Rather than add $99 billion to the pre-existing plan, about $55 billion should suffice for 2002-2007 (reflecting primarily the increases in the 2002 budget that would be sustained thereafter).

Procurement. The Clinton administration spent an average of about $50 billion per year to buy equipment; the figure is now about $60 billion. According to CBO, however, the expensive modernization plans of the military services might imply an annual funding requirement of $90 billion or more, Accordingly, the Bush-Rumsfeld budget envisions procurement funding of $99 billion in 2007.

But Operation Enduring Freedom has underscored the potential of relatively lowcost systems, such as Global Positioning System (GPS) guidance kits added to "dumb bombs," unmanned aerial vehicles (which cost a fraction of what manned fighters do), and real-time data links between various sensors and weapons platforms.

To be sure, expensive weapons such as aircraft carriers have been used as well. Moreover, not every future foe will be as militarily unsophisticated as the Taliban and al Qaeda. That said, the services need to prioritize. They should recognize, as former Vice Chairman of the Joint Chiefs of Staff Bill Owens has argued, that the electronics and computer revolutions often promise major advances in military capability without inordinate expenditures of money.

The current procurement budget of about $60 billion does need to rise to the $70 billion level proposed for 2003; in fact, it probably needs to reach $75 billion or higher. But the $99 billion level envisioned for 2007 is greatly excessive.

For many critics, the problem with Rumsfeld and Bush's weapons plan is that it protects the traditional priorities of the military services without seeking a radical transformation of the United States armed forces. But this basic criticism is not quite right. Individual programs or omissions in the Bush plan can be debated, but it is beyond serious doubt that the Bush administration has an aggressive program for so-called defense transformation (see table 3). As is appropriate for such an effort, most of the emphasis is in the realms of research, development, and experimentation, where the Administration envisions spending $99 billion more than the Clinton administration would have by 2007 (even though, as noted, these areas of the defense budget were not severely cut in the 1990s). The problem is a more classic one of unwillingness to set priorities. Despite the absence of a superpower challenger, the Administration proposes replacing most major combat systems of the United States military with systems costing twice as much-and doing so throughout the force structure.

A more prudent modernization agenda would begin by canceling at least one or two major weapons, such as the Army's Crusader artillery system. In addition, rather than replace most major weapons platforms with systems often costing twice as much, the Pentagon would only equip a modest fraction of the force with the most sophisticated and expensive weaponry. That high-end or "silver bullet" force, as CBO has described it, would be a hedge against possible developments such as a rapidly modernizing Chinese military. Otherwise, the rest of the force would be equipped primarily with relatively inexpensive upgrades of existing weaponry carrying better sensors, munitions, computers, and communications systems. For example, rather than purchase some 3,000 joint strike fighters, the military would buy about 1,000, and otherwise purchase planes such as new F-16 Block 60 aircraft (and perhaps even some unmanned combat aerial vehicles in a few years) to fill out its force structure.

Conclusion

In times of war, it is often militarily necessary, and politically natural, for defense spending to rise. But the nation is presently running the risk of spending too much on defense. Many members of Congress are fearful of challenging a popular president in a time of war over his proposed defense requests.

This dynamic puts the Nation's fiscal health and domestic agenda at risk and may not even be good for national security. Defense budgets may decline in the years ahead, especially as the Nation moves farther away from September 11. If that happens, the Bush administration may then regret that it sacrificed its opportunity to promote the kind of defense reform it championed on the campaign trail and during its first few months in office. The country could be left with a defense program that is too large and expensive for the resources at hand.

Some defense spending increases, beyond those already put in place since 1999, are needed. But most of those proposed by the Bush administration have only limited relevance to the war on terrorism. They should not be justified on the grounds of fighting al Qaeda, other terrorist organizations, or state sponsors of terrorism. And many are not needed on other grounds, either. The $48 billion increase requested for 2003 should be cut to about $20 billion, mostly because war costs should

be paid through supplemental appropriations so that they are more visible and more easily debated by the Congress. And future defense budgets should grow by less than $10 billion a year above the inflation rate, winding up at $430 billion in 2007, rather than the $470 billion level proposed by the Administration.

President Bush, Vice President Cheney, and Secretary Rumsfeld all have considerable experience in the private sector. Yet they seem to be ignoring an important principle of corporate management-institutions need incentives to become more efficient. Give an organization all it wants and it will fail to prioritize; impose some financial discipline and it will innovate and reform.

Chairman CONRAD. Thank you very much. Thank you for that thoughtful testimony.

Dr. Thompson, welcome. Very good to have you here. We appreciate your taking the time to join the committee. Please proceed with your testimony.

