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i 

51–666 2010

[H.A.S.C. No. 111–19] 

SECURITY CHALLENGES ARISING FROM 

THE GLOBAL FINANCIAL CRISIS 

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MARCH 11, 2009 
(II) 

HOUSE COMMITTEE ON ARMED SERVICES 

ONE HUNDRED ELEVENTH CONGRESS

IKE SKELTON, Missouri, Chairman 

JOHN SPRATT, South Carolina 

SOLOMON P. ORTIZ, Texas 

GENE TAYLOR, Mississippi 

NEIL ABERCROMBIE, Hawaii 

SILVESTRE REYES, Texas 

VIC SNYDER, Arkansas 

ADAM SMITH, Washington 

LORETTA SANCHEZ, California 

MIKE MCINTYRE, North Carolina 

ELLEN O. TAUSCHER, California 

ROBERT A. BRADY, Pennsylvania 

ROBERT ANDREWS, New Jersey 

SUSAN A. DAVIS, California 

JAMES R. LANGEVIN, Rhode Island 

RICK LARSEN, Washington 

JIM COOPER, Tennessee 

JIM MARSHALL, Georgia 

MADELEINE Z. BORDALLO, Guam 

BRAD ELLSWORTH, Indiana 

PATRICK J. MURPHY, Pennsylvania 

HANK JOHNSON, Georgia 

CAROL SHEA-PORTER, New Hampshire 

JOE COURTNEY, Connecticut 

DAVID LOEBSACK, Iowa 

JOE SESTAK, Pennsylvania 

GABRIELLE GIFFORDS, Arizona 

NIKI TSONGAS, Massachusetts 

GLENN NYE, Virginia 

CHELLIE PINGREE, Maine 

LARRY KISSELL, North Carolina 

MARTIN HEINRICH, New Mexico 

FRANK M. KRATOVIL, Jr., Maryland 

ERIC J.J. MASSA, New York 

BOBBY BRIGHT, Alabama 

JOHN M. MCHUGH, New York 

ROSCOE G. BARTLETT, Maryland 

HOWARD P. ‘‘BUCK’’ MCKEON, California 

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 

ROB BISHOP, Utah 

MICHAEL TURNER, Ohio 

JOHN KLINE, Minnesota 

MIKE ROGERS, Alabama 

TRENT FRANKS, Arizona 

BILL SHUSTER, Pennsylvania 

CATHY MCMORRIS RODGERS, Washington 

K. MICHAEL CONAWAY, Texas 

DOUG LAMBORN, Colorado 

ROB WITTMAN, Virginia 

MARY FALLIN, Oklahoma 

DUNCAN HUNTER, California 

JOHN C. FLEMING, Louisiana 

MIKE COFFMAN, Colorado 

THOMAS J. ROONEY, Florida 

ERIN C. CONATON, Staff Director 

ANN MILES, Professional Staff Member 

ROGER ZAKHEIM, Professional Staff Member 

CATERINA DUTTO, Staff Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2009 

Page 

HEARING: 

Wednesday, March 11, 2009, Security Challenges Arising from the Global 

Financial Crisis .................................................................................................... 1 

APPENDIX: 

Wednesday, March 11, 2009 ................................................................................... 41 

WEDNESDAY, MARCH 11, 2009 

SECURITY CHALLENGES ARISING FROM THE GLOBAL FINANCIAL 

CRISIS 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

McHugh, Hon. John M., a Representative from New York, Ranking Member, 

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

Skelton, Hon. Ike, a Representative from Missouri, Chairman, Committee 

on Armed Services ................................................................................................ 1 

WITNESSES 

Cooper, Richard N., Professor of International Economics, Harvard University, and Former Chairman, National Intelligence Council and the Federal 

Reserve Bank of Boston ....................................................................................... 7 

Haass, Richard N., President, Council on Foreign Relations .............................. 4 

Rothkopf, David, Visiting Scholar, Carnegie Endowment for International 

Peace ..................................................................................................................... 13 

Zakheim, Dov S., Former Under Secretary of Defense (Comptroller) ................. 9 

APPENDIX 

PREPARED STATEMENTS: 

Cooper, Richard N. ........................................................................................... 51 

Haass, Richard N. ............................................................................................ 47 

McHugh, Hon. John M. .................................................................................... 45 

Rothkopf, David ................................................................................................ 67 

Zakheim, Dov S. ............................................................................................... 55 

DOCUMENTS SUBMITTED FOR THE RECORD: 

Annual Threat Assessment of the Intelligence Community for the House 

Permanent Select Committee on Intelligence by Adm. Dennis C. Blair .. 87 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

[There were no Questions submitted during the hearing.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

[There were no Questions submitted post hearing.] 

(1) 

SECURITY CHALLENGES ARISING FROM THE GLOBAL 

FINANCIAL CRISIS 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, Washington, DC, Wednesday, March 11, 2009. 

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

2118, Rayburn House Office Building, Hon. Ike Skelton (chairman 

of the committee) presiding. 

OPENING STATEMENT OF HON. IKE SKELTON, A REPRESENTATIVE FROM MISSOURI, CHAIRMAN, COMMITTEE ON ARMED 

SERVICES 

The CHAIRMAN. Good morning. 

Our committee meets today to hear from a very distinguished 

panel of experts about security challenges arising from the global 

financial crisis. 

November 2008, our committee initially set out to hold a hearing 

on this topic, but for a variety of reasons, we were not able to make 

the schedule work. Consider briefly what has happened in the intervening months. 

The U.S. financial crisis has widened into a global economic crisis. Our unemployment rate increased from 6.8 percent in November to 8.1 in February. The governments of Iceland and Latvia 

have fallen as a result of the crisis and others are likely to follow. 

Three of our most important partners in the Muslim world—Turkey, Indonesia, Pakistan—all face acute balance of payment crises. 

And the Director of National Intelligence (DNI), Admiral Dennis 

Blair, has concluded that the crisis represents the single greatest 

threat to our national security. 

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

page 87.] 

The CHAIRMAN. In short, we face a world that has been suddenly 

transformed and not for the better. 

Students of history know that hyperinflation in Germany was a 

significant factor in the rise of Adolf Hitler. The economic decay of 

the Soviet Union led to the regime change across Eastern Europe. 

So we know that economic crises can have consequences of national 

security of the highest order. 

Here in the United States, our economic strength has been the 

foundation of our national power and our national security. It is 

reasonable to assume that economics play no less important a role 

in the fate of many other nations. At a minimum, the global financial crisis will exacerbate an already growing set of political and 

economic challenges facing the world. 
2 

In country after country, the crisis is increasing citizen discontent and anger toward their leaders and providing an excuse for 

authoritarian regimes to consolidate their power. It is causing 

emerging nations to question the Western model of market capitalism. It heightens the always ongoing tug-of-war over budgetary 

resources and international assistance at a time when millions are 

being pushed into poverty. It distracts and strains our allies, generates conditions that could provide fodder for terrorism. Financial 

turmoil can loosen the fragile hold that many countries have on 

law and order and increase the number and size of ungoverned 

spaces. 

Perhaps most serious at a time when United States leadership 

is sorely needed, our international credibility is at an unprecedented low. 

In my view, our response to these challenges must be to restore 

our economy, maintain and enhance our key instruments of national power, including the Department of Defense, and take an approach with the world that reestablishes our credibility and claim 

to world leadership. 

Let me be clear, in today’s world a strong national defense is not 

a luxury. It is an imperative. I will be interested to hear our witnesses’ views on the likely demand of our national defense capabilities in the current environment. 

Let me pause for a moment. And I see in the audience friends 

we met yesterday, parliamentarians from the country of Pakistan. 

And we hope you get a lot out of our hearing. 

And why don’t you stand so we can—would you, please? Our 

Pakistan parliamentarians. 

We welcome you and hope you have an excellent stay here in our 

Nation’s capital. 

Let me briefly introduce today’s witnesses before turning to my 

friend, my colleague John McHugh, for opening remarks. Today, we 

have with us Dr. Richard Haass, President of the Council on Foreign Relations and former Director of Policy Planning for the State 

Department; Dr. Richard Cooper, Professor of International Economics at Harvard University, former Chairman of the National 

Intelligence Council and former Chairman of the Federal Reserve 

Bank of Boston; Dr. Dov Zakheim, whom I call the real Dov 

Zakheim—his son is one of our excellent members of our staff; 

former Under Secretary of Defense and Chief Financial Officer for 

the Department of Defense—in essence, the Comptroller thereof; 

David Rothkopf, visiting scholar at the Carnegie Endowment for 

International Peace and former Acting Under Secretary of Commerce for International Trade. 

Gentlemen, we welcome you all. We look forward to your testimony and your insights on today’s topic. 

So now I recognize my colleague, the gentleman from New York, 

John McHugh. 

STATEMENT OF HON. JOHN M. MCHUGH, A REPRESENTATIVE 

FROM NEW YORK, RANKING MEMBER, COMMITTEE ON 

ARMED SERVICES 

Mr. MCHUGH. Thank you, Mr. Chairman. Pardon me. 
3 

Let me begin by adding my words of welcome to our distinguished panelists—some are welcomed back, actually, being no 

stranger to this full committee. We deeply appreciate your contributions, that we are looking forward to hearing you make today. 

Also, Mr. Chairman, I want to add my words of greeting and 

deepest hellos again to our Pakistani counterparts. It was a pleasure, as you and I shared amongst other Members yesterday to have 

some lunch with these real champions of democracy. And it is inspirational for—at least for me; I will speak on my own behalf— 

to have the chance to see the struggles and the courage and the 

fight for a nation that these good folks represent. And we are honored by their presence. 

Mr. Chairman, I would ask that my statement be entered in its 

entirety in the record; and I would note, as always, you—— 

The CHAIRMAN. Without objection. 

Mr. MCHUGH [continuing]. You covered much of the waterfront 

with respect to the comments I wanted to make. But let me just 

say that I certainly join you in your assessment of the seriousness 

of this topic today as a national security concern. 

You mentioned. As I was prepared to, the DNI, Director Blair’s 

comments with respect to the importance of this challenge to our 

near-term security. And clearly, again as you noted, Mr. Chairman, 

we read the newspaper, we listen to the news, the data tells us— 

whether through unemployment insurance or unemployment rates 

and the fall of the stock market and other indexes—the very outward and discernible aspects of this challenge. 

But I would suggest the national security implications of this 

issue were far less overt, and like you, I am looking forward to 

hearing our witnesses develop further DNI Blair’s comments. And 

perhaps they could discuss with us today other ways in which the 

economic crisis will impact upon our security. 

History has proven to us, it seems to me, time and time again 

that instability often follows financial crisis. The intelligence community rightly raises concerns over the security of our friends, our 

allies. And the crisis also invites opportunism by rogue states and 

terrorist organizations, as you noted, Mr. Chairman. 

So the question I would also like our witnesses to address today 

is, what do we do with this intelligence. In other words, what steps, 

if any, I suppose, should the Department take to deal with the 

risks of this crisis? 

My first concern, as it is so often, Mr. Chairman, is defense 

spending. Though the top line defense numbers for Fiscal Year 

2010 show a four percent increase in spending, by moving war 

costs out of the supplemental and into the base budget, the reported growth is much less than that. And I would note, as an 

aside, I support the end of supplementals and the masking effects 

that they have on defense budgets. But we have to be, I think, very 

clear and sober with respect to the mathematical effects of that effort. And that is why I suspect, in part, Secretary of Defense Robert Gates greeted the budget’s release by saying he would have to 

make, as he called them, ‘‘tough choices.’’ 

The story is even bleaker in future years when the real cost of 

our baseline defense requirements will no longer—appropriately, 

but no longer—be masked by supplemental appropriations. Let’s 
4 

just take the growth of the military as one example. Supplemental 

funding bought the Army and Marine Corps over 50,000 active 

duty personnel from 2001 through 2008. The price tag for that 

growth was roughly $6.8 billion in additional basic defense costs. 

Future defense budgets will have to absorb these costs, and that 

is why I am concerned what impact flat-lining defense spending 

will have on national security policy in the midst of this global financial uncertainty. 

Missile defense policy offers yet another good example. Many are 

calling for deep cuts in these programs, and while I may understand their perspective, I would argue that strategic deterrence 

may be exactly what will be required to bolster our allies and 

friends at this time. A weakened global economy is unlikely to lead 

competitors and adversaries to increase their strategic capability as 

some may hope. In fact, I think it can be argued that the opposite 

may be more plausible. 

Faced with fiscal constraints, will Iran double down on its ballistic missile program? The question, it seems to me, merits our 

most careful consideration. 

In contrast to the 1990s, today we more fully understand where 

our security challenges reside: The wars in Iraq; Afghanistan; the 

fight against al Qaeda; Iranian and North Korean nuclear weapons 

programs; the return of a more aggressive Russia; the rise of 

China—all require not just words but resources as well. Diplomacy, 

soft power, to be sure, is a necessary condition, but that effort will 

ring hollow, in my judgment, absent a strong commitment on defense. And it seems to me this will be particularly true during the 

current economic crisis. 

Mr. Chairman, with that and the rest of my statement entered 

into the record, I would once again welcome our witnesses and say 

how anxious and happy I am to hear their comments. And I would 

yield back to you for the rest of the hearing. 

The CHAIRMAN. I thank the gentleman. 

[The prepared statement of Mr. McHugh can be found in the Appendix on page 45.] 

