Hamilton, an important contributor to our project over the years. We have done it ends with him before. Job, he was the comptroller of the pentagon, the chief Financial Officer of the pentagon, during the five years of greatest fun one could have possibly had. When we think about stanford these days, we are thinking about katie ledecky. For all the great pain she has gone through in the swimming pool, i dont think it begins to compare to the pain bob has gone through in trying to injure sequestration because he was the guy at the pentagon who found a way to survive it. Some people would say he almost did too good of a job because it almost made sequestration seem. Olerable to remind you, sequestration is the automatic spending cuts that kick in to bring us down to a lower spending level if there is no other deal and this is all necessitated by that budget control act from 2011. Bob has been a distinguished and very patient government servant on some of the toughest issues in finance and in management of the pentagon throughout his career. Previously, he had been comptroller of the air force and director of the National Security division at the Congressional Budget Office. As my good friend, the president of the committee for a responsible federal budget. She also runs the fix the debt campaign. She has been one of the most tireless maybe the most tireless and persistent people favoring responsible fiscal policy in the United States for the last kid of decades and has been exemplary and how she has found many different vehicles through which to get the word out, including through a great deal of writing, a great deal of testimony with congress, coalition building, working with younger people whose future is perhaps most at stake in many of these conversations, and it has just been an exemplary sort of scholar activist on these very important issues. Im thrilled to have her. This one more time because Hillary Clinton has not yet been elected president i hope she will be soon. Thats my own personal view, but until she is, if she is, alice in my mind remains the most a congresswoman in american political life in our history, and im not exaggerating. Shes founding director of the Congressional Budget Office, head of the office of management and budget in the Clinton Administration, vicechairman of the Federal Reserve board, and when some people would have called it a career after all that, interspersed with a number of periods at brookings when she was writing on a number of issues of the day, and when she quote unquote retired from the fed, she decided to help d. C. Fixes finance issues. She remains one of our most distinguished and eloquent voices on matters about the economy and, certainly, the federal budget. We started by talking about the overseas Contingency Operation and then we will get into a federaldiscussion about budget policy and really federal Economic Policy and the future of our country, for that matter because that is what it is all about in the end, as you well know. I will just a one more thing beginning with a broad question, and by the way, i will do a quick advertisement for my little booklet, which is about the pentagon budget called the and nowlion bargain, you know all you need to know. My argument is we should spend about 50 billion a year on military, a little more than were spending now, and that raises the question if we are going to spend more on the military, what about the rest of the pentagon budget . Another 15 or 16 is all the other socalled Discretionary Spending that we do as a federal government, and that term, for those of you who do not follow not day in, day out, means optional stuff, necessarily, but programs, capabilities that have to be appropriated each year by the congress, and if they are not, then theres no money. Unlike entitlement, which is, along with interest, the other 2 3 of the budget, which are all the things we value as individuals, but which may, frankly, have less to do with longterm national power. If you are thinking about longterm national power, the strength of the country, at least i think about military, highways, infrastructure, federal support for education, which is a modest fraction of total education spending in the country, but all these things are in the socalled to mystic discretionary accounts, and therefore in my minor not so discretionary, and they are getting squeezed pretty hard through the budget process we have all come to know and love as the budget control act with the looming specter of sequestration hovering over our next every year or two. Thats the broad context, and now im going to ask my colleagues to expand on some of these themes and begin with bob. Noting you begin by have often said that the turbulence in the budget at the pentagon has been one of the greatest handicaps, leave aside the level, the turbulence and uncertainty. Could you explain more about that problem and how to solve it. Bob thanks for the chance to be here. If i was looking at the next administration and the issues they face, the most important would be finding a predictable and reasonable level of funding for federal agencies. I will focus on defense because i know it best. Since 2010, we have gone to the enormous turbulence in the department of defense, 2013, we had the sequester cuts which harmed in the Mission Effectiveness by leaving inefficient and funds for training, wasted money, we did not allow Civil Servants to work. At the time, many Senior Leaders could have spent time on better things. We need a reasonable, predictable level of defense and funds. To do that, we need a longterm deal. This includes mandatory spending, Social Security, revenues, and considers all of that in context of the deficit. In that deal, i would keep the budget caps, because i think the process needs discipline, but i would raise them for defense and probably nondefense also, probably to the levels currently proposed by the Obama Administration. Certainly