STATEMENT OF LOREN B. THOMPSON, PhD., CEO, LEXINGTON INSTITUTION; ADJUNCT PROFESSOR, GEORGETOWN UNIVERSITY

Dr. THOMPSON. Thank you for inviting me, Mr. Chairman. I would like to spend about 5 minutes this morning talking about three things: the size of the defense budget, the priorities it reflects, and what I think is its principal defect, which is a dearth of procurement spending relative to need.

Concerning size, much has been made of the fact that at $379 billion, the proposed budget for 2003 would roughly match the combined spending of the 15 next biggest military powers. If you then add in the Department of Energy security programs, as you did in your chart, then it is the 18 next biggest.

Just the proposed increase between 2002 and 2003, or $48 billion, is as much as the entire military budget of Russia or China. However, as a share of national wealth, the proposed budget is much lower than the norm for the last two generations, despite the fact that we have launched a global campaign against counterterrorism.

Between 1950 and the year 2000, defense spending averaged about 7 percent of gross domestic product annually. If GDP in 2003 surpasses $11 trillion, as expected, then the administration's defense budget would represent about 3.3 percent of the economy, less than half the average of the last 50 years.

Of course, the economy has grown considerably during that period. But if we consider the overall scale of the economy today, the proposed level of defense spending is actually relatively modest.

For example, it has been estimated by Standard & Poor's that Americans spend 6 percent of gross domestic product on gambling. If you believe that estimate, then the entire $6 billion shipbuilding proposal for fiscal year 2003 is about as much as we spend in one weekend on gambling.

Concerning priorities, the Bush administration has added substantial funding to several areas of defense activity that it considers to be underfunded, most notably military pay and benefits, training, equipment maintenance, and scientific research.

However, because the increases it proposes are spread across the entire defense budget, the priority assigned to major categories of activities has changed quite little since the Clinton years.

In the year 2000, the Clinton administration spent 26 percent of the defense budget on military personnel. Bush would spend 25 percent in 2003, 26 percent in 2005. In 2000, the Clinton administration spent 14 percent of the defense budget on research and development. Bush would spend the same percentage in 2003, 15 percent in 2005.

There is a similar alignment across time in the shares allocated to procurement and to operations and maintenance.

So while the Bush administration would raise the buying power of the defense budget considerably higher in 2003 than what prevailed in 2000-by about a third, actually-the alignment of priorities within the budget has changed relatively little from the Clinton years.

That is a very different situation from the fiscal year 1978 budget that Secretary Rumsfeld proposed when he was last in charge of the Pentagon. The 1978 budget was designed to reverse the postVietnam malaise in military spending by raising Pentagon funding above $100 billion for the first time in history. But back then, Secretary Rumsfeld stressed the importance of allocating a disproportionate share of the increase to investment accounts, an emphasis that is not at all apparent in the 2003 proposal.

While the Bush administration makes much of its desire to transform the military by embracing new technologies that enable new concepts of operation, its basic framework of ideas and programs for modernizing the military is quite similar to that of the Clinton administration.

Where it is different is in its willingness to allocate more money to all facets of military activity, which at least in theory accelerates the potential speed with which transformation can occur.

Even with the increases it proposes, though, a combination of rising costs, political constraints, and new overseas commitments has diminished the latitude Mr. Rumsfeld and his team have for radical innovation.

Finally, concerning defects, I think that the administration's defense proposal contains relatively few. It has corrected shortfalls in military pay and benefits. It has raised funding for readiness accounts. It has covered the Pentagon's share of the cost for the war on terrorism. And it has increased research and development funding for transformational technologies.

The one area where the budget is deficient is in procurementin the replacement of aging weapons.

The Joint Chiefs of Staff estimate that $105 billion in procurement spending is needed every year in order simply to prevent the existing force structure from aging or shrinking.

The administration's proposed budget for 2003 only funds twothirds of that amount, and thus it assures that an increasingly decrepit arsenal is going to grow older or smaller.

The shortfall in procurement is not new. In the Clinton years, we saw the only prolonged period in the last half-century in which procurement spending was consistently below 20 percent of the defense budget.

One consequence of that was that the average age of Air Force aircraft was 13 years in 1990 and 22 years today. The average

Navy plane today, for the first time in history, is older than the average Navy warship.

Some Army and Marine helicopters have become so aged that they pose a danger both to the readiness and to the safety of the people who are flying them.

I was sitting at dinner last night next to a four-star Marine general who told me that they are flying 35-year-old helicopters in Afghanistan. I don't think you could even get the FAA to certify a 35year-old helicopter to fly civilians.

I have attached a chart to my remarks showing that every category of Air Force aircraft except bombers has either exceeded its maximum acceptable average age or is within months of doing so.