The CHAIRMAN. Let’s begin. Once again, Dr. Haass, please. 

STATEMENT OF RICHARD N. HAASS, PRESIDENT, COUNCIL ON 

FOREIGN RELATIONS 

Dr. HAASS. Thank you, Mr. Chairman, for the opportunity to testify before this committee. And let me applaud you and your colleagues on holding these hearings. 

Let me say at the outset, the economic crisis was not inevitable. 

It was just a result of flawed policies and poor decisions and questionable behavior. The problem lies with the practice of capitalism, 

not the model. 

But, nevertheless, I believe we need to face the reality that the 

perception in many places is otherwise. And that one consequence 

of the economic crisis is that market economies have lost much of 

their luster, and the United States has lost much of its credibility 

in this realm. And this only adds to the importance that the U.S. 

economy get back on track, lest the lasting casualty of the crisis 

be the perception of modern capitalism itself. 
5 

The impact of this crisis will be varied and profound. Let me 

begin with the developed world. Many governments, including several in Central and Eastern Europe outside the Eurozone, will require substantial loans. The economies of Japan, much of Europe, 

the United States and Brazil are all contracting. World economic 

growth will be anemic, if it manages to be positive, which is increasingly unlikely. There will be fewer resources available for defense and foreign assistance. That is obviously the purview of this 

committee, but I would think the pressure on defense resources 

will make it even more critical that our priorities are determined 

and are clear. 

Developing states around the world may appear to be better off 

as their growth, on average, is down by roughly half from previous 

years and it is still positive. But this growth is measured from a 

low base, and the reduction in the growth in the developing world 

has, in many cases, been dramatic. Their exports are down as demand is down. In the developed world, aid flows are reduced and 

investment flows are much reduced. Let me single out a couple of 

countries. One is China. Absent renewed robust economic growth, 

the chances are high that the government will react to, among 

other things, the high unemployment by clamping down somewhat 

more on the population, lest economic frustration lead to meaningful political unrest. 

Secondly, I would single out Russia. Russia is quite characteristic 

of countries that are dependent on raw material exports for much 

of their wealth. The economy there is contracting sharply after a 

boom; and again, I believe we can expect a greater assertion of political control domestically, and I would not rule out the possibility 

that Russia’s leaders will look to overseas crises to divert attention. 

Iran and Venezuela are two other countries that are heavily reliant on energy exports. Obviously, their foreign policies have been 

counterproductive from our perspective. The good news here that 

it is possible that one or both of these countries will pull in their 

horns at least for a while. 

Iraq, yet another energy-producing country, here the effects of 

the crisis are going to be undesirable. There is a real danger that 

disorder in Iraq will increase as unemployment there goes up, as 

prospects for sharing revenues goes down, and as the ability of the 

central government to dispense cash also goes down. 

We have, as you noted, visitors from Pakistan. And I would simply say that Pakistan’s economic performance is down for many 

reasons, but one is the reduction in foreign investment and the reduction in Pakistan’s exports. The problem is that Pakistan has little margin for error. The possibility that it could fail with all that 

that would mean for terrorism, for the future of Afghanistan, and 

for nuclear stability is all too real. 

Also North Korea is another nuclear arms state whose stability 

is worsened by the economic crisis; and I think there are real questions about the ability of South Korea, in particular, to intervene 

economically on a scale that will be required to potentially stave 

off collapse. 

Another serious issue of the global economic crisis affects every 

country, which is protectionism. Some 17 of the 20 governments set 

to meet in London in early April have already increased barriers 
6 

to trade. Negotiated free-trade agreements, as you know, with Colombia, Panama, and South Korea continue to languish in the Congress. The President lacks trade promotion authority essential to 

the negotiation of complex multilateral trade accords. Prospects for 

a Doha global trade pact appear remote. The volume of world trade 

is down for the first time in decades. 

I would simply say the costs of this are high—the economic cost, 

but also the strategic cost, the subject of today’s hearing. Trade is 

a major source of political as well as economic integration. I would 

suggest that one reason China acts as responsibly as it does in the 

political realm is because of its need to export; and it would—without this economic integration—it would have less incentive, I believe, to act responsibly. 

Trade is also a principal engine of economic growth. A Doha 

Round alone might generate something on the order of $500 billion 

in economic output to the world, one quarter of which would be in 

the United States. To use the language of the day, trade may be 

the purest form of noninflationary stimulus available to the United 

States or any other government. Exports are a source of millions 

of relatively high-paying jobs. Imports can be anti-inflationary and 

can spur innovation. 

What then should be done to limit the adverse strategic effects 

of the economic crisis? Let me quickly suggest five things the 

United States should do or consider doing. 

First, I would suggest that the United States should do all in its 

power to resist the growth in protectionism. This means resisting 

buy American provisions in stimulus legislation. On balance, more 

American jobs are likely to be sacrificed than preserved. 

I also believe we should resist ‘‘lend national’’ provisions that are 

springing up around the world, and instead, we ought to look for 

ways to bring countries into an expanded world trading system, in 

particular, bring them into the World Trade Organization (WTO). 

Secondly, we cannot allow recession to become this country’s energy policy. We must continue to look for ways to decrease U.S. 

consumption of oil, imported or otherwise, despite the temporarily 

lower prices. 

Thirdly, the United States should work with other developed 

countries and reserve-rich countries to increase the capacity of the 

International Monetary Fund (IMF) to assist governments in need 

of temporary loans. We cannot afford to have a rash of essentially 

failed governments around the world. 

Fourth, the aid budget should be protected to the extent possible. 

It is needed on a large scale not just for humanitarian reasons and 

not simply to build human capital, but also to substitute for trade, 

to substitute for investment flows. Again, absent aid, we are likely 

to see a larger number of failing or failed states which will give, 

among other things, terrorist groups, drug cartels, and the like 

greater room for operation. 

Fifth, the upcoming Group of 20 (G–20) summit in London is an 

important opportunity to address some of the issues I mentioned. 

Europe and Japan, in particular, should be pushed to take steps to 

stimulate their economies, but guidelines also need to be adopted 

so that stimulus programs do not become mechanisms for unwar-
7 

ranted subsidies and ‘‘buy national’’ provisions that are simply protectionism by another name. 

The London summit is also an opportunity to increase IMF capacity to make loans, to generate commitments to making aid 

available to developing countries, and to agree on at least some 

regulatory principles for national banking and financial systems. 

That said, I don’t think we ought to get too ambitious. We are 

not going to have the opportunity in London to remake the architecture of the international economy, to solve the problems of countries that run chronic balance-of-payments surpluses, or to revamp 

the system of exchange rates. 

Let me close, Mr. Chairman, with one final thought. Much of this 

hearing is focused on the question of the consequences of the economic crisis for global security. But developments in the political 

world can and will have an effect on the global economy. In short, 

things can go in the other direction as well. 

Just imagine for a second the economic consequences of, say, a 

Taiwan crisis; or fighting between India and Pakistan; or an armed 

confrontation between the United States and/or Israel and Iran 

over Iran’s nuclear ambitions. And I would single out this last one. 

This last possibility of an Iran crisis is the most worrying geopolitical possibility, I would think, in the near term. And it underscores the importance of trying to negotiate limits on Iran’s enrichment program lest the United States and the world be confronted 

with the unsavory option of either living with an Iranian near or 

actual nuclear weapons capability or mounting a preventive military strike that, whatever it accomplishes, would be sure to trigger 

a wider crisis that would lead to energy prices several times their 

current level. 

In short, again, it is right that you are addressing the economic 

crisis. But it is also important, I think, at the same time to think 

about developments in the traditional national security realm, either in their own right or, again, how they can affect the trajectory 

of our efforts to get out of this economic crisis and restore economic 

growth. 

Thank you. And I look forward to your questions and to hearing 

the testimony of my extraordinarily able colleagues. 

The CHAIRMAN. Dr. Haass, thank you. 

[The prepared statement of Dr. Haass can be found in the Appendix on page 47.] 

The CHAIRMAN. Now we turn to Dr. Cooper. Thank you so much 

for being with us, Doctor. 

STATEMENT OF RICHARD N. COOPER, PROFESSOR OF INTERNATIONAL ECONOMICS, HARVARD UNIVERSITY, AND 

FORMER CHAIRMAN, NATIONAL INTELLIGENCE COUNCIL 

AND THE FEDERAL RESERVE BANK OF BOSTON 

Dr. COOPER. Thank you, Mr. Chairman, for having me here. 

I would like to start by noting that during the—— 

The CHAIRMAN. Doctor, you will have to speak very closely into 

that microphone. The acoustics in here are not very good on this 

end. So as close as you can get, we would appreciate it. 

Dr. COOPER. I would just like to recall that the period 2002 to 

2007 was an extraordinary period for the world economy, arguably 
8 

the best half-decade in history. Growth was high and widespread, 

inflation was low in most countries, and this exceptional performance before the recent crisis may have created unsustainable expectations about the future, particularly in young adults who do not 

recall earlier, less buoyant periods of economic activity. 

Now, the impact of the current global recession on U.S. national 

security—I interpret it broadly—is extremely complex. There are 

pluses and minuses. Let me start with a few of the pluses. 

It will be easier to recruit and retain desired persons for the U.S. 

armed services at unemployment rates of 8 to 10 percent than at 

unemployment rates of 4 to 5 percent, with lower signing bonuses. 

Second, one year ago, a major source of anxiety in many countries around the world was the rapid rise and continuing rise of 

food prices and of oil prices insofar as it affects ordinary urban 

dwellers. With the slowdown in the world economy, food prices are 

now way down, not compared with six years ago, but compared 

with one, two, and three years ago; and this is a source of major 

relief to many countries in the world who will benefit. The World 

Bank estimates that over half of developing countries will benefit 

from the lower food prices. 

Third, the oil revenues of all oil exporting countries, again, while 

higher than they were a decade ago, have declined sharply from 

the elevated levels of 2007 and early 2008. And this includes, in 

particular, the revenues of Russia, Iran, and Venezuela, each of 

which in different ways has posed problems for the United States. 

All three countries have become fiscally undisciplined, and all will 

have to cut their expenditures sharply in view of their declines in 

revenue unless they are willing to countenance a sharp increase in 

domestic inflation, which would increase domestic disaffection with 

their respective governments. 

The decline in oil prices is directly linked to the slowdown of 

world economic activity. So in this respect, the slowdown can be 

said to benefit U.S. national security. Concretely, Iran will have to 

balance more carefully its financial and material support for outfits 

like Hezbollah against pressing requirements for domestic expenditure. So there are some pluses, but there are also some serious negatives. 

The recession implies a decline in demand and particularly a demand for labor-intensive products made in many developing countries. World trade is likely to fall for the first time in a quarter century this year and more deeply than it fell since the 1930s. And 

this contrasts with an annual growth in trade volume in excess of 

seven percent over the last several years. 

Thus, a major source of new jobs, pulling people from the countryside into urban areas in many countries will disappear and perhaps go into reverse. There will be disappointed migrants and millions of workers laid off. 

For example, it is said that in China already 20 million migrants 

have lost their jobs. These are internal migrants mainly in lowskilled manufacturing and in construction, both of which have declined sharply. And, in addition, several million newly graduated 

students will have difficulty finding jobs in the current economic 

environment. 
9 

The Chinese authorities are greatly concerned about the eruption 

of social unrest and have already taken a number of steps to head 

it off, for example, by providing loans for self-employment by new 

college students and by improving life in the rural areas. 

It is worth noting that in the oil exporting countries of the Persian Gulf, the impact of the decline in new jobs will fall mainly on 

foreigners, rather than on residents, since most of the work in the 

private sector in those countries and much of it in the public sector 

is performed by temporary migrants from other countries. 

Now the recruiting ground for terrorists and for criminal gangs 

is typically among idled, disaffected, alienated young men. They 

are not typically from among the poorest people of the world, but 

from people that, by world standards, would be considered ‘‘lower 

middle class,’’ if one can use that categorization. The recession will 

increase the numbers of such people, but probably not massively 

unless the recession becomes much worse than is now generally expected. 

Some countries are more vulnerable than others. Pakistan has 

already been mentioned. Large numbers of Pakistanis work in the 

Gulf Area. Some may lose their jobs, returning to Pakistan and depriving that country of their extensive remittances. 

The most important effect of the financial crisis and the subsequent recession may be the least tangible: a serious, worldwide erosion of confidence in American competence, a confidence that was 

previously carried, almost a sense of invincibility. The rest of the 

world typically placed more confidence in American competence 

than Americans deserved, as most Americans knew better. But the 

events of the last six years have brought American competence 

under severe doubt, starting with the post-combat phase of the war 

in Iraq, which the United States is generally, around the world, 

viewed as having bungled. 

This, was reinforced by the perceived debacle over the handling 

of Hurricane Katrina; and now the subprime mortgage crisis at the 

heart of the seemingly invincible American financial system has led 

to a wider financial crisis and, now, a global recession, and that 

further undermines confidence in American competence. This crisis 

clearly started in the United States, not in some emerging market 

or, as in 1992, in Europe. 

This loss of a perception of invincibility may embolden existing 

hostile groups to try, through some dramatic act, to bring the system of American capitalism, now vulnerable, crashing down for 

good. And I think that is probably the most serious immediate 

threat to come out of the current financial crisis. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. 

[The prepared statement of Dr. Cooper can be found in the Appendix on page 51.] 

The CHAIRMAN. Now our old friend, Dr. Dov Zakheim. 

