Media Conference Call: Future of U.S. Defense Spending

GIDEON ROSE: Hi, everybody. Gideon Rose here, editor of Foreign Affairs. We'll get right to it.

We have a great opportunity today. Andy Krepinevich, the head of the Center for Strategic and Budgetary Assessments, may well just be America's most respected and influential defense policy wonk. He's also a frequent Foreign Affairs author, mostly recently of a piece on defense strategy in times of austerity, charting forward some very interesting ideas for the future of American defense policy and strategy. But he's here today to talk to us not just about that but also about the budget cuts coming up and the sequester and what's going to happen with the American defense budget over time.

So let's get right to it. Andy, what is the basic issue with the sequester? First of all, is the sequester going to happen? All of us assumed -- or many of us assumed that it would never happen. It was designed to be a poison pill that would never happen to get them to do something else. But now it actually looks increasingly likely that it will happen. So what is it and is it going to happen?

ANDREW KREPINEVICH: I think the betting line is increasing that we will see sequester. Both sides seem to be hardening their positions.

The Republicans feel this is the only way they can get what they want, which is cuts to the federal spending, and the administration is offering what it considers to be a balanced plan of maybe some cuts and some revenue enhancements or closing loopholes. And that at this point in time, doesn't seem to be satisfying the Republicans, of course. And unless something can be worked out in Congress, we're going to go over the cliff around the 1st of March and we'll see what happens then.

But you're absolutely right, Gideon. When this piece of legislation was crafted, it was sort of with the mind of nobody would be foolish enough -- (chuckles) -- to want to put anything like this into effect. And so you had the supercommittee that was set up that was supposed to come back with recommendations that would lead to sort of an informed strategically-guided set of cuts. That never happened, and so what you were left with is sequestration, and both sides in this game of chicken. Neither side seems to be willing to move off their position right now, and again, I think that's what we're looking at come March 1st.

ROSE: So what are your odds personally that we're actually going to see a sequester right now?

KREPINEVICH: Given the current situation, I'd say it's about 80/20. That's my gut.

ROSE: Wow. That's just amazing. OK, so this legislation was designed to be idiotic, and it actually is idiotic in terms of public policy. So -- but if it's going to go forward, what actually is the sequester? What does it consist of? And why is it so idiotic?

KREPINEVICH: Well, it -- basically, what it requires is a step function in cuts. And so originally, the defense budget would have been cut about $53 billion in one year off of the president's request.

And so, you see, you have a rather stark drop. It's about -- it's about 10 percent in one year. The -- but, you know, that's -- so typically what you get is a gradual drawdown so the Defense Department can adjust and you don't have this step function cut.

But the other and arguably even more pernicious effect is that it cuts across the board. So every major program line gets cut by the same percentage, with the exception of military personnel. The legislation allows the president to exempt military personnel, which of course doesn't reduce the size of the cuts, it just increases the percentage in the other areas that aren't related directly to military personnel. So you have a situation where you can't strategically target the cuts. Everybody gets cut. The term at the Pentagon is everybody gets a haircut. And you know, when you get a haircut, you sort of trim everything off the top and everything's equal and even, but of course, when you do that, all sorts of unintended, inefficient things happen. And quite frankly, I think it's going to lead to a loss of military effectiveness over and above what you'd have if you did this in a more reasoned, strategic way.

ROSE: OK. The people who often know the most about the military in Congress and are often the strongest defenders of sensible appropriations and policy also are seen by some as somewhat (corrupt in/corrupting ?) the system because they end up sort of benefiting a lot because of their defense policy connections in the sense of, you know, the -- jobs in their districts and so forth. You have an iron triangle effect. Is -- are there -- is there anybody with credibility to say, this is ridiculous, we need to make cuts but this is not the way to do it? And are those people going to have any say?

KREPINEVICH: Well, I think -- you know, there are some people, certainly, on the Hill -- I mean, everybody, to a greater or lesser extent, has an effect in terms of what it means for their particular district.

And of course, there are equal cuts, I mean, in terms of size and percentage on the domestic discretionary side. So you're not just talking about defense. I signed up to recently a -- sort of an open letter -- Secretary Gates, for example -- former Secretary Gates has signed up to it. It's sort of bipartisan -- former Senator Lieberman -- saying look, again, at a -- at a minimum, if you're going to go forward with sequestration, at least give the Defense Department the flexibility to target the cuts so we're not unduly threatening, you know, troop morale and welfare -- we're not unduly threatening readiness, so that we can do this in a logical way.