Because air power is essential to every facet of our warfighting effectiveness, I believe the defense budget needs to reflect a greater sense of urgency about replacing aging aircraft.

Aside from that shortfall in procurement, though, I believe the administration has done a fairly good job in its first year of balancing the Pentagon's books, fixing inherited problems, and addressing new dangers.

Thank you.

[The prepared statement of Dr. Thompson follows:]

PREPARED STATEMENT OF LOREN B. THOMPSON, PH.D, CEO, LEXINGTON INSTITUTE, ADJUNCT PROFESSOR, GEORGETOWN UNIVERSITY

Mr. Chairman and members of the Committee, thank you for inviting me to comment on the Bush administration's proposed defense budget for fiscal 2003.

This morning, I want to briefly discuss three subjects: the size of the defense budget, the priorities it reflects, and its principal defect-inadequate spending for procurement.

Concerning size, much has been made of the fact that at $379 billion, the proposed budget for 2003 would roughly match the combined spending of the 15 nextbiggest military powers.

Just the proposed increase between 2002 and 2003-$48 billion-is as much as the entire military budget of Russia or China.

However, as a share of national wealth, the proposed budget is much lower than the norm over the last two generations-despite the fact that we have embarked on a global campaign to counter terrorism.

Between 1950 and the year 2000, defense spending averaged about 7 percent of gross domestic product annually.

If GDP in 2003 surpasses $11 trillion as expected, then the administration's defense budget would represent about 3.3 percent of the economy-less than half the average of the last 50 years.

Of course, the economy has grown considerably during that period.

But if we consider the overall scale of the economy today, the proposed level of defense spending is relatively modest.

For example, it has been estimated that Americans devote 6 percent of GDP to gambling.

At that rate, the Navy's proposed $6 billion shipbuilding budget for 2003 would be about equal to what is spent on gambling each weekend.

Concerning priorities, the Bush administration has added substantial funding to several areas of defense activity that it considered to be underfunded, most notably military pay and benefits, training, equipment maintenance, and scientific research.

However, because the increases it proposes are spread across the entire defense budget, the priority assigned to major categories of activity has changed little since the Clinton years.

In the year 2000, the Clinton administration spent 26 percent of the defense budget on military personnel; Bush would spend 25 percent in 2003 and 26 percent in 2005.

In 2000, the Clinton administration spent 14 percent of the defense budget on research and development; Bush would spend the same percentage in 2003 and 15 percent in 2005.

There is similar alignment across time in the shares allocated to procurement, and to operations and maintenance.

So while the Bush administration would raise the buying power of the defense budget considerably higher in 2003 than what prevailed in the year 2000-in fact, by nearly a third-the alignment of priorities within the budget has changed little. That is a very different situation from the fiscal 1978 defense budget that Secretary Rumsfeld proposed when he was last in charge of the Pentagon.

The 1978 budget was designed to reverse the post-Vietnam malaise in military spending by raising Pentagon funding above $100 billion for the first time in history.

But back then, Secretary Rumsfeld stressed the importance of allocating a disproportionate share of the increase to investment accounts, an emphasis that is not apparent in the 2003 budget.

While the Bush administration has made much of its desire to "transform" the military by embracing technologies that enable new concepts of operation, its basic framework of ideas and programs for modernizing the military is similar to that of the Clinton administration.

Where it is different is in its willingness to allocate more money to all facets of military activity, which potentially accelerates the speed at which transformation

can occur.

Even with the increases it proposes, though, a combination of rising costs, political constraints, and new overseas commitments has diminished the latitude Mr. Rumsfeld and his team have for radical innovation.

Concerning defects, I think the Administration's defense budget contains relatively few.

It has corrected shortfalls in military pay and benefits, raised funding for readiness accounts, covered the Pentagon's share of the cost for the war on terrorism, and increased research and development funding for transformational technologies. The one area where the budget is deficient is procurement-the replacement of aging weapons.

The Joint Chiefs of Staff estimate that $105 billion in procurement funding is needed each year to prevent the existing force structure from shrinking or aging. The Administration's proposed budget for 2003 only funds two-thirds of that amount, and thus assures that an increasingly decrepit arsenal will continue aging. The shortfall in procurement is not new: the Clinton years were the only period during the last half century when procurement spending was consistently less than 20 percent of the defense budget.

One consequence was that the average age of Air Force aircraft rose from 13 years in 1990 to 22 years today.

The average Navy plane today, for the first time in history, is older than the average warship.

Some Army and Marine helicopters have become so aged that they pose a danger to both the readiness and the safety of United States forces.

I've attached a chart to my remarks showing that every category of Air Force aircraft except bombers has either exceeded its maximum acceptable average age or is within months of doing so.