Dr. Zakheim. 

STATEMENT OF DOV S. ZAKHEIM, FORMER UNDER 

SECRETARY OF DEFENSE (COMPTROLLER) 

Dr. ZAKHEIM. Chairman, I hope I am not that old. But thank 

you. And thank you, Mr. McHugh. It is so good to be back in front 
10 

of this committee and actually appear with such distinguished colleagues. 

The CHAIRMAN. Excuse me, the witness is going to have to really 

just talk right into it. 

Dr. ZAKHEIM. Can you hear me better now, sir? 

The CHAIRMAN. That is a lot better. Thank you. 

Dr. ZAKHEIM. All right. I will start the clock over. It is a pleasure 

to be here. 

Thank you, Mr. Chairman, and thank you for your kind words. 

And, Mr. McHugh, it is good to be back again before the committee, especially with such a distinguished panel of experts. 

Like you, I am deeply concerned that the financial and economic 

crisis that has affected our country in particular and the international community generally poses a major threat to American 

national security interests. That threat is likely to manifest itself 

in a number of distinct ways. 

First, it is going to create major pressures, already has, on the 

defense budget, most notably the acquisition—that is procurement 

in Research and Development (R&D) accounts; 

Second, it is likely to result in a further contraction of defense 

spending and, therefore, operations, as well, and modernization, on 

the part of key allies and friends; 

Third, it could prompt nations that are ambivalent about their 

relationship with America, most notably China and Russia, to act 

in a way that is deleterious to our own American interests; 

Fourth, it could prompt even more hostile behavior on the part 

of nations such as Iran that already don’t really like us at all; and 

Fifth, it could further destabilize states that are already vulnerable to internal unrest. 

Finally, it could spur further international criminal behavior that 

could undermine internal American stability. I have addressed 

each of my—each of these concerns—in my written testimony, 

which I request be inserted in the record. 

For now, I want to concentrate on the impact of the economic crisis on the defense budget and, as time permits, to add a few remarks about the implications of the crisis for other states. 

The defense budget is already under pressure as a result of this 

crisis. Real growth in defense spending, if the supplemental is included, is about 1.4 percent because next year’s supplemental is 

lower than the plan total of supplemental expenditures in fiscal 

year 2009. These figures represent a sharp drop in the growth of 

annual defense spending over the past eight years, which averaged 

4.3 percent in real terms. 

The lower rate of defense budget growth will manifest itself most 

sharply in the acquisition accounts—procurement and R&D. It has 

been by means of spending funds from these accounts that America 

has been able to assure itself of long-term military superiority regardless of the capabilities of a potential foe. When these accounts 

were assaulted, as they were in the late 1970s, not only did our 

leading adversary, the Soviet Union, become far more reckless, invading Afghanistan; but others, like Iran, also exploited what they 

perceived to be American weakness and introversion. If we go 

through another such reduction, can we say with confidence that 

in one or two decades’ time no powerful adversary will act upon the 
11 

perception of American weakness and threaten one of our vital interests? 

It is a truism that since World War II virtually every war we 

have fought was unforeseen. It is equally true that we have consistently structured our future force posture on the basis of a war 

that we had recently fought or were still fighting. 

I worry that we are falling into the same trap now. The result 

could well be, as in Korea or Iraq, many years of bloodshed and 

lost treasure until we righted ourselves; or as in Vietnam, outright 

failure. The opportunity cost of reductions in planned acquisition 

budgets are, therefore, exceedingly high and, if not reversed, will 

far outweigh any supposed short-term benefits from budget savings. 

Cuts in procurement, in particular, will have more immediate repercussions as well. They are going to result in the loss of jobs, in 

particular for skilled blue collar workers, engineers, and physicists—the very people who earn far less than $250,000 a year, and 

at whom the Administration is targeting its recovery plan. 

Moreover, it is most likely that as jobs dry up, firms will apply 

the traditional ‘‘last in, first out’’ principle; in other words, those 

who have benefited from the most up-to-date education and training will be lost to the nation’s vital defense industrial base. And 

it is ironic that even as our young engineers will find themselves 

unable to contribute to our national security, the United States will 

continue to train foreign students, such as those from China, in the 

engineering and hard sciences, enabling them to go back to their 

countries and help their countries modernize their military. 

Members of the committee might also consider that the impact 

of a flattening of acquisition spending will be unevenly distributed 

around this country. Those states with major defense industrial activities, including hard-hit areas in Michigan, the Northeast and 

the South will suffer more than other parts of the country. This 

couldn’t be what the Administration intends as it pours hundreds 

of billions of dollars into job creation programs. 

Finally, because the Administration is ratcheting up the national 

debt so severely, once the economic turnaround does occur and 

there is a growing demand for dollars and a resulting rise in interest rates on government paper, the cost of servicing that debt will 

rise dramatically. Budget deficits will increase sharply as a result, 

and the government will be forced to cut back on discretionary programs. 

Well defense accounts for more than half of the entire U.S. discretionary budget and has been increasing its percentage of discretionary spending in the past eight years. It is going to be the most 

likely target for real cuts, which is not merely a flattening of the 

growth rate in order to manage the ballooning deficit, but actual 

cuts. The impact on our national security spending will be profound 

and negative. 

In her testimony before the House Budget Committee on January 

27th, Alice Rivlin, my former boss when I was at the Congressional 

Budget Office (CBO), underlined the difference between a shortterm stimulus and what she called—and I am quoting here—‘‘a 

more permanent shift of resources into public investment and future growth.’’ She also said, again a quote, ‘‘The first priority is an 
12 

anti-recession package that can be both enacted and spent quickly 

to create and preserve jobs in the near-term and not add significantly to long-run deficits.’’ 

The defense budget offers several ways to meet her prescription. 

Vast spending, job-creating programs include: reducing deferred 

maintenance; accelerating ship overhauls and aircraft and ground 

vehicle rework; advanced procurement of subsystems to make units 

like warships—such procurement would preserve the second and 

third tier industrial base, which is most vulnerable in the current 

downturn—and finally; expanding and accelerating military construction (MILCON) and family housing programs. Of these three 

elements, only the third is part of the $787 billion stimulus package. 

There is considerable merit in the $7.4 billion for military construction and operations and maintenance (O&M) in military facilities for family housing, military hospitals, and the homeowner assistance program. 

But the stimulus should and could go further. Additional plans 

to support both rework and overhauls, as well as advanced procurement, will create and sustain critical jobs in hard-hit areas. 

I don’t want to overrun my time. 

You have heard from my colleagues some of the difficulties that 

apply to the allies who, for many years, have not spent as much 

as they could and now are not in a position to spend as much as 

even they would like. From countries that we clearly have ambivalent relationships with—Russia, by the way, has just announced, 

its deputy defense minister announced, that regardless of the economic crisis, they are going to modernize their strategic nuclear 

program and their anti-satellite program. 

Historically, we have seen you can have a basket-case economy 

and still be a military threat. North Korea is an example. And, by 

the way, when we talk about adversaries like North Korea, remember that it doesn’t really cost Iran that much to support Hezbollah 

or to support Hamas, and for that matter, its economy has been 

unbalanced since 1979 and it still has developed a nuclear program. 

So the restrictions that are imposed on us, given our goal, are 

not the same as the constraints on potential adversaries—and real 

adversaries—because their objectives are different and because 

their approach is far more asymmetrical. 

Let me finally say a word about unstable states or—Dr. Richard 

Haass mentioned some of that. Remember also, Mexico may be in 

that category, as well, and we need to worry very much about what 

goes on there. Again, our contingencies have rarely been foreseen, 

and there are a lot of unstable countries in this world about which 

we have to worry. 

So let me conclude by saying, the national security implications 

of this crisis are both broad and profound. They will affect our alliance relationships, our interactions with major states whose intentions towards us remain unclear. They will affect the behavior of 

unfriendly states and the stability of weak and failing states. Most 

importantly, the economic crisis could have a major and deleterious 

impact on our national defense budgets and, therefore, our national 
13 

security posture, which would complicate and, in fact, exacerbate 

relationships we have worldwide. 

Nevertheless, the ultimate impact of the crisis on our national 

security posture remains in our own hands. We can forge ahead 

with defense modernization, we can protect the jobs of our young 

engineers and skilled blue collar workers, we can continue to signal 

our determination to fight for our values and freedom. 

The budget is policy and the policy choice is ours. Thank you. 

The CHAIRMAN. Thank you, Dr. Zakheim. 

[The prepared statement of Dr. Zakheim can be found in the Appendix on page 55.] 

The CHAIRMAN. Mr. Rothkopf, please. 

STATEMENT OF DAVID ROTHKOPF, VISITING SCHOLAR, 

CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE 

Mr. ROTHKOPF. Thank you, Mr. Chairman, Mr. McHugh. 

The CHAIRMAN. Again, get very, very close. And turn it on. 

Mr. ROTHKOPF. I will do both those things. 

Thank you, Mr. Chairman, Mr. McHugh and members of the 

committee, for inviting me here today. 

It is worth looking, as we consider this issue, as we do with 

many issues nowadays, back to September 11, 2001, and remember 

that the reason that we were attacked on Wall Street was that terrorist enemies considered that to be a symbol of our national 

strength. Naturally, we followed after the terrorists and we took 

our eye off of the source of that natural strength in this country. 

The damage has not just been done to our markets or our 

401(k)s, but to our national security for many of the reasons that 

we have outlined here today. We have been weakened, we have 

been distracted, and at the same time, a host of new problems have 

been created as a result of the damage done here. 

I would argue that there are two kinds of core challenges that 

we face from a national security perspective. The first of these is 

what I might characterize as a great hollowing out of the forces 

upon which we depend to stabilize. In other words, we have heard 

about the forces that are likely to have us spending less money on 

defense in the United States. Related to those are forces that will 

distract us from attending to issues associated with security. But 

our allies are going through the same thing. 

At the same time, there has been enormous crisis of confidence 

with regard to the international institutions which have been such 

a stabilizing force. Whether those institutions are the European 

Union (EU), the International Monetary Fund (IMF), the World 

Bank, the United Nations (UN) system, all of those institutions are 

now being weakened for economic reasons and being doubted because of this sweeping crisis of confidence in our institutions. 

At the same time, there is a rise of new threats, threats that are 

associated with this crisis and come in a variety of flavors. Let me 

very briefly outline some of those and then come to a set of priorities and recommendations. 

The first set of threats that we are going to face are what might 

be characterized as the destabilizing internal effects of the crisis in 

countries around the world. This is, countries have rising unemployment, and the International Labor Organization (ILO) esti-
14 

mates that in 2009 unemployment as a result of this crisis worldwide may hit 50 million or may exceed that. 

This causes unrest. Dwindling budgets reduce the ability of governments to deal with that unrest and then you have a kind of 

domino effect as viable states become weak states, and weak states 

become failed states; and we know what the creation of failed 

states leads to both in terms of the creation of new threats and in 

the creation of regions to harbor threatening nonstate actors like 

terrorists. 

Another set of issues are associated with destabilizing bilateral 

or regional effects of the crisis. One—which Dr. Zakheim touched 

upon a minute ago—which is a serious one for us, is, if Mexico 

loses control of a number of states to narco cartels, as it seems to 

be doing, and that creates further unrest in the country, we have 

an immigration crisis in the United States. This holds true elsewhere in the world as well. 

Also, historically, opportunistic politicians have sought to lash 

out at favored enemies across borders to distract from domestic 

issues. We have seen that in Russia, whether it is in the context 

of Georgia or in the context of the recent baiting of Ukraine, which 

could grow much more dangerous. 

And then there are, as I mentioned earlier, the destabilizing 

global effects of the crisis. Richard Haass made this point well, 

first, and it was repeated several times. Protectionism is corrosive 

and undercuts the kind of international relationships upon which 

we have historically depended and, I might add, the kind of interrelationships upon which we need to depend going forward simply 

because our resources are going to be limited. We are going to need 

to find ways to improve burden sharing if we have less capability 

internally. 

In terms of individual cases, in terms of the destabilizing group, 

or countries about which we should be specifically concerned, some 

have been mentioned here. Pakistan, Ukraine, Turkey, Egypt, Iran, 

Russia, Venezuela, Argentina, Indonesia, the Philippines, China, 

and North Korea are all countries where internal forces associated 

with this crisis could produce either a backlash internally, political 

crisis internally, or crises that spill across borders. 

In the issues between nations, I mentioned Russia; and in the interest of time I will skip forward, and we can come back to that 

or you can review it in the remarks that are in the record. 

On the risks on a global scale, I would say that we are at a moment where virtually every international institution we have either 

is facing renovation or requiring reinvention. The IMF, the World 

Bank, the WTO, the nuclear nonproliferation regime, we are going 

to have to create a new institution with regard to global climate 

issues; and the United Nations (UN) also comes into question. This 

could be a moment for reimagining the international system, and 

I agree with Richard, it is not all going to be fixed on April 2nd. 

But over the course of the next several years, one of the legacies 

of this Congress and this Administration could be to reinvent that 

system. 

At the same time, there is a very real threat that concerns about 

budgets, an inward turn on the part of political leaders, and tensions across borders as a result of these things could lead to further 
15 

weakening of those institutions, which will take away the ability 

that we might have to share burdens and to resolve problems before they become crises. This is a legitimate threat. 

Now, very quickly, let me go to a prioritization of how you might 

see these threats and the response to them because clearly one of 

the big issues that you face as a committee and that the government faces is a series of asset allocation decisions because we have 

limited assets. 

