the problem. otherwise, none of these other things are really going to matter. >> that is correct. it's striking when the u.s. debt was downgraded by s&p last summer wlashg summer, what they cited was the political kearns about tconcern ability of the congress to make progress. so it's easy for me to say obviously, i recognize that spl politics is a tough game and a lot of disagreements in congress. the more that can be done to show cooperation and collaboration on this important issue. we all agree on the issue, as you say. >> i was surprised this last, 1st of january, i was in new zealand and australia and the philippines, and talking with official there's in businesses there, i was surprised that they are really watching congress. they're worried about congress' inability to get together to solve this problem, because they

know that the problem is going to extend to them, if we don't solve our problem here. and i was surprised that they follow us as closely as they do. but let me ask you, do you believe that the general assumption we have to get to $4 trillion to $6 trillion in savings is the right number, or a number that will stabilize our deficit and get us headed in the right direction? and could you paint a picture -- it's sometimes hard for us to explain to the public what could potentially happen if we don't do anything? could you paint a picture for us what you think will happen to this economy if we don't take the steps knows stabilize our debt? and if we put it off for another year or another year after that as we've been kicking that can down the road forever? >> the $4 trillion to $6 trillion, congressman, was number that was talked about for the next decade. >> right. >> the idea was achieving that

would stabilize the debt gdp ratio, get progress there. i was supportive of being, so to speak, when we were discussing all these issueissues, "we," th country were discussing this last summer. so, yes. a very substantial additional attack on the deficit is needed. the other point i would make is that the $4 trillion, the $6 trillion number is about the next decade. >> right. >> the biggest problems we have are beyond the next decade. they stretch out into the next 20 or 30 years. this entitlement costs in particular begin to rise further and our demographics begin to move, i guess some would say adversely. so one thing i would urge you as you think about these issues is not just to focus only on the ten-year official budget window but to think about the longer term, even beyond ten year, because what we've seen, an

example would be the social security reform done in the early '80s phased in. the more time you give people, the slower the process, the more warning, the more likely it's going to be successful both politically and economically. so you need beyond ten years. in terms of the implications for the economy, the good scenario is that we have, when the economy recovers, that we have higher interest rates, we have higher borrowing abroad. we have a slow are growing economy, slower productivity gains, et cetera. as i discussed in my testimony, the bad case scenario, which ultimately will happen if we don't change this trajectory is that anatural gois what we've seen in some countries in europe, investors will lose confidence that we can manage our long-term fiscal situation and we'll see sharp movements in interest rates or a loss of confidence in u.s. debt, in

which case changes would have to be made, but in a much more chaotic, rapid and disruptive way than by doing it in a long-term thoughtful way. >> thank you. >> mr. bloomenall. >> thank you, again, circumstance for joining us. i cringed a little with my good friend from new jersey's portrayal. seems to me you are independent of congress, not cbo. you are managing the monetary system, and you are purposely an independent agency trying to insulate the notion that somehow you're at the beck and call of a particular administration or congress my understanding, that's it's structure in place to try to give you that independence. am i missing something here? >> set up that way.

congress set us up to try to create independence in making monetary policy decisions. we have a role a number of roles including supervisory ole roles on so on, bringing us in cabinet with housing mortgages and so on. i want to be clear to this committee, our intention, try to provide useful background and in all cases looked at both sides of the issue, and we recognize we had no doubt whatsoever that it's congress that has to make those decisions. >> and i appreciate that, and i am of -- having been here through some of the stormy weather, i think there are lessons to be learned by all of us. you and governors looking, congress looking at what we did or didn't do, hopefully people in the private sector. the notion that somehow we might ask the fed to come up with a report on the recovery act. i mean, there is an independent agency. it's called the cbo, which we

set up to give us that. who produced such a report that said that it raised real inflation adjusted gdp between 0.3% and 1.9 and lower unemployment, increased the number of employed between 400,000 and 2.4 million and increased the number of full-time equivalent jobs between half a million and 3.3. that's the independent agency congress set up. you may not like the answer, but asking somebody else, and independent agency to do it, i think is not going to get us further down the line. i am personally struck by what my good friend from idaho said, because, as usual, he's making sense subpoe sense. get to it. deal with the situation, and i

have opined in this situation and others, that we know what to do. we could do things to rein in military spending without putting us at risk, could reform agricultural spending. we could, in fact, move to have a health care system that rewards value instead of volume, that meets mr. bernanke's test, which isn't just in ten years. the real test is 20 and 30 years that potentially sinks us. and i'm hopeful we're able to focus on the big picture that this budget committee can look on things that actually enjoy bipartisan support that could make a difference over the next quarter century and not have the picture that is being portrayed today and yesterday by independent experts become a fulfilling prophecy.