I think -- I think that's the minimum because in that event, if you're, say, the Republicans, and you say, look -- you know, we just can't go on spending like this; we've got to have some economies put into place, you're still getting the same level of cuts, but you're getting them in a way that minimizes the damage in terms of, you know, loss of efficiency, loss of effectiveness.

There are concerns -- I'll tell you, Gideon -- (chuckles) -- we, you know, talk about doing foolish things. It may be the case that the Defense Department has to break contracts with firms that are producing new capabilities. And of course, when they break the contracts, there could be penalties associated with that we pay to get, you know, essentially nothing back -- renegotiating the contract. And, you know, again, I can't imagine that the contractor -- you know, having been -- having had the contract breaches is going to come back and say, well let me offer you even more favorable terms. So again, just so many ways in which this is a bad way to run a railroad.

ROSE: What are the odds on that sort of -- we'll keep the cuts, but give us more flexibility -- the odds on that passing are?

KREPINEVICH: I'd like to think they're closer to 50/50, but you know, the situation is so fluid. And what will be the specifics of that and, you know, how willing is the administration to compromise and, again, how willing is the House majority? I just don't know. But I think again, if the -- if the concerns of the deficit hawks are, look, we've got to effect cuts, at least you're giving them that. And you know, hopefully they don't see much in the way of compromising their position to do that. And of course, the question then becomes is does the administration see that as a way of bringing about the cuts that they're trying to avoid?

ROSE: OK. Let's get to another -- (inaudible) -- the continuing resolution. I heard General Dempsey talking about this and he was almost as apoplectic about that as he was about sequestration. What's that issue?

KREPINEVICH: Well, you know, when you don't pass a budget -- and, you know, this is another issue of contention up on the Hill; I believe the Senate in the fourth year of not having passed a budget -- then what you typically get is a continuing resolution that calls for spending to be sustained along previous levels.

Well, you know, it doesn't really account for inflation, it doesn't account for the fact that the Obama administration actually in its defense plan calls for modest increases in defense spending over time. And so again, you -- and it creates a certain amount of uncertainty. Is this what I'm going to have to work with? Are we finally going to pass a budget and I'll be working with a new level?

So again, not quite as bad as sequestration, although I could understand why General Dempsey is frustrated because this just compounds his problems. But again, it's -- you know, to the extent that you generate unneeded uncertainty, it makes it more difficult to plan, it makes it more difficult to contract --

ROSE: I think he was talking about the difference -- the inability to move things from one pocket to another within that.

KREPINEVICH: Well, to a certain extent, yes, that -- you know, there's a problem that's associated with that as well because if what you're doing is just sustaining what is, then, you know, again, that creates a problem at the top of everything else.

ROSE: The -- they just moved the -- or they just have announced that they're not going to send the carrier to the -- another carrier to the Gulf. And they've tied that directly to the, you know, the sequestration and the spending cuts and so forth. A, is that just propaganda, or is it an actual sort of serious impact of this sort of budgetary foolishness on American national security policy? And B, are we likely to see anymore things of that sort in the coming months?

KREPINEVICH: I think it's probably a combination of both, of, you know -- hey, you know, look, if you're not going to give us the money, here are some of the things that, you know, we're not going to be able to do. It may be somewhat similar to, you know, when the school budget is cut locally, you say, well, we have to cut bus service and the high school football team, and then people -- it like grabs their attention right away.

But you know, the fact of the matter is, what -- because there was this sense that sequestration wouldn't happen -- you know, the fiscal year starts October 1st, and sequestration is supposed to be put into place in January, but essentially it cuts the full year's budget. So basically, Secretary Panetta decided, look, possibly assuming nobody would be foolish enough to go through with sequestration, we're not going to start cutting back on things like operations and maintenance and so on, we're going to take a risk here. We're going to continue to operate as we think is necessary, and expect that sequestration won't happen. Well, the longer you wait to do that, the more you sort of pile up in fewer and fewer months the overall cut that you have to exact.

So again, you -- and of course, we've -- the legislation that was passed in early January to avoid sequestration going immediately into effect pushed it back to March.

So you're talking about getting to the point where you've got to come up with a full year's of sequestration savings in roughly half a year. So the cuts are going to be all the deeper. And you can move money around to some extent, but again, as I mentioned earlier, you can't move procurement money into the readiness account. So you can't say, well, I'm going to -- I'm going to slow the buy of, you know, a new aircraft or a new ship so I can put money into operations and maintenance so I can deploy that carrier to the Persian Gulf.