The number one issue here, if we are going to address the national security issues caused by this crisis, is to address the economic and political constraints placed on the United States of 

America, to address our economic crisis here and also to maintain 

a forward-looking and -leaning political stance internationally. 

Another of the threats—the remaining set of threats that I think 

need to be prioritized would include the economic and political constraints placed on the European Union (EU), China, and other potentially stabilizing actors; the crisis of confidence in institutions 

worldwide and the threats to the international system; the exacerbation of critical threats associated with proliferation of weapons of 

mass destruction—failed states become conduits for networks of 

nonstate actors; this can make that problem a lot more difficult to 

deal with—the consequences of protracted crisis for the world’s 

weakest states and the threats to weaken weakened states directly, 

impacting U.S. national interests—of which Mexico, I think, is a 

good example. Haiti is another example in this neighborhood. 

As a consequence of this system—or this series of challenges that 

we face, we might want to prioritize our recommendations for response as follows: 

We need to be strategic about marshaling and maintaining U.S. 

resources. This includes fiscal restraint and restoring thought to 

fiscal restraint. Being indebted to overseas nations weakens us; we 

lose leverage internationally. We are going in the wrong direction 

on that. 

We also need to rethink defense budgeting. Dr. Zakheim has 

talked about this, and I will not. 

Maximizing the means of leveraging U.S. power, which means 

maintaining critical institutions and alliances is going to be key, 

given the restraints on us. 

Leading a coordinated proactive global effort to reduce or eliminate or contain threats, beginning with economic threats, is going 

to be another priority. 

Maintaining a credible deterrent against bad actors. We are 

going to be tested. We are already being tested. You have this incident with the U.S. ship off the coast of China. You have had statements by Iran about their nuclear program. You have had statements by the Russian Government that are somewhat provocative. 

This continues around the world. 

If we seem to be back on our heels, if we seem to be reluctant 

to engage, if people perceive weakness as a consequence of this crisis, they will take advantage of that weakness. 

We need to recognize the likelihood of crises emerging beyond the 

Iraq and Afghanistan and Pakistan conflicts. That is where our 

focus is now, but as has been indicated here, whether it is in Mexico or whether it is in the Ukraine or whether it is the central part 
16 

of Africa in battles over vital resources, we are going to have serious problems in other regions to which we have not devoted attention, planning, or sufficient resources. 

Finally, we need to fight the temptation to turn inward, and we 

need to remain focused on issues abroad. That is hard to do, and 

there are mixed signals right now about how the United States is 

going to deal with those impulses to turn inward and balance them 

with the requirement that we stay focused on a world that has 

grown considerably more dangerous as a consequence of this crisis, 

which is nowhere near ending. 

There are very likely to be another set of downturns later this 

year, whether it is related to the consumer credit crisis in the 

United States or the collapse of a number of emerging economies 

around the world, that will destabilize markets further. 

I know that the stock market going up 378 points yesterday left 

everybody here a little cheerier, but I wouldn’t read too much into 

that. The stock market is not linked to events in the real world, 

as we have learned over the course of the past several years. 

So I am happy to answer your questions and get into any of the 

issues over which I have skimmed. Thank you very much. 

Mr. ORTIZ. [presiding.] Thank you so much. 

[The prepared statement of Mr. Rothkopf can be found in the Appendix on page 67.] 

Mr. ORTIZ. This has been an eye opener to many of us. This has 

been very, very interesting testimony; and it just goes to prove that 

the world is in a hell of a shape right now, economically. 

But, you know, maybe from each of you could answer this question. Do you believe the crisis will increase or reduce security 

threats to the United States in the short term? And what about 

when we look at the long-term aspects of it, maybe you can touch 

a little bit on that. 

Anybody that wants to go first, no problem. 

Dr. HAASS. It was that famous strategist, Yogi Berra, who said 

that predictions are always difficult, particularly about the future. 

This is no exception, but I would suggest, on balance, there is 

more downside than upside here. Yes, there are some pockets of 

upside: the fact that the Iranians and the Venezuelans are paying 

a price, given their budgeting and their expectations of high oil 

prices and so forth. 

So, yes, there are pockets of upside: the fact that certain poor 

countries which are dependent upon imports of fuel and food and 

other commodities, their import bills are reduced—yes, another upside. 

But, on balance, this will hurt us and others more than it will 

help us. 

It will increase the number of challenges in several ways. One 

is, just objectively, it is going to create a larger number of weaker 

and potentially failing and failed states. And as has been pointed 

out, those are the potential places where terrorists, criminals, those 

involved in the drug trade tend to congregate. In a global world, 

what happens anywhere does not stay there. So we can expect 

greater problems, if you will, a messier—a messier world. 

Second of all, we ourselves are likely to have fewer resources to 

bring to bear. And by ‘‘we,’’ I mean not just the United States, but 
17 

the developed world. We are going to be concerned with our own 

situations; but investment flows will go down; there will be pressure on the resources available for foreign assistance programs; 

there will be pressures on the resources available for defense programs. 

So if you add up a situation where challenges are likely to increase and available resources are likely to be pressured, again it 

reinforces, to me, the likely future of a somewhat more disorderly 

world, overall. 

Dr. ZAKHEIM. I am inclined to agree. Problems are going to be 

very much of a kind that are not really the sorts we are used to. 

This always tends to be the problem in the end. 

Let me give you an example of what I mean. The last couple of years, China has been buying up American firms—spent over $6 

billion in 2008 doing that. Now the Chinese have moved their holdings of U.S. Treasuries from longer-term to shorter-term. It gives 

them a lot of flexibility. It allows them to hedge. 

They are not going to bring the economy crashing down. There 

is a much better way to do it: Keep buying up companies. 

What does that mean when you have a country that is ambivalent about us and that just announced it—at its Party Congress— 

that it absolutely rejects moving to the kind of system we have. It 

thinks our system is a failing system. 

Buying up our companies, it is that sort of problem that we have 

not fully thought through. 

We have heard about a bunch of failing states. And nine times 

out of ten, it is the one state that we didn’t think about that we 

wind up sending our troops into. How many people thought about 

Somalia? How many people thought about Afghanistan, for that 

matter? 

So if we are not prepared and we are restraining our own defense capabilities; and other countries will have new and different 

strategies to cope with their problems, as we will with ours—I suspect Western Europe will see coping with their problems as cutting 

back even more on defense. 

And how many of our major allies—I am not talking about the 

minor ones—but how many of the major ones spend three percent 

of their Gross Domestic Product (GDP) on defense? Not very many 

at all. How many do you expect to spend as much as they are 

spending now in the next 10 years? I wouldn’t bet on it. That puts 

a greater burden on us at the very time that we are going to have 

to contract our capabilities somehow. 

So the ramifications—the second-, the third-, the fourth-order 

ramifications are such that we can’t really predict except to say, it 

doesn’t look good. 

I agree with Richard Haass. 

Mr. ROTHKOPF. I think Richard has said that it is dangerous to 

predict and that it doesn’t look good, and Dov has said it doesn’t 

look good and it is dangerous to predict; and from that I am going 

to derive a prediction, which is that it doesn’t look good. 

You know, things are going to get worse before they get better. 

And we have only seen the economic tsunami emerge. It is going 

to hit political villages. And, you know, it takes a lot of different 

ways—with deference to the delegation here from Pakistan, you 
18 

know, there is a saying in Pakistan that no government in Pakistan has ever survived an IMF bailout. 

You know, sometimes the solutions that we bring to countries 

create political tensions that themselves create problems. 

So over the short term, we are going to have to deal with the fact 

that governments in Eastern Europe and Central Europe are insolvent; that the Government of Mexico is losing control over key 

states within that country; that Africa which, you know, was desperately poor and fighting for its survival before, is going to get 

worse, and this is going to happen even as we identify resources 

within that continent that are important to us and are important 

to the Chinese. And it is going to be linked, and other growing 

economies, and it is going to be linked to resource conflict. 

And I think that we also ought to consider, because your question addressed the longer-term consequences of this, that one of the 

great sources of American strength for as long as any of us can remember was the easy availability of capital on Wall Street—our 

ability, when we had an idea, to turn it into an action. If the 

changes on Wall Street, which are structural—they will be regulatory, but they will also be attitudinal and cultural—produce a 

contraction there and less of a willingness to lend for a protracted 

period of time, that is going to weaken us in a fairly substantial 

way. 

At the same time, when we come out on the other side of this, 

it is quite likely that emerging economies will recover faster than 

we do. Because of this crisis, less money is going right now into oil 

production, which was a bottleneck before. So what happens when 

demand goes up? The price of oil goes right back up on the other 

side of this crisis, and oil-producing nations start building up big 

reserves of cash that they can use to buy political influence around 

the world. 

And so there may be a shift in sort of geoeconomic power that 

has got longer-term consequences to this and that we need to be 

very aware of because that kind of economic power is the foundation of our national strength. 

Dr. COOPER. I also agree with Richard Haass’s able summary. It 

is hard to believe that with 50 million more unemployed people in 

the world than last year that is good for U.S. security. 

I would suggest, however, that the main threats to U.S. security 

will come via greater instability in other countries, rather than 

through willful actions by the governments of other countries. I 

think that is the main thing that we have to be concerned about. 

I do want to put a nuance on what Dov Zakheim said about 

China, at least the report that I read did not say that the Chinese 

rejected the American system. It said that the Chinese rejected the 

American systems of contested elections and democracy. The fact 

that they are investing in our companies is, in a sense, a vote of 

confidence in our system. And I have to say this is the wrong—I 

don’t have to tell this group—anyone who looks at campaign financing in this country has got to think that there is something 

not quite right with the American electoral system. 

Zhu Rongji, no longer an official of China, was very clear that he 

thought the financing of contested elections was at the core of difficulty of the American political system. But that is a much nar-
19 

rower statement than rejecting the American system. The Chinese 

do not reject the American system. In fact, they have been shaken 

by the financial crisis. But the fact that they invest so much in the 

United States is a vote of confidence. 

Mr. ORTIZ. Mr. Chairman, if I could just have a follow-up question. 

The CHAIRMAN. The gentleman is recognized for a follow-up. 

Mr. ORTIZ. You mentioned and this is a trend that we are beginning to see, foreign countries coming in, buying companies, doing 

joint ventures, what can we do to be prepared in the long term. I 

mean, what are the security problems that we might have, if any? 

Maybe you all can touch a little bit on that? 

Dr. COOPER. My general stance is one that is supportive of foreigners buying American companies. By the way it is completely reciprocal; Americans buy a lot of foreign companies. One the trends 

in the last quarter century has been tremendous amount of cross 

border investment, both ways, Mexicans in the United States, 

American firms in Mexico, et cetera, et cetera, et cetera. And I 

don’t exclude the Chinese in this process. 

We do have legitimate concerns, I think, about two dimensions, 

one is militarily sensitive technology. And we have a process which 

is designed to screen out foreign investments that might represent 

a source of leakage of that technology. And as far as I can tell, the 

process works reasonably well. 

The other concern I think is that foreign governments where 

they own firms at least have the possibility of engaging in non-commercial activity, leave aside the military as a separate area, in noncommercial activity. We actually have not seen anything of that, 

but it is a potential that I think we have to keep our eye on because it is a possibility. This of course goes particularly to stateowned firms of which there are many in China, but I will remind 

you there are many state-owned firms still in Europe also. So I 

think we have to have our antennae out and from time to time 

make noises about the illegitimacy of using commercial channels 

for political objectives. Of course, the main guilty party on that 

score is actually the United States worldwide. We use American 

firms to execute American foreign policy. 

Dr. ZAKHEIM. I agree with Dick Cooper about foreign direct investment, and the key really is how you protect against it being exploited. By the way, China’s investments haven’t always been good. 

They invested in Bear Stearns, the one year anniversary of Bear 

Stearns’ collapse. There are some holes in the CFIUS system which 

is what we are talking about, the Committee on Foreign Investment in the United States that we need to all think about. One is, 

how do you handle joint ventures? Second of all, you have got 

issues and I have only heard about this anecdotally, but it is something perhaps this committee might want to look at. If someone is 

affiliated with some criminal organization and the criminal organization has connections to a government, and we know that there 

are quite a few places like that. The impact on a company is stultifying. And after all is said and done, no chief executive officer 

(CEO) wants to have somebody who is a member of his board who 

is packing a pistol and they are terrified of this, and there are 

ways to get around CFIUS rules and still be able to get people into 
20 

companies like that. And by definition, criminals don’t play fair. So 

there are some issues to really consider about this. 

I agree by the way that China has invested in our economic system, and when I was speaking about our system, I meant our political system, not our economic system. But we do have to watch this 

carefully. And I think that there are some areas where right now 

hedge funds, by the way, were another one, but they are less of a 

problem right now. They could reemerge where the system we now 

have doesn’t cover every eventuality. 

Mr. ROTHKOPF. We also need to be careful here of the risks of 

that an overreaction to this can create. We have seen examples in 

the past few years, whether it was the China National Offshore Oil 

Corporation (CNOOC)/UNOCAL example, or the Dubai Ports example, where it became politically expedient to react against something which was not actually dangerous. And you know over the 

course of the past few months, we have seen the United States systematically abandon a whole set of the market principles which we 

have been preaching to the world for a number of decades. And the 

result has been that opportunistic politicians around the world 

have started to say, look, they threw it out the window, we don’t 

have to play by these rules. 

