I think the economic situation in the Soviet Union today is as bleak as it has been perhaps in the last 50 years, since the end of World War II; and there is now no doubt but what the Soviet economy is collapsing. It is only a question of how rapidly it is shrinking. The estimates for 1990 range from an official Soviet estimate of some 2 percent reduction in Soviet economic activity to at least a 10 percent reduction in the last 12 months. Most of the experts I rely upon anticipate that 1991 will see a continued further rapid contraction of the Soviet economy.

Mr. Gorbachev's success in the eyes of many_hinged upon his ability to deliver economic reform, to move the Soviet Union into the modern era so it could compete with the West, so that it could participate in the modern industrialized world. That depended first and foremost upon his ability to dismantle the old structures that clearly didn't work and put new structures in their place.

If you were to grade his performance to date you would have to say that he has clearly not yet achieved that.

His rejection of the 500-day plan last fall, perhaps the best prospect that had been debated inside the Soviet Union for meaningful economic reform, means that as of today, in my opinion, there is no policy for economic reform, no effective policy for economic reform, in place in the Soviet Union.

That means, we have to anticipate that there will continue to be economic decline and all that goes with that in terms of the prospects for significant unrest.

What does all this mean for U.S. policy and for U.S.-Soviet relations? How severe will the Soviet threat to the United States be 5 years from now? What direction will the Soviet military take in the years ahead? What kind of assumptions can we make in terms of planning for our own force requirements in the future?

There are five basic propositions that I would advance. First, is the proposition I mentioned earlier-the Warsaw Pact is dead. I don't see any possibility for resurrecting the Warsaw Pact. It is my belief-and I think that of most of us in the administration-that the Soviets will continue to withdraw from Eastern Europe; and that perhaps is the most significant change we can count upon affecting our military strategy.

Second, the Soviets' ability to project power beyond their borders will continue to decline, at least where conventional forces are concerned. That decline will continue whether it is done for policy reasons, in other words, as part of a broad strategy of improving relations with the West, or whether it is done because of the simple continued economic collapse of the Soviet Union.

Whether they want to or not, I think they will find it increasingly difficult to project power beyond their borders; and that obviously lessens the threat we have been faced with for the last 40-some years.

Third, we have to plan on enormous uncertainty about developments inside the Soviet Union in the future. I have to believe there will be continued economic decline, as I mentioned earlier. That means increased unrest, the possibilities which the Soviets discuss among themselves perhaps even of civil war in the Soviet Union. That in turn means the greatest threats to the neighbors of the Soviet Union in the future may well come more from the Soviet

inability to control events inside the Soviet Union than it will from any conscious policy of seeking to expand their influence by military means.

Fourth, and a key point, the Soviets will retain significant strategic capability, the ability that is represented in their ballistic missile submarines, their land-based ICBM force, steadily, continuously improving, modernizing the strategic threat to the United States.

In spite of all the grief that the Soviet people are currently being subjected to because of the failures of their government to undertake meaningful reform, we still see evidence that the Soviet military is insisting upon retaining an excessive claim to Soviet resources and insisting upon continuing to modernize and upgrade their forces.

The fifth and final point that I think needs to be made, Mr. Chairman and members of the committee, is that the prospects for arms control are in doubt. We have not yet completed a START agreement. We thought we were close on a number of occasions. We have had sessions within the last few days here in Washington between the U.S. and Soviet negotiators. There will be additional sessions this week in Geneva. We have not yet been able to come to closure on a strategic arms agreement. We hope to be able to complete that in the near future.

On the conventional force reduction agreement, while the treaty has now been signed, we have made it clear that the Soviet interpretation of the treaty and some of their actions in connection with their conventional forces have raised serious doubts on our part about submitting that treaty for ratification. Until such time as we are satisfied of their good faith, there will continue to be problems there as well.

Hopefully, we will be able to conclude those arms control agreements, but it ain't over yet.

What all of this leads me to, Mr. Chairman, is a cautionary note that we are going to present to you today in the 6-year package that I will run through—a presentation that reduces U.S. military capability and force structure by very, very significant amounts.