i just feel from the bottom of my heart that this is something we ought to be focusing on, and in particular, the notion that we are looking at the longer term. we live with a ten-year budget window, but the real challenges are beyond that, and that's where the savings have to occur. that's where it actually gets easier not harder, and for us to bludgeon the fed -- i mean, i think you've done an extraordinary job trying to balance, being more transparent in what you're doing, but not spooking people, not adding fuel to one fire or the other. i appreciate your continued patience coming here, although i know it's probably statutory duty. >> always do it of my own volition. >> good humor, and i don't know

we have subpoena power but i hope we can focus on the lessons we could or should have learned and get to the work mr. simpson talked about in terms of getting to t. sounds like an endorsements of our budget. >> i'll yield back. >> thanks. >> okay. thank you. >> i hope we -- gentleman's time is expired. >> [ inaudible ]. >> agree. mr. campbell. >> thank you. mr. chairman and dr. bernanke. a suggestion was made earlier that you make policy pronouncements on housing, and i'm very deeply, as you know, involved in trying to restructure housing finance and the housing market. as much as i personally wish that were true and that you would weigh in on the side of the proposals that i have made

and versus others, you and the fed have been, i think, judicious in not doing that, but what you have opined on and i would like to be ask to you say in your own words is the importance of housing, the housing market and a housing recovery if we wish to have a robust economic recovery and job growth. would you care to comment on -- >> oh, i certainly would, and this is the reason that we have a housing committee, basically, at the fed, which a bnch unch o staff and governors looking at this all the time. i would say that one of the main reasons that the recovery has been as disappointing as it has been is that usually housing provides an important amount of the impetus to growth. not just construction, but all the related industries and services that are tied to housing. in this kashgs houcase, housing

very weak and we've seen a few small positive indicators but generally remains at a very low level. so the housing -- the recovery in housing would be a very important boost to the overall recovery. it works through a number of different ways. not just through construction but by affecting the wealth of consumers, and their financial well-being. the mortgage market, the problems with access to credit, for example, being that the federal reserves monetary policies are less effective than they otherwise would be, because not as many people could be are taking advantage of the low mortgage rates we have tried to create. there's a lot of other implications for both borrowers and lenders. clearly, continued poor conditions in housing markets imply losses on mortgages, imply foreclosures, imply people under water who can't move or sell their houses. so there are a lot of costs that

the neighborhood in the household level as well, but i do think that the lack of a housing recovery is one of the big reasons that recovery has not been more -- stronger that it has. >> without advocating a specific solution, kind of like on the budget deficit, you're saying it's something to which we should be paying policy attention? >> i think it would repay your efforts to think about ways to make, to remove some of the barriers to the recovery in housing. i don't think it's purely a market phenomenon. i think there are a number of legal and administrative and regulatory barriers to housing being as strong as it should be. >> thank you. shifting gears and going to europe. could you comment on the last 30 or 60 days, has a -- a recovery or a positive solution in europe, is it closer or farther

away in your view? and we can't control this, but yet if they were to have a -- a failure of some sort over there which was not well constructed or whatever, that would affect us? could you comment on where you think europe is today and what impact it would have on us. we can't control it. if they were to have some sort of failure. >> certainly, congressman. a couple positive developments. the european central bank has provided extensive financing to the european banking system, and will provide another round of financing at the end of this month. that has had the benefit of reducing some of the stresses in the banking system. it has even gone so far as to bring down to some extent the borrowing cost of some of the more fiscally troubled countries as well. that's taken away some of the financial stress and given a little more breathing space.

also progress made in terms of a international agreement within the eurozone to have mutual surveillance of fiscal policies to try and get long-term agreement on fiscal stability within the eurozone and within individuals countries. that's a necessary condition for a full solution. those are positive things. but there's an awful tloot remain r lot that needs to be done. negotiations are still ongoing. we don't know how those are coming out. the banking system remains under capitalized. restra retracting credit, contributing to a weak economy in many dmunts europe. the backstops needed to protect, if one country has problems to protect other countries from contagion, the europeans have been setting up financial backstops to do that.

there's still a lot of uncertainty about the size of the backstops and how could be used and so on. more work needs to be done there. it's important to conclude there are really deep fundamental problems. not just fiscal issue, slow growth issues but issues of competitiveness. countries on the periphery, like greece and portugal, are not at all competitive to germany. they have big current account deficits. they cannot change the value of their exchange rate because they're tied through the euro. so it's going to be a very difficult process for them to get to a more competitive situation, and all of those things put together mean you could have very slow growth in some european countries for quite a while. >> thank you, mr. chairman. >> good morning. >> dr. bernanke, the economy is creating jobs. we've had 22 months of private sector job growth. the unemployment rate sat its lowest level for three years.