If we start being protectionists on this front, we will engender 

precisely the same kind of reaction overseas. It will limit the ability 

of our companies to grow, it will limit our ability to create jobs, it 

will limit our influence internationally. 

Mr. ORTIZ. Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. McHugh. 

Mr. MCHUGH. Mr. Chairman, I don’t know if I have said this in 

17 years on this committee but I would commend all of the written 

testimony to my colleagues, it is a fascinating collection of very interesting and I think timely and, important thoughts. I thank all 

four of you gentleman for putting the time into compiling them. 

Dr. Cooper, you said on the very last line of your written as well 

as your spoken testimony, ‘‘This loss of invincibility may embolden 

existing hostile groups to try through some dramatic act to bring 

the system of American capitalism now vulnerable crashing down 

for good.’’ 

That is a very profound and dramatic statement. And I didn’t 

want the politicians of Washington, D.C. filling out your thoughts. 

Could you perhaps expand a bit on what type of hostile groups you 

may be thinking about and what kind of dramatic act you may 

have had in mind? 

Dr. COOPER. Well, one need not speculate in this area, one can 

just think of history. 9/11 was a dramatic act designed to hit the 

heart of American capitalism. They also tried to hit the White 

House, but the heart was the towers in New York. And I can well 

imagine folks sitting in probably Pakistan now or Somalia thinking 

the system is much more fragile than I, for example, think it is, 

and one more dramatic act like that is enough to bring it crashing 

to its knees. 

And I think our intelligence system needs to have its sensors 

doubly out to pick up any tendency of that. My own view is that 

while the financial system has proven itself to be much more fragile than most people thought a couple of years ago, the funda-
21 

mental economic system is actually very robust and we are just 

going through a bad patch which we have been talking about. But 

that optimistic view of mine may not be shared universally around 

the world. 

Mr. MCHUGH. So obviously, then, you see a potential link between this crisis and particularly the world’s view of the United 

States role in this crisis and increased national security challenges? 

Dr. COOPER. That is correct, yes. 

Mr. MCHUGH. Which brings me over to Dr. Zakheim’s testimony 

and he spoke of this, but it is also in his written testimony when 

he talked about the 1970s when the acquisition accounts, procurement and research and development accounts, of the armed services were somewhat put into suspension. And he makes the conclusion that as that happened, not only did our leading adversary the 

Soviet Union become far more reckless, invading Afghanistan, but 

others like Iran also exploited what they perceived to be American 

weakness and introversion. 

The question I have extrapolating both from Dr. Cooper’s statement and Dr. Zakheim’s observation is that as I theorized in my 

opening comments there is at least a calculation we need to do as 

to the adventurism of others vis-a`-vis our national security as we 

consider our defense accounts. Is that a fair statement? 

Dr. ZAKHEIM. I certainly would agree, on the question of the impact of the acquisition in the 1970s, I was actually chatting with 

a friend of mine who reminded me that in the 1970s, after the Vietnam war there were an awful lot of engineers running around 

without jobs because they had been laid off in the cutbacks. 

And one of the sort of statements that a lot of people made in 

those years was well, they can convert to the civilian sector. And 

you may recall it didn’t really happen. People stopped taking engineering courses. People dropped out of engineering and we felt the 

impact of that for a long time. In fact, we may still be feeling the 

impact of that, look at our math and science scores and look at the 

value of math and science in this country. So it seems to me that 

if we move ahead without taking this into account, there is almost 

like a double-whammy. We hurt ourselves, the world sees we are 

hurting ourselves. It then takes advantage of the fact that they 

perceive that we are weaker and it becomes a very, very vicious 

cycle. 

Mr. MCHUGH. Any other comments from the other panelists? 

No. Let me, if I may, Mr. Chairman, you know what, we have 

taken a lot of time. Let me yield back and we have got a lot of 

other very interesting colleagues here, and I look forward to their 

comments as well. Thank you gentlemen. 

The CHAIRMAN. Thank you very much. Let’s turn to the history 

books for a minute. What lessons can we derive from past economic 

crises that we can apply now? Of course, the immediate answer is 

Weimar Republic, open the door to a fellow named Adolf Hitler and 

his followers. 

Are there other lessons of history where crises brought on authoritarian rule or severe problems akin thereto? Who is the historian with you all? 

Dr. HAASS. We are probably all amateur historians here. I would 

think when it comes to looking at history and its relevance, we 
22 

have to make sure we choose the right history. I am not particularly concerned, sir, for the foreseeable future about the rise of 

challenges to the United States on the scale of Nazi Germany or 

imperial Japan. Another way of putting it, I am not particularly 

concerned for the foreseeable future that the economic crisis we are 

seeing will have that destabilizing effect on great powers, or that 

sort of hyperaggressive, hypernationalist foreign policy. 

I would think that the historical parallels are much more in the 

direction of middle-size and weaker states. And the sorts of scenarios that I would think about that are relevant we have seen in 

recent years are, say, the Somalias and the Balkans where periods 

of extensive and deep economic hardship wore down societies, created weak or failing states, massive internal and then external refugee flows, led governments to more populist approaches and so 

forth. 

So it is less, again, that the United States is going to face a 

China or Russia or anyone else on a massive scale akin to the 20th 

century. But instead, it is much more consistent with the disorderly future of medium- and small-size states, either breaking 

down internally, which in a global era can create all sorts of challenges to us given the nature of globalization as a giant conveyer 

belt; or medium-size states which given their access to weapons of 

mass destruction could cause terrible local or even global possibilities. 

And here, the most worrisome scenarios, again, I would think, 

are breakdowns of authority in a place like Pakistan, an Indo-Pakistani relationship that gets seriously off track. And obviously, the 

challenges that are posed by countries such as Iran and North 

Korea. North Korea can be a breakdown of authority. Iran which 

is not a single, simple government; I can imagine scenarios where 

its nuclear program could lead to a conflict which again could lead 

to disruption of energy supplies or conceivably even a situation 

where Iran would hand off materials. So I think the parallels, if 

you will, are less great-power 20th century parallels, more so some 

recent parallels or even going back farther in time, 19th, 18th century to situations where you had local pockets of instability. 

Mr. ROTHKOPF. Let me, if I may, just build on what Richard said 

because I think the right way to look at this in the context of history is also to note how it is different from what has happened in 

the context of history. And what we have got here is the first global 

economic crisis of the global era, requiring a global response. And 

the jury is out about how well we respond to that globally, combining with Richard’s point that we live in an era in which the 

threats are more likely to come in weak states, and this is a crisis 

that is likely to lead to a proliferation of weaker or failed states 

and those two things taken together have a fairly profound consequence that makes this different from the past. 

The third is that while I agree with Richard’s point that this is 

not likely to produce the kind of immediate great power conflict 

that you saw coming out of your Weimar analogy, you are likely 

to see coming out of this a fairly significant shift in the powers that 

we consider to be major powers in the world. And we have already 

seen this as in this crisis we have moved from deliberations from 

the G8 to G20. You have seen it in the past 12 months as the BRIC 
23 

countries, Brazil, Russia, India and China, have actually gotten together on a regular basis politically at the head of state level and 

at the foreign minister level to coordinate their policies and try to 

assert themselves as key players. 

It is very likely that the world that emerges on the other side 

of this will be a world that has a different array of leading powers 

in it than the one we are accustomed to. 

Dr. ZAKHEIM. I take a slightly different tack. First of all, I think 

it is fair to say that the crisis in the 1930s was global. You had 

a lot of colonies in those days, but otherwise it was global. But 

there are two medium-sized countries that I think ought to make 

us pause and think. One is Mexico, medium-size country, but of 

course, it is next door and that changes everything. 

So if oil prices turn around and go all the way up, that might 

help, but I don’t know what the relationship is between when they 

go up and the problems they are having right now with drug lords 

and the killings, Ciudad Juarez and everywhere else. They have 

had a decline in manufacturing. People had started to come back 

to Mexico which affects remittances. So that country is in a very 

difficult situation, plus it is very sensitive about us. We cannot just 

go in there and tell them what to do. So this is a major challenge 

for us. 

The other middle-sized country, and this goes to your question 

about history, there was a country that went through a revolution 

on the slogan of peace, land and bread. It was called Russia in 

1917. It was a middle-sized country, it was not the world’s leading 

power by any stretch of the imagination. It was getting clobbered 

by the Germans actually in World War I. And it did not become 

a threat to the United States for 28 years. Between 1917 and 1945 

they were no threat to us, we recognized them in 1933 and we 

fought alongside them for 4 years. So what might be a middle-size 

power today might not be a middle-sized problem, it might be a 

major league problem in 25 years’ time. And which country that 

might be, heaven only knows. 

The CHAIRMAN. Thank you, any further comments? 

Dr. COOPER. Mr. Chairman I don’t know how serious you are 

about historical analogies, and as Richard says, we are all amateur 

historians, but I thought somebody, at least in the historical context, should mention the French revolution. France was in a serious economic crisis in the 1780s. It had a revolution which started 

out being entirely domestic, but it was very, very dramatic, and it 

very rapidly became a world war. We don’t call it a world war, but 

it actually was focused in Europe, but there were battles all around 

the world between France, Napoleonic France, and the other countries. But I would emphasize the very strong differences today between our situation and our understanding about how to manage 

macroeconomic crises. Certainly then in the 18th century, but even 

in the first half of the 20th century. Macroeconomics as a subject 

did not exist in 1931. It was invented as a result of the Great Depression. Our understanding is not perfect, but it is much, much 

better than it was in former times. 

The CHAIRMAN. I thank the gentleman. Mr. Bartlett. 

Mr. BARTLETT. Thank you very much. 
24 

Dr. Haass, our chairman’s opening comment caused me to look 

again at the caution that you give in your closing paragraph of 

your written testimony. Enormous stimulus measures here at home 

coupled with equally unprecedented increases in the current account deficit and national debt make it all but certain that down 

the road the United States will confront not just renewed inflation, 

but quite possibly a dollar crisis as well. 

I have been concerned, sir, that our profligate spending will not 

be satisfied with borrowing, because the money just won’t be there 

to borrow. And so the Fed will simply print the money. My wife 

and I went through Europe in 1973 and I seem to remember that 

in Italy, the new Lire was worth 1,000 old Lire. That means your 

$10 bill today is a penny in our new currency. I would like each 

of you to tell us what you think the possibility is that this kind of 

thing could happen in our country. And if it does, what are the 

positives, and I can think of one. The national debt as monetized 

will just disappear, there may be no others. And what are the negatives? What would this do? 

Dr. HAASS. I will say one of two things since you mentioned my 

statement and then I will quickly defer to Richard Cooper, who is 

one of this countries most distinguished economists. I am not particularly worried about hyperinflation on the historical scales you 

have mentioned. What I am worried about is a situation where 

doubts gradually grow around the world about the wisdom of continuing to accumulate massive holdings of dollars. 

And the United States obviously has and will continue to have 

for decades a need to import large numbers of dollars in order to 

finance our various deficits and our debt. At some point, we may 

find ourselves with the need to raise interest rates in order to persuade those who were holding dollars to continue to send them our 

way. 

The need to raise interest rates before we were fully out of a recession would be a disastrous choice for the Fed or the U.S. Government to have to make. Ideally, this would be sequenced. We 

would find ourselves well on the road to recovery, some inflation 

would kick in, and then we could exercise the tools to deal with inflation that we are fairly familiar with. Again, the nightmare is 

that we would have to consider raising interest rates before recovery is underway, and that is a truly unattractive choice which we 

want to avoid. It is one of the reasons that I think we need to look 

very hard at the content of stimulus packages to make sure what 

we are doing is essential and gives us the stimulus we would like 

to think that we obviously need. But secondly we need to look at 

parts of our economy to openly reign in spending. I do not believe 

there is any sustainable policy answer to avoid the sort of situation 

you have been talking about without a serious restructuring of our 

approach to entitlements. If we are going to be serious about containing Federal spending, if we are going to be serious about getting this budget of ours back on track, regardless of what we feel 

we need to spend in the way of stimulus, it has to involve above 

all Medicare and, to a lesser extent, Social Security reform. 

Dr. ZAKHEIM. Again, I find myself in agreement with Richard. I 

think one of the keys, and this goes to what Dick Cooper just said 

about macroeconomics, is that everybody plays the same game 
25 

around the world. One of the great threats and worries is that they 

won’t. We won’t play the game if people don’t listen to Dick and 

we close our trade doors. Everybody’s going to retaliate. It goes 

against everything that we set up in 1945. That does not, in any 

way, conflict with watching how people invest in us. On the contrary, it means if you have the right safeguards, you can actually 

foster more investment. But if we don’t trade or don’t foster investment, if the European Union (EU) starts to crack up and there is 

talk about that, then it becomes much more difficult to manage 

this globally, and then you really start running into problems. 

We are still the world’s reserve currency, we are still the most 

powerful economy. What we do is going to influence what others 

do. 

Dr. COOPER. I think, Mr. Bartlett, I don’t know exactly what you 

had in mind, but I think that the prospects of very high inflation 

in the United States are remote. It is absolutely true that the liability side of the Federal Reserve System has gone up, more than 

doubled in the last six months. And by traditional standards that 

might be thought to be potentially very inflationary, but of course 

it went up because we are not living in a traditional period of time. 

