. 

Mr. SCOTT. Absolutely. But 4 percent GDP growth, I think, is a 

very reasonable and good goal that we should have for this country. 

This country can, and Americans can, grow at 4 percent GDP. 

My point is that the cuts that the military is being asked to take 

is going to further reduce our starting point in getting back to that 

4 percent GDP, which I think is the point that you have tried to 

make as well. 

Dr. MORICI. Yes. 

Mr. SCOTT. One of the things I would ask each of you to take a 

look at, and then I will yield back the remainder of my time—one 

of my primary concerns is the President’s budget revenue estimates. I hope that you will each take a look at that—for 2010 he 

is saying the revenue from corporate taxes, $191 billion; 2011, $198 

billion; 2012, $327 billion; 2013, $397 billion; 2014, $478 billion. 

Those are pretty strong growth projections that he has built into 

his budget. And I would appreciate it—certainly, I respect each of 

you—if you would take a look into the tables where he has put 

some, I think, pretty robust assumptions. 

Dr. MORICI. Well, I have looked at the—by the way, this Administration is not novel, but the President, in his February budget, 

assumed about 4—it is in my testimony—about 4 years or 5 years 

of 4-percent growth. And since we are not growing at that pace, it 

just means the revenues aren’t going to be there. 

Mr. SCOTT. And it means the deficits will be larger? 

Dr. MORICI. That is why we will be back at this in 2013, after 

the election. 

The CHAIRMAN. Mrs. Hanabusa. 

Ms. HANABUSA. Thank you. Thank you, Mr. Chairman. 

Thank you, Professors. 

Dr. Fuller, beginning with you, I just have a clarification question. In your testimony on the top ten states, you said that they 

are manufacturing only. 

Can you tell me why you selected the manufacturing component 

in arriving at the ten states that would lose the most in terms of 

jobs in thousands, as well as the funding in terms of gross state 

product? 

Dr. FULLER. Well, if I left the impression it is only manufacturing I misspoke. What we do with DOD spending for equipment, 

which starts with manufacturing, but it also supports a very, very 

large—almost eight jobs in non-manufacturing for every one job in 

manufacturing. So, the job numbers that I have here include manu-
29 

facturing and all of the corollary jobs or support jobs that go with 

those industries. 

Ms. HANABUSA. So, it would be like a multiplier impact of loss 

of one job in manufacturing and DOD related situation, and then 

how it affects the other ancillary—— 

Dr. FULLER. Yes. It is only 12 percent of the total are the—— 

Ms. HANABUSA. Right. Right. 

Dr. FULLER [continuing]. Direct aerospace manufacturing jobs. 

Ms. HANABUSA. Okay. And you said that if you were to translate 

that to personnel, just loss of personnel, you would have a different 

ranking of the states. 

Dr. FULLER. It could very well have included the purchase of oil 

and other kinds of support commodities that the military consumes. I don’t know what the answer is, but I suspect—Virginia 

gets more DOD spending of all kinds on a per capita basis than 

Texas and California. But Texas was number one last year in total. 

So, there might be some rearrangement of the ordering in this. 

Ms. HANABUSA. And is that readily available, so you could give 

it to us? Or is that something you would have to calculate? 

Dr. FULLER. No, it is published every year. It would be easy to 

get it for you. 

Ms. HANABUSA. Thank you very much. 

Both Dr. Feldstein, as well as Dr. Morici, gave a strong testimony on China. And I represent Hawaii, so you can imagine my 

interest in the Pacific. 

Dr. Feldstein, first beginning with you, you said something in 

your testimony that I was interested in. And you said that you 

know we have to define the debt and GDP ratio. And you said 

about 50 percent. Did I hear you correctly? And then you said to 

get deficit down to 2 percent to 3 percent of GDP. Was that something—— 

Dr. FELDSTEIN. Historically, our debt ratio has been 50 percent 

or a bit less for decades now. But it is getting way out of control. 

And to get it back to that it would take bringing the annual deficits 

down to the 2 percent to 3 percent range. 

Ms. HANABUSA. Of GDP. 

Dr. FELDSTEIN. Of GDP. 