So again, it really is going to hit hard, I think, in terms of operations and maintenance because, you know, right now -- you know, we are -- (chuckles) -- engaged in such intensive operations -- not just in Afghanistan, but also obviously in other areas around the world -- the North Koreans just testing a nuclear weapon, you know, not quite clear, you know, what the Iranians are up to these days.

So -- but you're cramming more and more cuts into a shorter and shorter period of time. And Congress did revise -- I should mention -- the sequester so that it does, in a sense -- you go from about 52 billion (dollars), which was the original sequester, and then, with the Taxpayer Relief Act, you go to 40.9 billion. So it's less of a cut, but you're still talking about a more compressed period of time.

I don't know if that makes sense. You know, sometimes people look at these things, and their head begins to spin when they try and figure out just what happens.

ROSE: Given the vast amounts of money we're actually spending on defense, even with all the responsibilities that the country has and all the priorities -- it -- to most people looking at this, the absolute figure seems so great that it should be possible to accommodate even sequester-sized cuts over a period of time if you were to, you know, just simply make tougher choices and establish better priorities and so forth.

There's no article that comes into Foreign Affairs that can't benefit from being cut 10 percent, for instance.

KREPINEVICH: I know that. (Laughs.)

ROSE: And I assume the defense budget is the same way. Of course, the obstacles to that are not just sort of sheer budget figures but the political and bureaucratic interests that block the kinds of adjustments that would be necessary from a rational person. If I gave you a line-item veto on the defense budget, you could produce a more effective budget at a much lower cost, and presumably that would be true of General Dempsey or President Obama as well. Is there any chance that as we go forward in a more constrained budgetary environment that -- some of the logjams that are political and bureaucratic in nature to more sensible programming and budgeting will actually be loosened?

KREPINEVICH: I think that is one of the potential hidden benefits that, you know, clearly if you talk about cuts beyond a certain point, any reasonable person has to conclude, look, we just can't do business as usual anymore. We're going to have to think about, you know, different ways to approach the problem that we confront.

And we recently did a piece looking at what we called strategy in austerity that looked at the budget implications. and you know, there are a number of things you can do. One is, you can say, you know, we're just going to get rid of programs that, again, have political coverage but now we've got the opportunity to do it. And these were programs that were really marginal in terms of what they might contribute to long-term security. And I can probably name you a number off the top of my head.

Second is, let's try and become more efficient. And there's about --

ROSE: Why don't you name of those, because, you know, you know what they are and I know what they are, but not everybody does.

KREPINEVICH: Well, one is the Army's Ground Combat Vehicle.

This is sort of a descendent of the Army's future combat systems program that was terminated a couple years ago by Secretary Gates. It's just not clear that, you know, this program, which is supposed to cost in the tens of billions of dollars, isn't going to do anything than give us a marginal improvement in capability. And why you would spend all that money to get a margin improvement when there's really nobody racing against you in this area is a bit beyond me.

So again, I think, you know, that's a sort of a program that bears greater scrutiny and --

ROSE: What's another one?

KREPINEVICH: Goodness.

ROSE: (Inaudible) -- plane.

KREPINEVICH: I think if you look at -- in general, I think we need to revist our thinking about our kinetic missile defense, which is, you know, hitting a bullet with a bullet. We are on the very wrong end of the cost equation. You know, the recent example is what happened with the Israelis and Hamas. They were firing rockets -- Hamas was -- in to southern Israel.

And the Israeli missile defense system, called Iron Dome, had a number of, you know, very impressive successes. The problem you face here though is that Hamas is firing rockets that cost maybe a few thousand dollars and the Iron Dome defense system cost about 50 million (dollars) to buy. And the interceptor rockets that they use cost about 40(,000 dollars) to $50,000.

So you're spending an order of magnitude, arguable, more to defend yourself against the threat. This is -- this is an --

ROSE: So, wait, the real story of Iron Dome is not that it was effective, but rather that it's ridiculously costly and allows the enemy to bleed you dry?

KREPINEVICH: I think the -- yeah, I think the long-term story of Iron Dome is this works on a couple levels. It works because -- if you're absolutely concerned about reassuring your citizens that you're actually doing something to defend them actively.

It works if it's a very short engagement where you don't have to use a lot of them. But if you're talking about a long-term competition -- if I'm Hamas, or if I'm Hezbollah, which is an even -- and of course, Hezbollah, during that little episode, mentioned, hey, you know, you think you've got a problem with Hamas? You know, we can really bring it down on you.