The demand for highly reliable assets on the part of public has just 

shifted way to the right. I mean it has gone way, way up. And the 

Fed, I think, properly responded to that by increasing the money 

supply. The Fed needs an exit strategy, I know the staff of the Fed 

is working on an exit strategy as we return to normal, the Fed has 

to work that back down again, but the staffs of the Fed are thinking about that already. Although unhappily we are not anywhere 

near close to that at the present time. 

So I think the prospect of, you mentioned Italy, of sort of a 1,000 

to 1 conversion for the United States any time in my lifetime is remote in the extreme. 

Now, on the question of global imbalances, I have written a 

paper on that which is not especially for this committee, but if you 

are interested, I can give it to the staff. But the bottom line of that 

paper is I think these global imbalances are entirely explicable in 

terms of two factors, one is globalization of financial markets and 

the other is demographic developments. 

We are living through a demographic revolution. We don’t notice 

it because demography always moves slowly from year to year. But 

Europe and East Asia both are in serious demographic decline. And 

among the rich countries, the United States stands out as an 

outlier. Our birth rates have declined but they remain markedly 

higher than in other rich countries. And in addition, we have immigration which we are still, I think, very good at bringing people in 

and making their kids Americans. 

On both counts, the U.S. stands out on demographic grounds. 

When you work through the economics of those two things, what 

do you get? Large surpluses in the rapidly aging societies, Germany, Japan, China. And you get large deficits in the secure, robust economies like the United States. Now, this was all, of course, 

before September of 2008. Our deficit is going to go way, way down 

this year. But my forecast is that it will come back as the recovery 

takes place for these basic long-term demographic reasons. By longterm, I don’t mean forever, but for another decade or so. 
26 

Mr. ROTHKOPF. We tend to be concerned about sudden dramatic 

shifts because they make headlines and they make people nervous. 

But I think long, slow shifts are also worth noting. And it is almost 

impossible to imagine a circumstance in which a country like the 

United States building debt at the rate that the United States is 

building debt has a strong currency any time soon. And I think 

that some inflation seems highly likely. I think a weaker dollar for 

the foreseeable future seems highly likely. And that then leads to 

a question, because this debate or this question has come up in the 

press over the course of the past couple months. And one of the 

common retorts is well, we are the only reserve currency in the 

world, we are the only port in the storm. Look at how people have 

come in here now. That will always be the case. 

Well, we have all lived long enough to know that things that we 

have assumed would always be the case, whether it is the gold 

standard, or that there would never be a common currency in Europe, or that there would always be a Soviet Union don’t always 

remain the case. That doesn’t mean that suddenly the new, new 

Lire will become the reserve currency of the world. In fact, I think 

the odds of that are pretty close to zero. But it does mean that it 

is quite possible that the dollar’s traditional place in the vaults of 

central banks around the world is likely to decline. And that is 

likely to have quite an impact on our influence internationally. 

The CHAIRMAN. I thank the gentleman. Dr. Snyder. 

Dr. SNYDER. Thank you, Mr. Chairman. All your written testimony today and your statements I was reminded of, I believe it 

was in November 2007, when Secretary Gates made his speech at 

Kansas State in which our Secretary of Defense called for dramatic 

increases in both numbers of personnel and in dollars for the State 

Department and U.S. Agency for International Development 

(USAID). His point being that we have gotten too lopsided in the 

instruments of national power to achieve the policy objectives that 

we want to. 

Several of you discussed in your statements our defense budget. 

It seems to me it would be it would more appropriate to be discussing this in terms of a national security budget. During this 

time of belt tightening, in which we all recognize it is a time of figuring out where our priorities are, we need to be sure that we are 

not going to continue the problems that Dr. Gates was talking 

about which was to shortchange USAID and the State Department 

to our detriment as a national power. So any comments you might 

have on that aspect of looking at an overall national security budget, not just a defense budget. 

Separately, I met yesterday with our friends from Pakistan. And 

one of the concerns they had was in their view some three years 

ago or so there had been some promises made from this country by 

the Bush Administration in terms of some development dollars. 

They feel like those monies have not been forthcoming. It seems 

like the world is pretty good about making promises at national aid 

conferences and then not following through. Given what is going 

on, it seems like this is even a better time for us to make sure that 

we as a nation and we as a world community do indeed follow 

through on what we say we are going to do with regard to foreign 

aid and development. 
27 

Any comments you have on anything I said there until my time 

runs out. I note the clock is not on, Mr. Chairman. I hate to point 

that out, but it might be a good time to—thank you, go ahead. 

Dr. HAASS. Let me just say one thing, protecting aid levels is obviously going to be difficult given that it is discretionary and those 

aspects of budgets are going to come under pressure, though obviously where we can, particularly for humanitarian reasons, I believe we should and to help some of these states get through these 

difficult times. But I don’t believe we should or can have an aidcentric foreign policy, either when it comes to the United States or 

others. 

Far more valuable than aid flows is trade, if you really want to 

help poor countries in Africa, allow them to export into the United 

States. It creates more jobs and is much less prone to corruption 

and far more efficient than any amount of aid flows. 

If you want to think about national security spending, I agree we 

need to increase capacity particularly on the civilian side for nation-building or state-building. Again, we should not lose sight that 

probably the single most important thing we can do to improve national security would be to reduce our dependence on import oil 

and our use of oil. That would have a tremendous—we don’t think 

of it as the national security budget, but if you take a national security writ-large point of view—we have to get beyond, I think, 

spending levels, be it Defense, State Department, foreign aid, what 

have you. 

Trade and energy issues, again, we don’t think of as narrowly national security, but a greater openness on trade and a reduced use 

of oil would probably be two things that, if you will, are off-budget, 

that would probably do more to contribute to national security over 

the next decade than any amount of dollar to dollar spending we 

would do on aid or anything else. 

Dr. SNYDER. I will make a comment and move to other people. 

Dr. Gates’ comments in November 2007 remember was in the context that we had been expanding trade and trade agreements and 

things were going well economically. I think his point was we still 

even in the face of robust, positive trade policy and I have been a 

supporter, he still thinks it was important to dramatically increase 

funding for USAID and the State Department. 

Dr. ZAKHEIM. I certainly agree with what Mr. Gates said. I think 

the Administration has made a good start by reorganizing the National Security Council (NSC) to recognize that Treasury and Energy and Commerce are all part of our national security approach. 

And I think that is right. There is a huge imbalance and it starts 

actually on Capitol Hill, not in any Administration. The State Department has loads of authority and Defense has loads of dollars. 

And when I was coordinator for Afghanistan, I felt that restriction 

severely. There were all kinds of things I wanted to do, I had the 

money to do it but I had no authority to do it. This was back in 

2003 and 2004, I was the defense coordinator and Richard was the 

overall coordinator. And as a result of that, things did not get done 

at all, and I think we are paying the price right now. 

There is another question though, and Richard mentioned it, and 

that is state-building. And we really need to ask ourselves, even 

with these capacities which we clearly have to get in terms of the 
28 

civilian side, how much of state-building do we really want to do? 

It is not a matter of being isolationists, it is a matter of looking 

at the record. Our regard at state-building isn’t exactly great. 

There are times when we are forced to do it, I think in Afghanistan 

we were absolutely forced to do it. But the record: Somalia; Haiti; 

you can go back Haiti in the 1930s; Nicaragua; over and over 

again. We flatten countries and then we rebuild them, that is fine, 

but that is only Germany and Japan. And so we need to think carefully about that before we commit resources, which, by the way, 

right now on the civilian side, we don’t have, and I agree with you 

and Mr. Gates on that. 

Mr. ROTHKOPF. I was the Haiti economic recovery coordinator in 

the Clinton Administration, you can hold your applause. And as a 

consequence of that experience I agree with Dov’s assessment that 

we don’t have capability here yet. Most frequently, the mission that 

the United States has been asked to do since the Second World 

War has had an emergency economic intervention component. Nobody wants to do it in the United States Government. We don’t 

have the ability to do that. And there are a host of issues on the 

economic side that would benefit from a look at whether we can do 

them better, whether that is a Goldwater-Nichols on the civilian 

side of the U.S. Government, which I think is a good idea, or other 

kinds of restructuring. 

But to go very briefly back to the response that Richard offered, 

I agree with what he said. I think there is one area that we have 

got to look at very, very closely in the very near term, and that has 

to do with the replenishment or recapitalization of international financial institutions. Given our limited resources we are going to 

have to find ways to leverage our investments up, while the IMF 

and World Bank and the regional development banks are ill-constructed in some respects and will need some possible reshuffling 

in terms of their ownership structures, they are the only available 

mechanisms to leverage up. 

There are estimates right now that if things go bad $138 billion 

will be needed by the 49 poorest countries in the world as a consequence of this, and it could go as high as a trillion dollars. The 

World Bank is having a hard time raising $10 billion right now. 

So if we don’t support that, we are inviting deterioration. 

Dr. SNYDER. Thank you. 

The CHAIRMAN. I thank the gentleman. Mr. Jones. 

Mr. JONES. Thank you very much, I want to thank you and Mr. 

McHugh and the gentlemen for being here today. This has been 

very, very educational and also very helpful. I represent the third 

district of North Carolina, home of Camp Lejeune Marine base, the 

Outer Banks some of you might be familiar with. 

The income of the people in my district, I think I am close to it, 

the average income of a family of 3 or 4 is somewhere around 

$38,000–$40,000, gross, not net. Frequently I get the question of 

the fact that we are, and you touched on this many times, this is 

a debtor Nation. We are a Nation that owes China $800 billion and 

they buy financial notes and certainly they don’t want to see us 

fail. But when you look at history of the great nations of the past, 

that this is just one example, England, at one time, thought it 
29 

could go into Iraq and make it some type of a nation. They decided 

that wasn’t worth the effort. 

Mr. Obama, and I wish him well, I am one of the Republicans 

who wish him well, unlike some that feel the other way that are 

on the radio, I wish him well because we need to rebuild America. 

I understand he is saying that we are going to send 17,000 troops 

to Afghanistan. I know as a fact, most members of this committee 

know as a fact that our military is worn out. I won’t say the military is broken, but it is worn out. 

Does there come a time for a country, not to become an isolationist but for a country to just say within itself, so to speak, it 

wouldn’t be within itself, but let me use that as a word, that we 

cannot continue to police the world. We are borrowing money every 

day, we are wearing out our military. And yet I think some of these 

countries like NATO, they have not stepped up as of today to help 

us in Afghanistan. They have not done that. 

Is it to the detriment for the future for a nation to say within 

itself, its leadership, that we have got to have a period of time to 

rebuild our self. Because every day that we continue to borrow 

money from foreign governments to help other countries, and I 

don’t think we can become an isolationist, I really do not. But there 

has to come a time that the percentage of investment, in my humble opinion, has to be reduced because we can’t even fix our own 

streets. And the money that Mr. Obama, the stimulus package, I 

hope it works, I didn’t vote for it, but I hope it works, but I will 

tell you that what I see happening to this country concerns me 

more than what is happening in other countries. Again, I don’t 

want to be an isolationist, but we need a time-out to fix America 

and stop trying to police the world. 

Mr. Chairman, that is my question. 

Dr. HAASS. Can I respectfully disagree with you, sir? We may 

want to have a time-out from the world, but the world doesn’t 

grant times out. We can blow the whistle, but the world won’t stop 

playing to push the metaphor. 

Mr. JONES. Mr. Haass, real quick. I want you to finish on that. 

Why in the world won’t North American Treaty Organization 

(NATO) send its fair share? Why doesn’t England, why don’t these 

other countries just join us in all these fights and in taking care 

of the world? 

Dr. HAASS. I’ll come back to the NATO issue in the second. 

When we get involved in the world we do it not just as a favor 

to them, but as a favor to ourselves. The reason that we care about 

say Afghanistan’s achieving some level of stability is not necessarily as a favor to them or out of simply humanitarian concerns, 

but we learned the hard way in 9/11 that a lack of stability and 

a lack of central control in Afghanistan could have repercussions 

for us here in the United States that to me is a fact of 

globalization. 

I think though where I don’t disagree with you, we have to set 

limits on what we do. We can’t necessarily define success in places 

like Afghanistan or Pakistan or Iraq as creating what Bob Gates 

called a Valhalla or others would call a shining city on a hill. 

Sometimes success has to be defined quite modestly as simply the 

avoidance of failure or state collapse. We may have to content our-
30 

selves with simply propping up to some extent weak states to avoid 

state failure rather than trying to create strong states which I 

think would take too much in the way of resources. 

It does argue for policies based upon training, state-building and 

all of that so we don’t have to do it all ourselves. The question of 

what allies and others are willing to do for us, I share your frustration, but my reading of history and my sense of where these other 

countries are is we are going to continue to be frustrated, that they 

are not going to do all that they can and should. That is the nature 

of their economy, it is more important. It is nature of their will and 

their domestic politics. So at times we will have do more than our 

share simply because it is in our interest to get it done. 

Dr. COOPER. Mr. Chairman, once again, I agree with what Richard has said. But what I want to add is it doesn’t have to be either 

or. We can do both and. We are a fabulously rich country, both by 

our own historical standards, the standards of my parents and my 

grandparents, for example, and by international standards. And 

what most Americans don’t appreciate is, we have company in 

Japan, of all the rich countries we are the most lightly taxed, by 

a long margin. Switzerland which is hardly a country by normal 

standards, the Swiss tax themselves more than we do. If we decide 

we want to do something domestically, for heaven’s sakes, let us do 

it and let us pay for it through higher taxes. And that is where this 

body becomes very important. We can do both. 