To give you one item, the United States Army will go from its current structure of 18 active divisions to a structure of only 12 active divisions 5 years hence. The reductions in personnel end strength, in combat capability, in the U.S. military force under the plan we are presenting here is based on the assumption that we can continue to anticipate a safer and more peaceful world in the future. Of course, as was mentioned by Mr. Dickinson at the outset, it does not incorporate the burdens of Operation Desert Storm which will be handled in a separate supplemental appropriation in the next few months.

It is entirely possible that a year or two hence I would come back before the committee and want to recommend to the members of the committee that this path we are going to present to you today has to be stopped; that is to say, we can no longer head down that rosy scenario proposition that we will present to you today. Circumstances in the world, conditions in the Soviet Union and Europe, and the possibility for major unrest, may be such that we would not feel safe recommending to the Congress of the United

States the kind of long-term, 6-year reductions that we in fact plan to present to you this morning.

If we continue to see positive improvements in U.S.-Soviet relations, assuming all the good news in Europe does occur, and the Soviets do get out, as we expect they will, then we think we have for you a package that will be adequate to defend the Nation in the years ahead. But no one I know of 2 years ago correctly predicted the events of the last 24 months. While we are going to strike out boldly this morning and show you what we think we can do under the good news scenario, I want to emphasize this is a 6-year look that is being offered at a time of considerable turmoil and uncertainty out there in the world. I would like to reserve the right to come back at some future time and say we can't go down as fast, or as far, as this program will take us.

If I may at this point, let me run through the broad outlines of the budget. Then I will call on the Chairman for his testimony.

The first chart up there some of you may have seen before. We refer to it as the "pitchfork" at the Pentagon. The red line to the left is what we spent in real dollars, constant dollars, in defense from 1985, the first year on the left, out until 1990. The blue line on the upper right-hand section of the graph is the budget I first submitted to this committee when I became Secretary in April of 1989. It would have provided for a real increase in defense spending of a little over 1 percent per year.

The black line in the middle on the right is what we recommended a year ago. That would have provided for about a 2 percent real cut in defense spending from 1991 through 1995; and the green line on the bottom is what Congress actually did and what was finally agreed to in the Budget Summit last year.

Specifically, the $18 billion cut in our request for 1991 is reflected in the sharp downward slope; and then the out-years, 1992, 1993, 1994, 1995 are basically the budget accord that was agreed to by the President and the Congress then.

Significant points to be made are that from 1985 until 1996-that is the end of the program we are submitting to you this year-5 years down the road-real spending on defense in the United States will have declined by 34 percent. Those are constant dollars. We will have cut the defense budget in real terms, 1985 to the mid1990s, by a third, better than a third.

Another way to look at it is that chart which shows the top line, the blue line, is what we would have had appropriated and authorized to the Department if we had kept pace with inflation since 1985. We clearly didn't keep pace with inflation since 1985. We have taken cuts in real terms. That red wedge that is out there, if you will, is the amount of additional funding that would have been necessary for us to keep pace with inflation.

In real terms, you will see that the level of spending in then-year dollars-not real dollars, but in then-year dollars-in 1997 will be just about the same amount we were spending in 1985. Those are in then-year dollars. In other words, inflation is not factored in, in that case. Clearly, 1997 dollars are going to be worth less than 1985 dollars but we will have roughly the same amount of money. [The following information was received for the record:]

This is a table showing budget authority in outlays over the course of the 1991-1996 time frame. It is generally self-explanatory. The bottom line, of course, is there is no significant increase in defense spending; and again that is in then-year dollars; it is not real

Another way to look at defense spending, of course, is as a percentage of Gross National Product. I was fascinated to find out the other day that Saddam Hussein, over the decade of the eighties, spent approximately one-third, better than 30 percent, of his Gross National Product on the military. The peak expenditures by the U.S. in the post-war period were Korea, when we spent almost 12 percent of GNP on defense; Vietnam, 9.1 percent of GNP on defense; the peak Reagan years about 6.3 percent of our Gross National Product for defense.

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