They've got thousands of these. And again, it is not smart strategy -- it's not the practice of a good competitor to be spending, you know, far more in a competition -- a critical competition which is missile attack, missile defense, as a way of competing. Now, there is, you know, one area -- and it's not a done deal, but there have been remarkable advances in directed energy made recently, particularly in solid-state directed energy systems, and these can get you back into the game and maybe even on the right side of the cost equation.

So I think you're going to have to look more at investing in those kinds of capabilities, because I think, again, long-term, kinetic missile defenses, unless there's some incredible breakthrough, are just far too expensive for -- you know, for the kind of threat, for example, that Hezbollah or Hamas poses. And of course, it poses this kind of threat to Israel today; if we're involved five or 10 years down the road in ground-com operations somewhere, those ground combat operations, you know, could be jeopardized greatly if we find ourselves trying to use kinetic defenses to defeat enemy rockets and mortars.

ROSE: OK. There's lots of things we could discuss, and I definitely want to get to our audience. Let me just ask one question of myself, which is -- you know, you are an advocate of rethinking a lot of things precisely because you see the trends that are occurring and the future combat environment -- and the future battlefield may well be different from what the contemporary one is, and certainly what was true a decade ago.

And so you want to evolve and adapt the U.S. Armed Forces to meet the new and emerging threats, and do so in a cost-effective and intellectually serious way.

One could imagine, as we just talked about, the pressures of the strategy and a time of austerity being a spur to doing this that are only the important things, and doing them in the most cost-effective and sensible ways. One could also imagine austerity pressures and budgets cuts doing the reverse, which is in effect, oh, I don't want to worry about notional things that may or may not happen, I've got important political constituencies that need to be protected. And so I'm going to basically just keep the most sensitive things, and get rid of -- you know, not think forward in creative, interesting ways about theory.

Is there a chance that that's going to happen, that these sequestration and austerity will actually stop us from thinking creatively about the future environment and the changes that need to be made?

KREPINEVICH: I think there really is a chance, Gideon. I've had talks with senior defense officials, and you know, their argument has been -- and I've tried to outline that in the article I published, or you published in Foreign Affairs -- they say we lack a strategic narrative. In other words, we lack a way of explaining to the American people at a time of austerity in a persuasive way why they ought to keep spending roughly half a trillion dollars on national defense.

You know, particularly when you've got people saying that we've got al-Qaida on the run, we're drawing down from Afghanistan, that war's over, the war in Iraq is over, I think -- you know, if you look at the priorities of the American people right now, you know, it's just not in the area of defense. And I was talking with one Army general recently, and having this kind of conversation.

And he said to me, well, you know, the man on the street, the woman on the street doesn't really know what the defense budget is. They don't know how much we're spending. And I said, that may be true, but if you -- if you ask them, you know, would you prefer to cut Medicare, education or defense, I said, you know, the vast majority will raise their hand when it comes to defense.

And unless you have a persuasive explanation, if you tell me -- if the Army tells me, well, I need 40 brigade combat teams, I'll say, well, why not 36? If you say 36, I'll say, why not 32? You've got to -- you know, people will agree we need an Army. They won't agree we need an Army of 490,000, which is what we're planning to go to, at least. You know, for them, there's no clear explanation why it can't be lower. And I think, again, it's -- until you come up with that, then there is -- you know, what you're looking at is a situation where there is no bottom. There is no floor to defense cuts, I think, over time.

ROSE: Well, this is really interesting stuff. Let's bring our audience in. Operator, let's get some questions from the floor. (Chuckles.)

OPERATOR: Thank you. At this time, we'll open the floor for questions. (Gives queueing instructions.)

Our first question will come from Pat Host with Defense Daily.

QUESTIONER: Hey, Andrew. Thanks for doing this today.

KREPINEVICH: Sure thing, Pat.

QUESTIONER: I'm wondering if -- sequestration is obviously going to be across-the-board cuts. I'm wondering about the nuclear arsenal. Where do you think -- which leg of the triad do you think will be most affected and what leg of the triad do you think should be most affected if the across-the-board cuts take place?

KREPINEVICH: Well, again, because there are across-the-board and because, you know, each line is cut equally in terms of the budget lines, it's hard to say which leg would be affected most.

You'd have to know about deployments and readiness states and so on. So I can't really give you a precise answer on that. I would say that, you know, the administration was already, before the election and before this current defense program was released, doing analysis on going beyond the cuts that were agreed to in New START. And so I think the budget issue, with respect to nuclear forces -- and we're already beginning to see this in the think tank world -- is, well, just how much in the way of savings is there if you exact significant additional cuts on the nuclear forces?