Mr. JONES. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. I would like to thank 

the panel for making a very persuasive case that we have to strike 

a balance between reducing the possibility of strife in the world by 

encouraging global growth, I think that point has been made very, 

very well, and making sure that we are in possession of adequate 

resources to make sure that when strife occurs we can handle it. 

I think those are complementary, not conflicting goals. I agree with 

Dr. Haass on that. 

Dr. Zakheim, I want to explore with you the resource side of the 

equation. And on page three of your testimony, you talk about the 

defense budget being under pressure. I want to read what you say. 

Real growth in defense spending excluding the wartime supplemental is but 1.7 percent. If the supplemental is included in the 

growth, the spending is some 1.4 percent. And then you compare 

that to the 4.3 percent real growth of the last eight years. 

I am going to ask you in a bit about how you are accounting for 

supplementals and whatnot. But if my back of the envelope calculations is correct the annual difference between 1.4 percent real 

growth and 4.3 is just shy of 3 percent, 2.9 percent, which in terms 

of our present top line is about $15 billion a year. You are worried 

about that $15 billion delta and so am I. 

Isn’t one of the places we should look to deal with that delta, the 

waste in the procurement system, there is very authoritative information that indicates that of the major weapon systems recently 

acquired, they had $295 billion in cost overruns. By my calculation 

that would buy us, what, 20 years’ worth of the delta that is there 

had we done that correctly. I mean, what would you suggest to 

someone who has occupied the Comptroller’s position during that 
31 

time. What would you suggest as ways that we could fund that difference between what you evidently think we need and what has 

been proposed by making these procurement reforms? 

Dr. ZAKHEIM. Well, I agree with you that there is a lot of spending in the acquisition accounts that probably could be done a lot 

better. There are all sorts of panels, the Defense Science Board has 

a panel right now that I am on that is looking at that. Jack 

Gansler, who chairs that one, just chaired a major one for the 

Army. 

One of the difficulties we have is that any fixes we make are not 

going to have real short-term impact. Part of problem, and this 

comes out of the Gansler Commission Report is that our acquisition 

corps, the people who actually do the contracting, do the buying, 

are not as well trained as they used to be. And the ones who really 

know what they are doing are older and retiring. And the younger 

ones don’t have the right experience and the right training. 

Mr. ANDREWS. I read that report and I understand it is made 

very persuasively. And I don’t mean my question at all to be combative, but I would like you to answer it. Why didn’t we spend 

some of that 4.3 percent annual real growth on training the acquisition corps so they would have the tools to make these purchases 

better? What did we do with the money in the last eight years? 

Dr. ZAKHEIM. For a start, the money that doesn’t include 

supplementals went to fight the wars, number one. If you look at 

what we actually bought, we are buying less per unit than we did 

years ago, that is why the Navy has shrunk to 200 some odd ships. 

Whereas 20 years ago when I was at the Pentagon, it was at 600. 

Mr. ANDREWS. In your comparison between the 4.3 and 1.4 do 

you take into account policy change where we are disengaging from 

a combat role in Iraq? 

Dr. ZAKHEIM. Oh, sure, that brings you down to 1.4 because your 

supplementals are going to decline. Therefore relative to previous 

years, you would see a decline. 

My concern though, is that we know very well that the 

supplementals did two things, one that people didn’t like and one 

that people didn’t know about. The part that they didn’t like was 

there was a lot of procurement in the supplementals, and it didn’t, 

therefore, cover real programs of record and every year you had to 

keep the procurement going, that is just not a good way to procure. 

The part people didn’t know about is they didn’t really cover all the 

operations and maintenance. So you had a lot of O&M money moving around inside the defense budget to cover the operations themselves. You can’t predict what is going to happen in an operation. 

We do a budget today for something that we are going to be spending in 21-months’ time. 

Mr. ANDREWS. I hear you. I guess my only point would be in sort 

of challenging your hypothesis about the 2.9 percent spread, I am 

much more confident that the difference in policy in Iraq and aggressive procurement reform effort could close that delta rather 

sooner than you think, and your hypotheses that we are somehow 

underbuying resources is not true. 

Dr. ZAKHEIM. Again, the supplementals do take account of what 

is going to happen in Iraq. And we all hope that we will only need 

50,000 or less, I am not arguing with you there. But if you are 
32 

going have real procurement reform and you are dealing with the 

personnel side of it, you can’t do it quickly. 

Mr. ANDREWS. I hear you. Thank you very much. 

The CHAIRMAN. The gentleman from South Carolina, Mr. Wilson. 

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

being here today, this is such a serious issue and one that affects 

so many different countries. I am particularly happy to see Secretary Zakheim here. I appreciate your service, I appreciate your 

family’s service to our country. Additionally, I appreciate your efforts in Afghanistan and Iraq. 

I am particularly interested as a cold warrior in the success of 

the countries of Central and Eastern Europe. It has been so inspiring to me to see countries that were frozen in time, that now have 

dynamic economies, functioning democracies, but I am concerned as 

to the financial crisis and how this could affect their ability to continue to grow. In particular, last August I visited in Bulgaria, I am 

the co-chair founder of the Bulgaria Caucus. And I was there 20 

years ago to see the phenomenal advance economically of that 

country and additionally, I visited Romania several times to see 

what a dynamic country that is, too. For any of you, what is the 

consequence from Poland to—or from the Baltic states to the Black 

Sea? 

Dr. ZAKHEIM. I’ll start, first of all, thank you so much for your 

kind words, I really appreciate it, and there is someone else in this 

room who does too I think. These economies are clearly vulnerable, 

they are not all alike. And they are all different—to different 

extents—vulnerable not only to their internal issues, but also to 

how Russia deals with them, whether we are talking about gas or 

other things like the Estonians faced. 

In the first instance, I suspect it is the EU that will try to do 

whatever it can, and there are tensions within the EU itself. So 

this goes back to Richard Haass’ point and Dick Cooper’s point, 

that we really need to work together with the EU on this. I don’t 

see how the kind of issue that concerns you, which is a very legitimate issue because these are new NATO allies and it goes to the 

heart of what NATO is about as well. I don’t know how that gets 

dealt with unless we and the EU have some common plan to work 

together. Most of the big economies outside obviously Japan and 

Canada and one or two others—and China, are in the EU. So it is 

very, very important that we work together. 

Dr. COOPER. I would just echo that these countries are very vulnerable at the present time. They have grown very, very well during the last decade. And a lot of that growth has been on the 

strength of private capital inflows from all over the world, mainly 

from western Europe, but including American firms, including Japanese and Korean firms. In today’s circumstances that capital flow 

will diminish very sharply. They all have current account deficits. 

Hungary has already gone to the International Monetary Fund, 

Latvia, I guess, has applied to the International Monetary Fund. 

And I agree very strongly with Dov that we can rely on the international community but it needs to have the full support both of 

Europe and of the United States to make sure that these countries 

do not falter seriously. They are quite vulnerable. I have the current account deficits of the major ones, they are all above three 
33 

percent, Czech Republic, Hungary, Poland. And the smaller ones 

have bigger current account deficits so there is an issue. 

Dr. HAASS. Congressman, we had a meeting the other day at the 

Council on Foreign Relations about this. And I would say there was 

not quite consensus, but a lot of people thought the single most 

concrete outcome and important outcome of the April 2nd G–20 

meeting in London could be a commitment to significantly increase 

the scale of resources available to the IMF to tide countries over 

to deal with the balances of payments shortfalls to basically replenish the IMF significantly. 

The CHAIRMAN. I thank the gentleman, Mr. Marshall. 

Mr. MARSHALL. Thank you, Mr. Chairman. I don’t mean to bait 

and switch here, but the topic is appropriate to the longer-term 

problems that are facing the United States. It seems to me and to 

many others that the long-term budget deficits that we have been 

running now for decades present a real threat to our future security simply because they present a threat to our economy and our 

economy drives our ability to adequately defend ourselves and assist the rest of the world in defending itself from threats. I would 

like your comments about this long-term systemic issue that we 

face, and particularly about the proposed budget that you all have 

read about from the Administration, and whether the Administration’s budget appropriately takes into account how we are going to 

address the long-term budget shortfalls, the long-term deficits, the 

long-term increase in debt of the country, as that constitutes, it 

seems to me, a very substantial long-term security threat to the 

country, and it is a financial threat, so I am pretty close to the subject matter of this particular panel. And you are all experts, and 

you all thought about this, and I would like your opinions about 

the proposed budget. 

Mr. ROTHKOPF. If it is all right, I will start out with that. You 

put your finger on a critical issue, and it was really the issue I 

started off with here, which is that the wellspring of our strength 

is a functioning, healthy U.S. economy. And that if we don’t get our 

fiscal house in order, it will weaken our dollar and it will weaken 

our economy. We need to address that. We have had a hard time 

this year balancing the short-term needs of stimulus with the 

longer-term needs of dealing with 11, 12, 13, you count it, trillion 

dollars of debt in this country. And I don’t, to be honest, think that 

any U.S. budget of the recent past has dealt with this problem sufficiently, has focused on balance. 

Richard Cooper made the excellent point that we are going to 

need to tax in order to address this problem, even as we need to 

cut spending. And Richard Haass earlier put his finger on the point 

that until we deal with health care expenses in the United States, 

which is the elephant in the room on this thing, we are not going 

to be able to deal with that. There are projections that have been 

done that show that if you simply take entitlement spending, and 

defense spending at pre-war levels and carry them out to 2017, and 

you take our revenue, there is not money left for anything else. 

And we can’t wait until 2017 in order to resolve that issue. 

Mr. MARSHALL. And I am familiar with all that. By the way, I 

have read all of your testimony, heard your testimony and found 

it very helpful. It is consistent with what we have been hearing 
34 

from other experts. Those are the immediate threats. The longerterm security issue that is presented by the economy is what I 

would like you to address. And then specifically the President’s proposed budget, which is a budget that projects 10 years’ worth of 

spending and revenues. 

Mr. ROTHKOPF. Well, in terms of the longer-term threats, I mean, 

it is inevitable that you guys are going to sit in this room over the 

course of the next four years and you are going to grapple with 

your obligation to cut the defense budget of the United States, because it is the one big moving part in this budget. And once we get 

to the other side of this crisis, there is going to be pressure to do 

that in a way that no one in this room has experienced before. So 

cutting the defense budget is going to have that kind of a consequence on our ability to address issues overseas. And similarly, 

the contraction of our resources for soft power pursuits, whether it 

is aid or to fund international institutions, is going to have a similar effect in the United States’ role—— 

Mr. MARSHALL. I appreciate it. I am going to run out of time 

here. I want to, if it is possible, to get comments on the proposed 

Administration budget from the other panelists. 

Dr. COOPER. I am not going to comment on the budget because 

I am not familiar enough with it. Let me just say that I think the 

fundamentals of the U.S. economy—I know it is funny to say that 

in the spring of 2009—are very, very sound. We can handle lots of 

debt. We can handle growing debt. We have one huge unsolved political problem, the one Richard Haass mentioned, which is medical 

expenses. Medical science is advancing so rapidly, Americans think 

that they have a right to anything once it exists and that somebody 

else should pay for it. We need to have a serious discussion in this 

country, and no politician and most of the public don’t want it, 

about death, because death is becoming an option, but it is very expensive to prolong life in the older years. That is a huge unsolved 

problem. If we solve that problem, the rest of the problems are all 

manageable. They are all manageable, and our economy is strong 

enough to handle it. 

Dr. ZAKHEIM. I’d agree that the fundamentals are sound. I am 

not going to get into life and death issues, but I do think that precisely because the economy is sound, we need to think about investing today in the defense area in order to be stronger over the long 

term. This isn’t either/or. But, for instance, when I was just asked 

about acquisition. If we don’t train our people, if somebody can join 

the civil service with a masters degree and not take another course 

in physics or mathematics or systems analysis or anything for 40 

years before they retire, there is something fundamentally wrong, 

and that is why you have some senior civil servants who don’t 

know how to use computers as well as their grandchildren. That 

is a problem. That is an investment. That is something we need to 

do now. We couldn’t do those kinds of things or some of the things 

I wrote about in my testimony if we didn’t have sound fundamentals. But we do. And so, therefore, I think we can do it. 

Dr. HAASS. We have essentially reached a point where we have 

exercised all of our monetary instruments. We can’t lower interest 

rates any more effectively. We are going to have to continue to 

spend. So we are going to, in the short run, have to increase stim-
35 

ulus. For all I know, there will have to be another package. In that 

sense things are going to get worse as a necessary price of getting 

out of the deep recession we are in. 

The challenge, though, is that while we do that—and 30 more 

seconds of that. Part of what makes it so complicated is it is impossible to know in advance exactly what will be the consequences of 

certain kinds of spending, and we are literally, as I watch it, in the 

position of throwing a lot of things against the wall and hoping 

some things stick and have the impact that we want. 

But at the same time, while we experiment with stimulus packages, there is no reason we can’t address some other things, whether it is Medicare reform or things that would reduce our need to 

use energy or whether we can get growth out of other things other 

than stimulus like trade. So we have got to address other policy 

things. 

But I think, in the short run, the requirement of getting out of 

the economic situation we are in requires probably the running 

enormous deficits and increasing the Federal debt for the next couple of years. I don’t know any way to avoid that. But, again, we 

could do everything else at the same time, in terms of, you know, 

we could start introducing regulatory reform, entitlement reform, 

energy and security reforms and so forth which, in the long run, 

I think will address your concerns. 