Ms. HANABUSA. So, so that I am clear, for example if we agree GDP is almost $15 trillion, $14.7 trillion, somewhere around there, 

and the debt that you are speaking to that we would have to get 

down to would be about 7 point whatever. Are we talking about the 

same thing? 

Dr. FELDSTEIN. If it were to be true today, yes. 

Ms. HANABUSA. Right. 

Dr. FELDSTEIN. Exactly. 

Ms. HANABUSA. Thank you. 

Dr. Morici, you said in your testimony something that caught my 

eye. You say without a strong economy and military capable of 

meeting the emerging challenge posed by China in the Pacific, 

American values in the U.S. economy cannot succeed. And then you 

said something else, which was—and I am going to ask you how 

you relate the two or what you think we should do. 

You said large American multinationals, which have invested in 

China to serve the market, have been clients of Beijing’s protec-
30 

tionism, and invest in the middle kingdom mercantilism. I haven’t 

heard middle kingdom used in a while. 

And so I guess what I am looking at is as you say that we have 

this definite need in terms of a military power to look at China. 

And yet we have our own in China. And I think the end result of 

this was the transfer of technology. 

And I think that is how you are drawing it together, that we 

think China doesn’t have the technology that we have, but China’s 

taking care of our great, big manufacturing. And you are assuming 

that the technology will transfer. So, can you tell me how you are 

putting these two statements in, and what you think the ultimate 

result is going to be if we let this continue? 

Dr. MORICI. Well, essentially, in order to manufacture, to sell in 

China, you have to manufacture in China. That is why their exports to us exceed their imports from us 3.5 to 1. That is a huge 

spread. I mean, one of the best-selling vehicles in China are 

Buicks. But we can’t export them. 

Now, in a recent example, to benefit from the subsidies that they 

have, like we do, for electric vehicles they want to require General 

Motors to transfer its EV [electric vehicle] technology, its Volt technology. We are establishing labs in China that have the effect of 

people gaining experience, developing backgrounds and so forth, 

which is transferrable, whether it is software or the design of computers or the development of aircraft. 

By having design facilities in China people work there. They 

learn. They quit their jobs. They go someplace else and they can 

do the same thing. I mean, the same sort of thing happens in the 

United States, but we are developing this for them. 

Ms. HANABUSA. Thank you, Mr. Chair. 

The CHAIRMAN. Dr. Fuller, the study that you put out yesterday 

for the AIA [Aerospace Industries Association], you have the top 

ten states. But I understand you have that for all the states? 

Dr. FULLER. I do. 

The CHAIRMAN. Could you make that available to us, please? 

Dr. FULLER. I will. 

The CHAIRMAN. Thank you very much. 

Mr. Young. 

Mr. YOUNG. Thank you, Mr. Chairman. Appreciate all of our panelists being with us today. It has been an interesting hearing, and 

I really appreciate the chairman holding this hearing; first a comment, then a question. 

The comment is, as we make defense spending decisions here in 

this country I think it is important to clarify our greatest consideration should not be the multiplier effect of any given Government 

spending. It should not be, you know, other considerations. First 

and foremost, it is military strategy. 

None of you pretend to be military strategists, and so we defer 

to them. First and foremost is these different tradeoffs are made, 

assessments of risk and proposals to mitigate the risk. And so I 

just want to make sure that is clear. That is not the purpose, as 

I understand it, of this hearing. 

Dr. Morici, a question about the trade deficit with China, something you brought up a number of times, probably a little outside 

the scope of this hearing. But since we have heard it so many 
31 

times, I am going to give you an opportunity to fill in some concrete 

policy suggestions as to what could be done here at the Federal 

level since it does in fact have implications for employment in the 

defense sector, our country’s growth and whatnot. 

Dr. MORICI. I am not alone in making this suggestion. While I 

am known as a conservative economist, and sometimes referenced 

to a political party of which I am not affiliated, economists, shall 

we say on the other side of the aisle, have made the same suggestion. And that is that one way or another we could put a tax on 

Dollar-Yuan conversion so as to raise the value or raise the price 

of buying in China and investing in China to what it would be if 

China revalued its currency. 