I think the answer's going to be somewhat disappointing because, despite what a lot of people think, it doesn't comprise a substantial part of the budget -- somewhere in the neighborhood of 5 percent. In terms of -- if there are one of the three legs of the triad that was cut or done away with -- you've got the manned bombers, the ballistic missile submarine force and the land-based missile force. I think right now, the land-based missile force, you know, might be in the greatest danger. But then again, as Gideon points out, you could look at it in terms of, OK, what savings are we going to get and how much strategic sense does this make?

But there are also these parochial interests. OK, if we cut the ICBMs, that means that, you know, there are a lot of bases that are going to be shut down in the -- you know, the upper Midwest. If we -- if we cut back on the bomber force, then you're talking about the air bases where bombers are concentrated and so on. So there's that aspect to it.

QUESTIONER: Thanks, Andrew.

KREPINEVICH: You're welcome.

OPERATOR: Thank you. (Gives queueing instructions.)

Our next question will come from Michael Bruno with Aviation Week.

QUESTIONER: Hi. Thanks for the question. I've got an industrial base policy question. Can you talk a little bit about how you think maybe our approach to the industrial base needs to change, or at least the official policy out of the Pentagon in sort of a post-sequestration world?

KREPINEVICH: Well, the it's been encouraging recently -- I think the Obama administration has been factoring in -- or at least says it's factoring in the industrial base more in its calculations. Deputy Secretary of Defense Ashton Carter recently said that the industrial base is part of the force structure. So certainly the inclination is there.

If we're talking sequestration, and I think we're going to get sequestration or what I call sequestration on the installment plan. In other words, if for some reason Congress were to somehow slip the noose here, I think we're still going to get cuts in defense.

And like I said, if you're talking about going after entitlements, which the president kind of alluded to a willingness to consider last night, you're certainly going to see greater cuts in defense over time. And so one way or the other, I think we're going to get cuts that are at sequestration or maybe even greater.

If that's the case, then, Michael, you've got a real problem in terms of the industrial base, especially if we keep the force structure anywhere near what it's projected to be. And the reason I say that is you're looking at a shrinking defense budget pie, OK? That's point number one.

Point number two, a part of that pie that isn't going to shrink are personnel costs. You know, personnel costs rose roughly 50 percent in real terms after inflation between 9/11 and last year. So you know, you're not going to cut troops' benefits, you're not going to cut their pay.

And so what this does it puts greater pressure on readiness and training.

Okay, well, that's a third rail. Do we want to hollow military -- if you cut readiness training operations and maintenance, you know, people are going to raise that -- or wave that bloody shirt. And so the accounts that are left are procurement and research & development. And industry looks at this and of course planners in the Pentagon look at this and they can see some really hard times coming. And if that's the case, you know, they have one eye on the Pentagon -- their principal customer -- and the other eye on Wall Street, which is where they're all traded. And, you know, one way or the other, they're going to have to, you know, reconcile the problem and I could see us losing significant parts of the industrial base, you know, depending upon how we manage this period of austerity. And like I said, you know, sequestration is just one part of the problem, and personnel costs are another huge part of the problem, when it comes to think about -- thinking about sustaining a strong, healthy industrial base so that it'll be there when we need it.

My -- we are looking at the CSBA, where I work, an approach that says as you think about cutting, perhaps, as opposed to going after the cuts first, think about what you most need to keep. You know, what are the critical elements of the industrial base that you just cannot afford to risk losing? And I think that is an important exercise, I think it's an interesting exercise, and hopefully somebody like Deputy Secretary Carter will make sure it gets done.

OPERATOR: Thank you. (Gives queueing instructions.)

Our next question --

KREPINEVICH: I'll take --

OPERATOR: I'm sorry. Our next question will come from Sandra Erwin with the National Defense Magazine.

QUESTIONER: Hi, good afternoon. Andy, thank you very much for having this call.

I wanted to ask you about the carrier deployment that you mentioned earlier. I mean, how much money do they really save by canceling deployments? I mean, they still have to pay people. So do you -- are there any estimates of what are they really saving? I mean, obviously this is making a lot of impact, right, a huge impact as far as, you know, what sequestration means for the Navy. But I mean, are we really saving money by doing this? And where, I mean, other than -- I mean, fuel would be the obvious one, but you still have to pay people, you still have to pay for all the infrastructure.