The CHAIRMAN. I thank the gentleman. 

Mr. Coffman. 

Mr. COFFMAN. Thank you, Mr. Chairman. 

Dr. Haass, you had mentioned something about North Korea and 

that you were concerned due to the current global economic climate 

that North Korea might, in fact, be further destabilized. But isn’t 

North Korea a fairly insular nation? It certainly doesn’t have a 

market-based economy. Is it the aid flows you are concerned about 

it? What is it that might destabilize North Korea? 

Dr. HAASS. I am not necessarily known for my modesty. But 

when it comes to North Korea, I begin with it simply because it is 

arguably the most opaque country in the world. And any analyst 

looking at North Korea is constrained by that reality. But it seems 

to be clear that something is going on that is different there, that 

there is something going on with the political leadership that has 

increased the odds of instability and various forms of transition 

from the current leadership. Parallel to that, we are seeing the 

North Koreans getting somewhat more bellicose even by their fairly 

bellicose standards. The big governor, if you will, on the trajectory 

of North Korea has been two things. One has been China, its willingness to stay engaged sufficiently so North Korea does not collapse. The Chinese do not want to have the refugee flows and I 

think the uncertainties on the peninsula and don’t necessarily 

want to see a united Korea that looks a lot more like Seoul than 

Pyongyang. And the other part of it is the South Koreans, that 

they have been, to a lesser extent the Japanese but mainly the 

South Koreans have been a source of resources again to stave off 

collapse. Because as much as they would like unification in the abstract and in the future, they are worried about something that is 

convulsive and what that would mean in terms of refugee flows 

and simply the strains it would place upon their economy. 
36 

All I am suggesting is, in particular, the South Korean ability to 

pump resources in is, I believe, is going to be constrained given 

their economic contraction. If it is not in double digits already on 

an annualized basis, it likely soon will be. And I think it just adds 

to the dynamic of uncertainty in North Korea. That is my only 

point. 

Mr. COFFMAN. Thank you. 

I was having, in our relationship with the issues of the People’s 

Republic of China, I was having a meeting several years ago with 

a senior diplomatic official from Taiwan. And I asked him what his 

greatest concern was in their difficulties that they were having 

with mainland China, and his response was, I am concerned that 

if they have an economic downturn, that that will create greater 

friction between our two countries. Could any of you comment on 

your view of his assessment, if given, if in fact—and this was three 

years ago—that an economic downturn in China would in fact 

maybe raise the specter of conflict with Taiwan? 

Dr. HAASS. I for one don’t think it would appreciably. It is a little 

bit from the Chinese point of view—I know there are analysts who 

think that. It is a bit of the wag the dog theory, that in times of 

economic hardship, governments often look to foreign ventures to 

divert attention. But I would simply argue that China is too economically integrated with the world and needs the ability to export, 

needs the ability to import funds and so forth to keep its unemployment levels down. I do not believe that absent the major—that the 

Chinese would perceive as a provocation or a change of status on 

the part of Taiwan—I do not believe they would risk increasing 

their economic isolation dramatically. So, on my short list of crises 

that keep me up at night, given the economic situation we are in, 

that is not high on my list to be honest. 

Dr. ZAKHEIM. I agree with that. China right now is the source 

of a lot of Taiwanese investment. They have moved closer to each 

other. This is a politically driven conflict, and I am not even sure 

that China sees Taiwan as an overseas adventure anyway. They 

have argued the whole time that they are not; they are part of 

China. The trends actually look pretty good right now, and I would 

agree that that is not the one that keeps me up at night. 

Mr. COFFMAN. Thank you. 

Mr. Chairman, if I could, one more question. 

And that is, what would be the net impact if America were to 

much more aggressively move towards energy independence, and 

energy independence as being defined as no longer importing foreign oil, what is the impact in terms of the economic and national 

security of this country? 

Dr. HAASS. Well, you will forgive me, but the phrase energy independence is a nonstarter. The United States is not going to be energy independent in our lifetimes, and short of a major technological breakthrough. It need not be energy independent. 

What it needs to be is energy secure. What that means is considerably reduce use of oil. What energy security, though, would do for 

us would it would throw—it would reduce the flow of funds to unsavory regimes, particularly Iran and Venezuela. It would dramatically reduce the balance of payment pressures. It would ease some 

of the problems we talked about here on the dollar. Reduced use 
37 

of energy would obviously contribute to progress towards climate 

change issues and so forth. So it is one of those issues that would 

help us in multiple domains simultaneously. 

But independence can’t become the yardstick because it really is 

beyond reach, and it ought not to discourage all the things we can 

and should do that are within reach. 

Mr. COFFMAN. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. 

We have three votes. I respectfully ask that the gentlemen stay 

for a few additional questions and those that are here and have not 

asked questions, please return. Someone else will be presiding. I 

understand I have to manage a bill on the floor. So as soon as the 

three votes are over, and Mrs. Davis, if you are in a position to return and preside for me, I would appreciate it. 

Mr. Coffman, I appreciate your being ranking again. 

We have a few minutes, and we can ask you to ask your questions now. But my request is, when I have to preside or handle a 

bill on the floor, would you be in a position to preside for me? 

We will get someone else then. Go ahead with your questions, 

please. 

Mrs. DAVIS. Thank you, Mr. Chairman. And just quickly, following up on the issue of oil, we know that Iraq’s revenues are 

going down considerably. I mean, it is more than half what it was. 

Do we believe that they will have the ability to really provide the 

services for their people that are required with that reduction in 

revenue, and how are we factoring that into our work in Iraq? 

Dr. ZAKHEIM. Well, you know, part of the problem in Iraq for 

quite some time was that the money was actually flowing out of 

Iraq into the wrong places. As long as there appears to be some decent management of Iraq’s revenues, they are going to be able to 

provide services. And remember, the oil, the oil production itself 

still is nowhere near its capacity. 

So you have really two ways of dealing with this. One is to increase production, which would obviously recover some of the 

losses. Secondly, it is to be more efficient about how their resources 

are used and less corrupt about it. And finally, one other thing, it 

very much depends on what they were assuming in terms of their 

budgets. We know Russia assumed $70 a barrel. So they are being 

hit. No one, as far as I can make out, assumed $80 or $90 a barrel. 

So it may not be as bad as you think. 

Dr. HAASS. But it will be bad. It is going to be extraordinarily 

hard with oil in the mid $40s to get the investment to increase production. And even if you got the investment, it would take years 

before it kicked in. You still don’t have the arrangements for revenue-sharing in Iraq. And what it will do is decrease the ability of 

the central government to essentially use money, quite honestly, to 

purchase loyalties. So when you add up the plusses and minuses 

in Iraq, I would put this on the negative side of the ledger. As 

happy as we are that energy prices are going down, this is actually 

one of the places where there is a price to be paid for that. 

Mrs. DAVIS. Thank you. 

And also quickly, you all mentioned Mexico in one way or another. And I am wondering how you see, then, the impact of the 

government of the growing war with the cartels and what role, if 
38 

any—you mentioned, you know, there are obviously a limited 

amount of help and assistance that we can provide, and yet it is 

a growing threat, and those of us who live very close to Mexico, of 

course, are concerned about that reality. 

Dr. ZAKHEIM. Well, the government made one major decision in 

Mexico, which was to use the Army, which is far less corrupt than 

the police were and actually less vulnerable than the police are. We 

have all heard the horror stories about police being killed and police chiefs not wanting to take jobs and so on. So that is a major 

factor. 

Beyond that, how much we can do is really a function of how 

much Mexico wants to let us help them. We cannot, I don’t think, 

just go to them and say, here is what we think you ought to do. 

It is just much too sensitive a relationship. On the other hand, if 

it is done right, if we cooperate closely with the Mexicans pretty 

much on their terms, I think that would be a different story precisely because they did make that decision to use the Army and 

that was a huge decision to make. 

Mr. ROTHKOPF. I think what you are going to see is some effort 

towards some Merida 2.0 where we are going to be asked and will 

end up spending considerably more money assisting them because 

they will ask for some kind of assistance. You will also see a lot 

more activity on our own border. I mean, you did see the Governor 

of Texas send 1,000 National Guard troops to the border of Texas 

last week to address this issue, and you are going to see more like 

that. 

But one other thing that you should expect, and I have started 

to hear this rumbling out of Mexico, is an argument from them 

that this is due to the demand in the United States, and to the degree to which, you know, we want to help this problem, we are 

going to have to reinvest in controlling demand for drugs from 

Mexico in this country. 

Mrs. DAVIS. In addition to arms as well. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. We have one additional 

member, and maybe we can wrap this up before we go vote. 

Mr. Sestak. 

Mr. SESTAK. Thanks, Mr. Chairman. 

When I heard the DCI [DNI] speak about instability in other nations being the nearest near threat to us, for the Armed Services 

Committee, what brought me to mind was Tajikistan, for example, 

and all the ’stans where hundreds of thousands of young Muslim 

men work in Russia, and now Russia is having a challenge, so they 

are coming home. They are young. They can’t afford to get married. 

They are Muslim. They are right next to Afghanistan. Things are 

a little amok there. 

So as I hear that $25 billion is needed for nations if a number 

of the developing nations aren’t going to go into default, and I understand that $270 billion to $800 billion, depending upon who you 

want to read, is going to be the government shortfalls of developing 

nations, what is it, sir, if I might ask you, because I have three 

quick questions, that the U.S. Government cannot do now or is not 

doing now to address that security issue? Not the giving the 

money, like 0.7 percent that the World Bank is talking. But what 
39 

can we do as an example of that one example, of what I gave? Because that to me is what Blair was really talking about, Admiral 

Blair. 

Mr. ROTHKOPF. Well, I think it is a central issue, and I think 

that it is going to end up being development assistance primarily 

from international financial institutions, and, you know, if I were 

going to pick one place in the world for the incident that Dov was 

talking about, that we don’t expect it and we are not terribly well 

prepared for, it would be somewhere in Central Asia for precisely 

the reason you are talking about. So maintaining relationships 

there, maintaining base capacity there is also related to that because I think this is where the—— 

Mr. SESTAK. How about USAID? Does it—developmental assistance, Vietnam days had 15,000 Foreign Service officers, 5,000 in 

Vietnam. Today it has less than a 1,000. Is that something we need 

to look at, or do we just continue to contract out to RTI International, or what are those—I am asking, what can we do to address this developmental assistance? Because I honestly think that 

is what we can do in this government of ours. 

Mr. ROTHKOPF. I think we can expand it a lot. Before the crisis 

hit, there was a lot of discussion in the transition about, should 

there even be a new agency there? We are not going to have that. 

Mr. SESTAK. Should it be Cabinet level? 

Mr. ROTHKOPF. I think that there—I actually think that the better approach is some kind of Goldwater-Nichols on the civilian side 

that creates the ability to mobilize people in all the relevant agencies, including trade agencies, Overseas Private Investment Corporation (OPIC), U.S. Export-Import Bank (Ex-Im Bank), Commerce, USAID, Treasury, across the board because I think all of 

these places have a role to play. 

Mr. SESTAK. Let me move over, if I could, on the defense budget 

to the question that was asked. To some degree, I have looked at 

the supplementals like crack. I mean, when we had in those 

supplementals, helicopters that hunt submarines and a Joint 

Strike Fighter (JSF) aircraft that is not going to be online until 

2013, we have got a real problem weaning ourselves off of that. But 

when I look at the defense budget, it has risen from 7 percent in 

2001 to 21 percent at the end of 2006. So it is probably about 26 

percent of Overseas Development Assistance (ODA) funding overseas. So that is probably $9 billion to $10 billion. Why don’t we just 

kind of—we kind of gave that to you for some of Iraq’s money, 

didn’t we? Why don’t we just take that over and move it on over 

to USAID? 

Dr. ZAKHEIM. Well, first of all—actually, when I was Comptroller, I moved some money over there. I had to do it via the Office 

of Management and Budget (OMB). Part of it, again, is the authorities. We don’t have the authorities. And—— 

Mr. SESTAK. Should we effect that—is that a good move to move 

that—I mean, Congress can do that. 

Dr. ZAKHEIM. I think, Congressman, that there is a lot of sense 

in looking at this as a comprehensive whole. I think that is what 

Mr. Gates was talking about. Frankly, we could avoid sending our 

troops to lots of places if we had people in our civilian agencies that 

got to them first. So—I don’t know the numbers though. 
40 

Mr. SESTAK. My take is, I hear what Mr. Gates has said and the 

chairman, but words are words. It is not what is the defining coin 

of the realm here, resources. If it is to be a comprehensive whole, 

and I am not looking at fixing our financial system, the experts will 

do that in Finance and Ways and Means; should we really look at, 

not because it used to be 4.5 percent increase in Department of Defense (DOD), but can we prevent our men and women from going 

overseas in a better investment of moving moneys over to USAID? 

Dr. ZAKHEIM. I agree, but it is an issue of authorities. 

Mr. SESTAK. Which we can legislate. 

The CHAIRMAN. Gentlemen, thank you very much. 

Mr. Sestak, I suppose that was it. 

Gentlemen, we appreciate it very, very much. It has been excellent, one of the best hearings we have had in this committee. And 

we will adjourn and proceed to the floor to vote. Thank you. 

[Whereupon, at 12:20 p.m., the committee was adjourned.] 
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