We could determine the tax by dividing the value of its foreign 

exchange purchases, its currency intervention, which are quite 

transparent, published by the Bank of International Settlements 

and the IMF [International Monetary Fund] by the value of its exports. That would dramatically change the price of Chinese goods 

in the United States, and change buying habits and sourcing habits. 

It would also affect investments into China, and it would be in 

China’s hands because China could reduce that tax by reducing its 

intervention and letting the value of its currency rise. 

Mr. YOUNG. Thank you. I suspect you have published on this 

topic, and could direct me towards at least an article you have 

written? 

Dr. MORICI. I am sure I could do that. 

Mr. YOUNG. Are there articles critical of your position that you 

could also direct me to, perhaps? 

Dr. MORICI. I suggest you find them on your own, but some people would say that that is a protectionist position. And my position 

is that what China is doing is protectionist—— 

Mr. YOUNG. All right. All right. 

Dr. MORICI [continuing]. That we are in a trade war and they are 

shooting and we are, you know, using a pea shooter. 

Mr. YOUNG. And if you could restate your earlier point about the 

quality of GDP growth as opposed to the number there—I lost that 

point. 

Dr. MORICI. If the United States were to resolve its trade problems by dealing with China and oil, we would be manufacturing a 

lot more in the United States, which would finance a great deal 

more R&D. And that would create a lot more employment, for example, for American engineers, which would raise their wage rates 

and encourage young people to register in engineering programs. 

You know, one of the reasons that students major in finance instead of electrical engineering is because it pays better and there 

are more jobs. And one of the reasons there are more jobs is simply 

because we have this trade deficit. 

So, my feeling is it would improve the quality of human capital 

in the United States. And it would also result in us having a greater treasure trove of patents and knowledge and things that we 

could sell to the world. 

Mr. YOUNG. So this would translate into more sustainable GDP 

growth into the future. That is the benefit in terms of quality. 

Dr. MORICI. Right. And on top of that—— 
32 

Mr. YOUNG [continuing]. Would be broader as well. 

Dr. MORICI. That is right. The income issues are very different. 

By encouraging finance in this country, we encourage the problem 

that we have. 

But on top of that, we are going to have to acknowledge Professor 

Feldstein’s point. China is a very big place. And until the Chinese 

grow old from the One China policy, which is not until the next 

century, we have got a problem. 

So, we are going to have to have a technological edge if we are 

going to survive. We are going to have to be smarter. And we are 

going to have to have a better industrial capability to do that. And 

right now, on the path we are on at 2 percent growth, we are mining out and denigrating our industrial and R&D capability. 

Mr. YOUNG. I yield back. Thank you. 

The CHAIRMAN. Thank you very much. 

Excuse me. When I went to the Steering Committee to try to get 

the job as chairman of this committee, I told them that I saw the 

job as chairman of the committee to lookout for the defense of this 

Nation. And specifically to make sure that all of our people in uniform that are out on point defending our freedoms, wherever they 

may be around the world, have all the equipment, the training, the 

leadership, all of the things they need to carry out their missions 

and protect us, and return home safely. 

I am very concerned about the cuts that are in place, and those 

that we can see coming down the line on defense. We have held 

five hearings now to hear from specific experts on military and 

former Members of Congress who have chaired this committee to 

find out what their feeling was about the impacts of these defense 

cuts on our defense and on carrying out that mission with regard 

to those who defend us. 

I also think, though, that it is important that the Nation understand that these cuts will have significant economic impacts. And 

without a hearing such as this, they are not hearing that. In fact, 

most of the Members of Congress don’t even understand or know 

of the significance of the cuts that we have already made. 

That is, again, why the hearing. 

So I appreciate you being here. I understand that you haven’t 

testified before this committee before, and maybe we haven’t ever 

looked into the economics before, because that does fall under the 

purview of other committees. 

But in this particular case, it does have significant impact on our 

job as members of the Armed Services Committee, and I appreciate 

you being here today, and I appreciate your testimonies. And Mr. 

Smith, do you—— 

Mr. SMITH. Well, I thank you for the hearing as well, and I think 

the last conversation from Mr. Young there is very important. 