KREPINEVICH: Right, you're not, you know, really saving -- (chuckles) -- a nickel. And of course, the -- as the law called for and Mr. President is exercising, there won't be any cuts in terms of military personnel when it comes to compensation and so on. They won't be furloughing them as they will likely have to do with the civilian works force (sic).

But say, when you take a carrier on deployment, you know, obviously, you have operations you're conducting, otherwise why go on deployment? It's very expensive, not just in terms of jet fuel to run aircraft, but of course, the carrier has the escort ships that go with it. I was -- I served in what was called the hollow Army in the late '70s and early '80s. And when you take your equipment out to the field or to sea, you are -- you know, there's wear and tear, because of the nature of the equipment, you're going to have to repair some of it, so it's cost-and-repair parts and so on.

So it's -- the expense isn't catastrophic, but it's hardly trivial. And again, you're looking at a situation where if these cuts come through, essentially, you're cramming a full year's cuts or close to it into just a few months. And that requires you to, you know, to make some difficult choices. And it's always been a case of where do you take your risk, and I think in this case, the administration has concluded that -- I gather -- there's an acceptable level of risk in terms of just having one carrier on deployment in the Persian Gulf region.

If that weren't the case, it might be able to -- you know, it would certainly be able to take other steps, maybe cheaper steps. You could divert a carrier that's on deployment to another region to the Persian Gulf. While bombers, for example, can't do the job of carriers in every sense of the word, you might point out the fact that, in a crisis, we have bombers that, with aerial refueling, can reach any point on the globe.

So again, it's not backbreaking, but it's not trivial. And again, if you have a target to make, then you've got to start looking at where you're going to -- you know, where you're going to do without.

I think -- from what I can understand, there have been some briefings given by the services. They're looking at, for example, deferring maintenance. You know, one way to look at a carrier deployment is: I'm going to go out, and I may start out with a full carrier air wing and they're all ready and they're all operational. By the time we get back, 20 of those aircraft may need maintenance. I'm just not going to do it until the new fiscal year.

So you know, there's a lot of factors here, and you sort of pick your risks or -- you know -- you know, take your poison where you think you -- it'll do the least damage.

QUESTIONER: Thank you very much.

KREPINEVICH: Sure, Sandra (sp).

OPERATOR: Thank you. Our next question comes from Tom Bowman with NPR.

QUESTIONER: Hey, thanks for doing this Andy. Appreciate it.

KREPINEVICH: Sure thing.

QUESTIONER: You know, I think many people agree with you that it's likely that sequestration will happen. But I'm also hearing that the belief is, it'll maybe go on for a month or two; when everyone sees the impact of this, they'll come up with some sort of a deal. But again, there will still be some sort of, you know, pretty stiff cuts to the Pentagon.

Do you agree with that assessment? And all --

KREPINEVICH: I agree.

QUESTIONER: You do?

KREPINEVICH: Well, I would say, as a rational person -- at least I think I'm a rational -- I would agree with that. On the other hand, you're saying surely after two months we would stop this madness. Well -- (chuckles) --

QUESTIONER: Right, exactly. Yeah.

KREPINEVICH: We have persisted in this madness up to this point. There are -- I mean, for example, it's going to be very difficult to avoid furloughing federal workers. There have been already, you know, some of the public sector unions been protesting up on Capitol Hill this week. That's going to have certainly an economic hit to some extent, particularly the D.C. area, where policy is getting made.

I've also -- we have a terrific guy who runs our budget program here, Todd Harrison. And Todd has been looking into this. He said, you know, personnel -- military personnel accounts are protected, but, he said, the medical accounts aren't. So in terms of, you know, the operations of military hospitals, for example, from what he can tell, are supposed to be cut along with other things.

And if that's the case -- you know, we were talking a moment ago about not deploying carriers. Do you delay surgeries? Is it a case of where you can't fill prescriptions? You know, how does that play out? So I suspect there are going to be a lot of these human interest stories because we don't know some of the second- and third-order consequences.

I mean, you know, OK, so a defense contract gets broken. And, yes, the public's going to have to pay through the nose to set that thing right and what a foolish way to do business. But when you see, you know, human beings that are directly and immediately affected, I do think, Tom, that that'll up the ante in terms of bringing pressure on somehow both sides coming together and working out a solution.

QUESTIONER: Right. The other thing you hear too is that cuts to the ground forces are likely in the future because even with the cuts they've had already, both the Army and the Marine Corps will still be larger than they were at the time of the September 11th attack.

Do you think it's likely we'll see both -- additional cuts in both the Army and the Marine Corps, regardless of what happens?