put pressure on the overall negotiations. You would need to also look at some ups and downs. You may say to yourself, this guy has his head in the sand. With the divisiveness and a political debate, how could we see such a deal . I remain hopeful that we will get beyond this divisiveness. We will elect a president who will have to deal with these issues. I am at least hopeful that we will see a broad budget deal. I think it is the only solution. The other issue for defense in particular the next administration has to deal with is the future of the overseas Contingency Operations put in place in 2012 to cover the cost of the iraq and afghanistan war. I just wrote a paper and there are hard copies out there if you are interested. It is very important financially to the department of defense. Oco served the nation well, making sure it nature funds were available, so that those involved in combat with have the resources they need. I think theres probably nothing more important than the department to do. There were also some timing problems, the supplementals use before oco were enacted late, not enough time for dod to effectively put them in place. It has been harshly criticized because it has been used to get around the caps. Oco is not subject to caps, so we have put money into oco that shouldve been in the base budget. If you are interested, we can go into it more. So what does the new administration do . The ideal thing to do is to put oco back where it was but only use it for wartime needs. That would probably mean moving several tens of billions of dollars out of this war budget into the base budget. Given what i said, that they are already too low, i dont think that is practical. Regrettably, in my view, the administration will have to keep oco, try to keep it back in its box, maybe make some small moves, but i think a practical solution will require that it continues. We need a broad budget deal that helps defense and other agencies get more stability and reasonable levels of budget, unless the administration has to do something about the future of oco. Host one followup question. I would like to ask more about the paper itself, recommend it very strongly, a shorter version is being published on national interest. Org this week. A longer version on the Booz Allen Hamilton website. It is a very nice read. If you could summarize some of the key points, including out of that 60 billion oco budget, roughly how much has gotten divergent for purposes that would not be optimal . Secondly, if you have any notional sense about what the pentagon budget should be. I guess you said consistent with president obamas request. If you could spell that out for some with some rough numbers for the crowd. Bob they just set it higher than what they think the Department Needs. There is a lot of money in oco that is in a gray area in terms of its contribution to wartime needs. If you were to get it down to war needs only, i cannot give a specific number. I think it would be several tens of billions of dollars that you would need to move out of oco and put into the base budget. The reason you do not want this money in oco, several reasons, but the most important one, dod tries to do longterm planning to have a consistent fiveyear plan, so you dont buy a bunch of stuff you cannot support in the out years. It is hard enough to plan wartime needs one year in advance. If you start putting large amounts of the budget in oco, you lose all of that consistent plan a, you lose the budget discipline. I think it is just a bad idea. Paul ryan, when he was speaker of the house, said that he was using oco to undermine some of the budget needs. To the greatest amount we can, we should avoid it. Michael do you have a number that you would be culpable with with the pentagon budget . Bob i would be comfortable with the Obama Administration proposal, summer in the 540, 550 range. Michael there is a handout, for those of you here in person, which tries to summarize some of the numbers. These get confusing. Bob just gave the cunning on base budget, so he did not include the oco fund in that, and also not the Nuclear Weapons activities of the department activity. I tend to pull them together, if you want to look at it in a global sense, the National Defense function. That is summer over 600 billion. Once you have added the base budget, oco account, Nuclear Weapons activities. That does not include the veterans administration, which is another 175 billion a year roughly, which is not relevant to future defense needs, but the debt we owe to those that have been wounded or killed, their families, in previous military operations. It also does not include the department of states foreign assistance program, including security assistance, two countries we are working in partnership with. It also does not include the department of homeland security. So there are a lot of things related to defense not within that 0505 budget. They are all in nondefense discretionary, so everything is getting squeezed. Anyways, depending on what number you are looking at, the definition, in broad terms, i would say defense spending is just over 600 billion a year. That is considerably above the cold war average in inflationadjusted dollars. I still think it probably needs to go higher, as bob argued. Now lets broaden further. I want to ask alice what she would think of as an Adequate Funding level. We will get into the issue of the budget control act and what the next president should do. Even though you may not to give a precise answer, i was reviewing the Historical Data on how much we spend on nondefense discretionary. As a percentage of gdp, in the 1960s, it started in the low 3 range, went up to 4 in the johnson administration, 5 during that liberal Richard Nixon presidency, stayed up there through the 1980s. Ronald reagan never dropped it below where it is today, about 3. 3 of gdp. It has been in that range until the Obama Administration got into the low 4 . Now it is back to about 3. 