The industrial base really matters here, and I think going back 

to Mr. Bartlett’s, you know, digging holes and refilling them, I 

think there is certain types of spending that make a bigger difference, and I think defense, because of the manufacturing base 

that it has developed, and the workers’ skill set that it develops, 

that what I hear a lot from our defense contractors, is if you say, 

well, we are going to take a pause. 
33 

We are not going to build submarines for a couple of years; you 

can’t come back a couple years later and have the subcontractors 

and the skilled workforce that is necessary to build that submarine 

or aircraft carrier or bomber. You need to maintain that industrial 

base and also the manufacturing skills that are developed in doing 

that; have private-sector applications as well. 

And you can begin to develop products, whether it is in energy 

or health care or any other number of different other sectors, where 

you begin to manufacture and produce things in a way that help 

your broader economy. 

Now I happen to think this line of argument also applies to 

broad infrastructure building, that if you are talking about bridges 

and energy and roads and maybe even trains, even—not specific 

train, if you don’t like it, but some sort of infrastructure product— 

go ahead. Sorry. 

Understood. That is fine. 

You know, that type of infrastructure also has those same benefits, that you—you are manufacturing; you are employing the workforce that will grow wealth and move you forward in a more positive direction. 

So it doesn’t just apply to the defense area, but I think I really 

do think that is the biggest argument folks don’t understand out 

there—the importance of defense spending to our industrial base 

and our manufacturing economy. So I think this hearing has been 

very helpful, and I appreciate all of your gentlemen’s testimony. I 

appreciate the chairman for having this hearing. I yield back. 

The CHAIRMAN. Thank you very much. 

This hearing stands adjourned. Thank you. 

[Whereupon, at 11:51 a.m., the committee was adjourned.] 

A P P E N D I X 

OCTOBER 26, 2011 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

OCTOBER 26, 2011 

(39) 

Statement of Hon. Howard P. ‘‘Buck’’ McKeon 

Chairman, House Committee on Armed Services 

Hearing on 

Economic Consequences of Defense Sequestration 

October 26, 2011 

The House Armed Services Committee meets to receive testimony on Economic Consequences of Defense Sequestration. We are 

joined by a panel of top economists who will share three distinctive 

perspectives with the Committee—the macroeconomic impacts 

within the United States of further cuts to defense, the regional 

economic effects which may vary from state to state, and the global 

dynamics of further cuts to our military. 

The committee has held a series of five hearings to evaluate lessons learned since 9/11 and to apply those lessons to decisions we 

will soon be making about the future of our force. These hearings 

also focused on the national security risks posed by sequestration. 

We received perspectives of former military leaders from each of 

the Services and the Joint Staff, former chairmen of the Armed 

Services Committees, outside experts, and Secretary Panetta and 

Chairman of the Joint Chiefs, General Dempsey. Today, we will 

change direction and focus on the other side of the coin—the relationship between the U.S. military and the economy. 

As a fiscal conservative, I tend to oppose increasing Government 

spending for the purpose of job creation. But I think we must understand that the defense industry is unique in that it relies entirely on Federal Government dollars. We don’t spend money on defense to create jobs. But defense cuts are certainly a path to job 

loss, especially among our high skilled workforces. There is no private sector alternative to compensate for the Government’s investment. 

Secretary of Defense Panetta has said that cuts on the scale of 

sequestration will result in a 1-percent hike to unemployment and 

1.5 million jobs lost. The Aerospace Industries Association released 

a report yesterday, based on the analysis of Dr. Fuller, one of our 

witnesses today, that estimated just over one million industry jobs 

would be lost—based on cuts to procurement and R&D alone. When 

one factors in the separation of Active Duty service members and 

DOD civilians, the number is quite close to DOD’s. The impact is 

not proportional across all 50 states. Dr. Fuller’s testimony suggests that nearly 60 percent of the jobs lost would come from just 

10 states. One-third of the lost jobs would fall in three states— 

California, Texas, and Virginia. How does this translate to the larger economy? In 2013 alone, growth in GDP would fall by 25 percent. 
40 

But the economy could be affected further, as the U.S. military 

might no longer be seen as the modern era’s pillar of American 

strength and values. There is risk that some within the international community would try to take advantage of the fragile 

American economy and the perceived limitations on our military’s 

ability to promote global stability. 