KREPINEVICH: Well, you raise an excellent point there. The -- before 9/11, the active Army was at 475,000, and now they're projected at 490(,000). Well, that's 15,000 above where they were. Marines, the same. The Marines have -- if I recall, were about 173(,000), and they're projected to come down to 182(,000). So they are still above. And I think it's very hard to justify that when you look at the administration's strategy.

It's -- if you look -- you know, there are basically three key regions: the Western Pacific, that's basically a Navy and Air Force theatre of operations; the Persian Gulf, where the local countries don't want us there on the ground; and Europe, where, you know, the threat thankfully has really -- (chuckled) -- declined, you know, since the end of the Cold War; and the so-called developing world, where the president and I think, quite frankly, President Bush 43 both said: Look, we're not going to deploy hundreds of thousands of troops in protracted stability operations. So again, show me -- you know, tell me why I need that size of a ground force when you've got this particular kind of situation.

And again, the other thing that is really hurting the ground forces in particular, because they are so manpower-intensive, is the high cost of personnel. In order to recruit and retain a volunteer force where we could deploy hundreds of thousands of troops overseas, they had to, you know, substantially increase, you know, pay and benefits. And of course, you know, once you do that, they're very difficult to undo.

So what we did over the course of a decade to deploy over 100,000 troops to Iraq and 100,000 to Afghanistan, you know, those conditions no longer exist. And yet we're kind of, quote, unquote, "stuck" with those pay and benefit increases.

QUESTIONER: Right. OK, thanks.

OPERATOR: Thank you. Our next question will come from David Alexander with Reuters.

QUESTIONER: Oh, hi. Thanks for doing the call.

KREPINEVICH: Sure thing, David.

QUESTIONER: I was wondering if you could go into a little bit further what kind of flexibility they'd have to respond within sequestration and also within the continuing resolution to -- they mentioned that they're trying to protect certain things -- certain priorities. And I wonder what kind of flexibility sequestration and the continuing resolution really let them have to do that.

KREPINEVICH: Well, the big priority that -- where they did have flexibility has been exercised, and that's military personnel costs. Everything else, I'm just -- all the -- all the major lines in the budget have to be cut by the same percentage. Now, within those lines, I -- my presumption then -- I confess that I haven't looked at it this closely -- is that you could move money around there.

So if you have money, say, for base operations, you might decide, you know, whether or not -- I'm being facetious here -- that you got soldiers painting the rocks white or people, you know, providing supplies to the barracks. And you may have some flexibility there, but I -- again, I'm just not down enough in the weeds to know what kind of flexibility.

Whatever flexibility there is, it's of a very marginal nature from everything I've seen. And I'm sorry I can't give you a better answer, but that's the extent of my knowledge in terms of --

QUESTIONER: So it's at a very granular level, what's in individual line items?

KREPINEVICH: Yeah, I believe so. Again, you know, I've talked to our budget people and, you know, I've talked to folks around town here who are working on the problem.

And, you know, the big problem is -- first of all, it's the size of the cuts, the fact that they're compressed in a shorter period of time, and then the flexibility issue. And again, if you have a line in the budget, then you're going to be cut the same as everybody else. That's what the law calls for, unless they decide to provide some flexibility.

ROSE: Let me just jump the queue here a little bit; it's Gideon. And I realize we should have talked -- we are going to have a new defense secretary soon. What -- talk a little bit about the Hagel nomination, the process that's going on now in terms of getting him confirmed, and what impact that -- if any that will actually have on how these things play out.

KREPINEVICH: Well -- (chuckles) -- the -- Senator Hagel was voted at a committee. It was -- I think the vote was 14-11; it was strictly along party lines. I think there was one Republican who abstained. There is talk about, you know, Senator Reid, who is the Senate majority leader, trying to engineer a quick vote before the full Senate. There's discussion about whether the Republicans will filibuster this. So, you know, it's business as usual in Washington, I guess, in terms of the partisan jockeying for position.

In terms of what it means for sequestration, I -- you know, again, I do think Senator Hagel will be confirmed as defense secretary. If the Obama administration was hoping that by appointing a Republican to the post of defense secretary, that this would help in terms of, you know, the budget negotiations and so on, the principal opposition to Hagel comes from his own party.

So I don't think Secretary of Defense Hagel, in trying to negotiate with the -- with the Republicans on the Hill, particularly in the House, which of course, I suspect he has far fewer relationships there than he does in the Senate -- you know, these are the people who are willing, you know, absent some significant concessions from the administration, to say, look, if you won't offer concessions, then we have nothing to talk about.