4 of gross domestic product, and it is headed down to projections of about 2. 8 , the lowest level since the Eisenhower Administration relative to the size of the economy. So that raises the question of how much is enough for these domestic investments. Alice with all due respect, mike, that is a silly question. It would be nice if one could say, here is a number. There is something sacred about this number. It is silly on both sides of the budget. I once sat down with a group of defense experts, people with stars on their shoulders. I was the economist in the room, and they said, just give us a number for how much we should spend four defense. How much we can afford to spend on defense. Then we will figure out how to spend it. That may sound reasonable to them, but what you need to spend for defense depends obviously on what the threats are two the country, and how we think we should be dealing with them. We are spending roughly 3 of our gdp on defense right now. There was a time when you did not mention mr. And the cold war, when you are spending 10 of gdp on defense. We perceived that we had to do that. We do not perceive that now. The domestic side of the budget is roughly the same situation. In my opinion, the two big problems facing the u. S. Economy, as we look ahead, are we need to grow the economy faster. There are various ways you can think about doing that. But there are some obvious ways that we are not doing. We are not modernizing our infrastructure, roads, bridges, highways, train systems, sewer systems whatever. All of those need to be modernized. It would create some jobs in the process and some not bad paying jobs. Infrastructure is essential to looking at the future, as is development of the skills of the workforce, staying on the forefront of science. That does not tell you exactly what you should spend it for. You should spend it well and on sensible projects. We dont always do that. That is the question we ought to be talking about. The other big threat that we are not talking about at all maya keeps trying if we go on doing what we are doing in the federal budget, we are facing a growing debt, and one that is growing quite rapidly looking down the line. Why is that . We have an aging population and we are committed to Social Security benefits, but more importantly, to Health Benefits for people as they get older. And we have an inadequate tax system which will not keep up with those spending needs which were already committed and is pretty inefficient system to into the bargain. The real conversation we ought to be having, and bob suggested this is how are we going to bring those to give your budget lines together in the future, with the needs of an aging population, and the revenues to support those. That is partly a question of can we deliver health care more efficiently . It is partly a question of can we have a tax system which is more progrowth, but also more productive of revenue than the one we have got. The answer to that is yes. We had a lot of conversations about that five years ago when we were in the simpsonbowles mode. The president was talking to speaker boehner, everyone was trying to get to the grand bargain. We did not get there. The budget control act is a bizarre piece of legislation that was supposed to get us to the grand bargain, to say we will create some cuts in domestic and defense spending that are so unacceptable, nobody would want to do them, and therefore, they will get us back to the table to do the grand bargain. Maybe it was a nice idea, i thought so at the time, but it did not work. Now it has gotten us focused on the discretionary part of the budget, both defense and domestic. Discussing things like the problem of the overseas Contingency Operation, which is essentially a problem of how the Defense Department was able to live with unrealistic caps and cheated a bit in the bargain. Now we will figure out how we get back to something sensible. Something sensible is talking about what we want the government to do and how we want to pay for it in the long run. We cannot be incapable in doing that. Michael if i could follow up on the overall budget, i want to make sure i understand, whether you think the current track we are on for Discretionary Spending is acceptable. Alice no, i think it is much too low. That is because of the need to invest in the future. If we just let these entitlement programs, which are mainly for older people, and i am one of those, if we just let those escalate without inking about how we control the spending, then we force out investment in younger people and investment in the productivity of our economy. Nothing could be stupider than that. Michael bob has talked about being content with obama proposal numbers on defense. I would maybe go a little higher. We are talking about a few tens of billions added to the annual budget. You have a rough order of magnitude for the domestic side . Alice no, i dont. I think you need to look carefully at proposals for what you would actually invest in, and it should grow slowly over time, as you get more experience in what works. People are talking now about bringing private sector money in through an infrastructure bank. I dont think that is a bad idea but i dont think it will solve the problem. I do not have an exact number in mind, but it has to be a balancing act between what is productive spending on the one hand, and how much can you slowly grow spending in the future, so that you are not getting onto a worse debt trap and we are already on. Michael you may not want to give an exact number. Do you think it is the same kind of magnitude that we are talking about on the defense side, tens of billions of dollars, plus or minus . Alice that is a largely political question. It will be roughly the same magnitude because that is the way congress thinks. If we raise the caps on one side, they will be raised on the other. That doesnt mean it is the r