In these difficult economic times, we recognize the struggle to 

bring fiscal discipline to our Nation. But it is imperative that we 

focus our fiscal restraint on the driver of the debt, instead of the 

protector of our prosperity. With that in mind, I look forward to 

hearing from our witnesses today. 

Now please let me welcome our witnesses this morning. We have: 

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

• Dr. Stephen Fuller, Faculty Chair and University Professor, 

George Mason University, Director, Center for Regional 

Analysis at the School of Public Policy; and 

• Dr. Peter Morici, Professor of International Business, Robert 

H. Smith School of Business, University of Maryland, Director of Economics at the United States International Trade 

Commission. 

Gentlemen, welcome to the House Armed Services Committee. 

We know this may be an unusual venue for you and this is a first 

for us. Thank you again for being here. I’m sure there is much we 

can learn from you. 
41 

Statement of Hon. Adam Smith 

Ranking Member, House Committee on Armed Services 

Hearing on 

Economic Consequences of Defense Sequestration 

October 26, 2011 

I would like to thank the witnesses for appearing here today. We 

are in a time of significant uncertainty concerning the budget, and 

the advice provided by the witnesses will be extremely helpful in 

understanding the impact of potential defense sequestration. 

Our country faces a long-term, systemic budget dilemma—we 

don’t collect enough revenue to cover our expenditures. According 

to the House Budget Committee, we currently must borrow about 

40 cents for every dollar the Federal Government spends. If we’re 

going to fix this problem in the long run and avoid sequestration 

in the short run, I believe that we must address this from both 

ends—spending will have to come down, and we’re going to have 

to generate new revenues. 

Like many, if not most, of our members here, I share the view 

that large, immediate cuts to the defense budget caused by sequestration would have dangerous impacts on the ability of the U.S. 

military to carry out their missions. I am also deeply concerned 

about cuts to all non-entitlement spending, which bore the brunt 

of the recent deficit deal, and which also directly or indirectly support the jobs of thousands of American workers. This committee is 

properly focused today on the impact of the defense budget on jobs, 

but we also serve a larger body—the American people—and we owe 

it to them to approach the budget and jobs debates carefully and 

comprehensively. 

If we can avoid sequestration, I believe that we can rationally 

evaluate our national security strategy, our defense expenditures, 

and the current set of missions we ask the military to undertake 

and come up with a strategy that requires less funding; indeed the 

Department of Defense is currently focused on just such an evaluation. Sequestration would make that rational evaluation impossible, which is why it must be avoided. But it is also important that 

we address the revenue side of our budget problem. Recently, some 

of my colleagues on this committee issued dire warnings about the 

potential impacts of additional defense budget cuts. I share their 

concerns, and that is why we must consider raising additional revenue. In order to avoid drastic job losses caused by cuts to our military and other important programs, revenue must be on the table. 

It is my hope that this hearing will help remind everyone here 

that we have to make some serious choices. Our budget problems 

must be looked at in a comprehensive manner. If we are serious 

about not cutting large amounts of funding from the defense budget, something else has to give. Large, immediate, across-the-board 

cuts to the defense budget, which would occur under sequestration, 

could do serious damage to our national security. They would also 

likely result in thousands, if not tens of thousands, of Americans 

losing their jobs. Sequestration would have a similar impact on 
42 

American workers in cutting other non-entitlement spending. In 

order to avoid these large cuts and the resulting job losses, we’re 

going to have to stop repeating ideological talking points and address our budget problems comprehensively, through smarter 

spending and enhanced revenue. 

Thank you again, Mr. Chairman, for holding this hearing. And 

thank you to our witnesses for appearing here today. 
43 
44 
45 
46 
47 
48 
49 
50 
51 
52 
53 
54 
55 
56 
57 
58 
59 
60 
61 
62 
63 
64 
65 
66 
67 
68 
69 
70 
71 
72 
73 

DOCUMENTS SUBMITTED FOR THE RECORD 

OCTOBER 26, 2011 

(77) 
78 
79 
80 
81 
82 
83 
84 
85 
86 
87 
88 
89 
90 
91 
92 
93 
94 
95 
96 
97 
98 
99 
100 
101 

Æ