So I'm not sure Hagel is the right guy to grease the skids or work, you know -- you know, sort of work the House to bring Republicans around to a position that's acceptable for the administration.

OPERATOR: Thank you. (Gives queuing instructions.)

Our next question will come from Henry Gaffney with CNA.

QUESTIONER: Hi Andy, this is Hank Gaffney.

KREPINEVICH: Hey, Hank.

QUESTIONER: Talking about the question of narrative, you know, I've watched the services always say, oh boy, if we get our story just right, Congress will give us more money. And what would you think would be part of a narrative? Surely it can't be something like the mad old woman in the attic called Auntie Excess?

KREPINEVICH: (Laughs.) That's good. Well, in -- I would say that -- and I tried to discuss this in the piece that ran in Foreign Affairs, and going to try to elaborate on it further, but my sense is that, you know, when you get down to brass tacks, there's two reasons we have a military. And it's basically to protect the physical security of the country and its people, and also to promote their well-being.

I think, quite frankly, that the latter argument -- even though survival, I would think, is more important than well-being in Maslow's hierarchy of human needs -- again, I don't think the American people really see much of a threat right now -- certainly not the kind of existential threat that would, you know, give them pause about -- with respect to cutting more from defense.

But I do think there's an argument to be made -- and I think it's a true argument -- that if we're going to have a recovery, and we're going to recover as quickly as we can economically -- and if we're going to have sustained economic growth over time, then a big part of that will be our ability to preserve access to key regions of the world, which we rely on because our principal trading partners are there, and because access to resources that we need are located there.

And again, I think that's the western Pacific, the Persian Gulf region and Europe. Unfortunately, as I mentioned before, Europe has become a strategic backwater. But I think our access to the Gulf and to the western Pacific/Far East is becoming increasingly contested. And I think, quite frankly, that's the underlying reason why the Obama administration has pivoted to the western Pacific and to the Persian Gulf. You know, in the western Pacific, you know, China's expanding its military capabilities and is creating an anti-access area denial problem for us.

The Iranians are doing sort of a poor man's version of that. And so access is becoming increasingly contested. And I think the strategic narrative, if you will, is, our economic well-being -- long- term economic health is inextricably tied to our ability to have assured, confident access to these regions -- the trading partners and the resources that are within those regions, but also to the global commons that enables us to link ourselves to those regions and move goods and services.

So I'm talking about space, cyberspace, the sea and the undersea. And that's the argument that I would make. And that's why in the article that Gideon published, you know, I talk about a strategy that really is less about major combat operations and regime change and so on, but essentially defending our access. And so again, I -- that's a -- that's the strategic narrative that Krepinevich is advancing. And we'll see what happens.

OPERATOR: Thank you.

Sir, it looks like we have no further questions at this time.

KREPINEVICH: All right.

ROSE: OK, I'm going to -- if I can get one last chance at this, Andy, this has been great. We're going to be following this story, and if it really does continue to move forward in dramatic ways, maybe we'll bring you all back. Until then, Gideon Rose for Foreign Affairs, Andy Krepinevich for CSBA, and well, thank you for attending, and talk to you all the next call. Take care.

(C) COPYRIGHT 2013, FEDERAL NEWS SERVICE, INC., 1120 G STREET NW; SUITE 990; WASHINGTON, DC - 20005, USA. ALL RIGHTS RESERVED. ANY REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION IS EXPRESSLY PROHIBITED.

UNAUTHORIZED REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION CONSTITUTES A MISAPPROPRIATION UNDER APPLICABLE UNFAIR COMPETITION LAW, AND FEDERAL NEWS SERVICE, INC. RESERVES THE RIGHT TO PURSUE ALL REMEDIES AVAILABLE TO IT IN RESPECT TO SUCH MISAPPROPRIATION.

FEDERAL NEWS SERVICE, INC. IS A PRIVATE FIRM AND IS NOT AFFILIATED WITH THE FEDERAL GOVERNMENT. NO COPYRIGHT IS CLAIMED AS TO ANY PART OF THE ORIGINAL WORK PREPARED BY A UNITED STATES GOVERNMENT OFFICER OR EMPLOYEE AS PART OF THAT PERSON'S OFFICIAL DUTIES.

FOR INFORMATION ON SUBSCRIBING TO FNS, PLEASE CALL 202-347-1400 OR EMAIL [email protected].

THIS IS A RUSH TRANSCRIPT.