and it's very noticeable at home. in florida, you know in 2007 and 2008, the headlines in newspapers were devastating, about companies closing and people losing jobs. it's notably different. last year with stories about companies hiring. it's pretty steady right now, but obviously we can do better. and i mean, you have said -- in your testimony you said a more robust recovery will lead to lower deficits and debts, in coming years. so here's the frustration and our colleague who gave us the list of ways to reduce the debt and deficit, it was very noticeable that he did not include job creation in that list. it was cut spending. we're doing that. and the budget control act. we did that. we need to do more.

entitlements. there's some common ground we could find there, but he left off that very important list. job creation, and dr. elmendorf testified yesterday that, yes, if we had a lower unemployment rate we would have a lower deficit rate followed ups with letter in october, technical language. the under utilization of capital and labor resources in the economy. if we had better utilization, more people working, the projected federal deficit under the current law in fiscal year 2012 would be about one-third lower. that deficit would be equal to about 4.0% of gross domestic product compared with 6.2% projected for 2012 in the cbo's baseline. if the economy were operating at its potential, the deficit would be lower, because incomes and, therefore, revenues would be

higher while the rate of unemployment and, therefore, outlays for certain government programs, would be lower. here's our frustration. and the frustration of folks back home. they know we can be doing more to reduce the deficit and put people back to work, but the congress has not been able to get off the dime and come to common agreement on ways we invest in infrastructure and research and development. so give us some words of wisdom on this. going forward, what do you believe are the most effective policy options that all of us can be, can pursue to speed job creation and thereby low are the deficit? >> congresswoman, glad to hear the tone is a little better in florida. that's good. there has been some progress, obviously, but it's still very slow. i made in my testimony, i made, i think, three related points about fiscal policy. the sfirs that whatever we do

for a confidence purposes and long-run sustain ability, keep our eye on the long term. have a credible plan put in places that will be moving us towards stability and sustainability in fiscal policies over the next few years and into the subsequent decade. so i think we've got to keep that part always on the table. i think that's really important. secondly, i think we can avoid, if we can avoid, unnecessary disruption to the recovery. i think that's important. mr. elmendorf i'm sure pointed out under current law there's going to be a massive fiscal contraction in 2013. without addressing any of the specific policies involved, i think congress should be aware of that, and try to avoid having too big a hit on the recovery in 2013. and then, finally, you know, again, without taking specific

policies -- aside specific policy, third point, fiscal policy is not about fiscal spending and taxes. a lot is the quality of the budget. are the things we're spending it on, are they going to help our economy? do they support rnd or workforce skills or other thanks will help the economy grow in the long run? on the tax side do we have -- are we moving towards more efficient, more effective tax codes, simpler, fairer and the like? so i think you want to look at the top lines, total spending and total tax, the deficit, but obviously, and it's easy for me to say, but it make as difference the quality of the program, the way the money is spent, the way the money is collected make as difference in terms of jobs and growth. >> mr. cole? >> thank you very much, mr. chairman. and before i get to my questions, i just -- i want to thank you for the role you

played during the t.a.r.p. situation, which i think was a critical point for the country, and i want to thank you for the transparency and the efforts since then. i think to try and restore a measure of public confidence in the fed. in the histories of the periods written i think a lot of people, fed, zeshgs the gscs, congress, are going to have a lot to answer for at the leadup. at the moment of crisis i think you did a really terrific job for the country and i appreciate it very, very much. >> thank you. >> you laid out pretty compellingly the fiscal challenge that we face going forward, and i think that's what we wrestle with on this committee more than almost anything else. and let me pause osit a couple s and get your opinion, if it's appropriate. first, you mentioned spending restraint. that's actually beginning to happen. appropriations committee has actually cut discretionary spending two budget years in a

single calendar year. we have an agreement in the budget control act going forward that's going to let out the belt a little but honestly in the context of the federal budget not a lot. we can argue about whether it was good policy or not, but we did tie long-term spending cuts in some fashion to the debt ceiling increase. so there's lots of signs that at least on the discretionary side we're beginning to see some discipline and it's likely to stay here for a while. second on the revenue front, you know, the president obviously extended all the tax cuts for two years. he had the ability not to do that. could have knocked all of them out or any he wanted to knock out, because we couldn't have possibly overridden a veto and frankly had majorities until january to do pretty much what he wanted. he told us clearly then we needed those tax cuts another two years, bargained an extension of unemployment and pay role tax holiday, but he signaled that, look, come

january next time we're going to have a revenue increase for high-income earners if i'm still the president of the united states and he'll have the ability to do that if he so chooses. pause for a moment. hate to do this as republican, but leez he's in a position to that. that will be a revenue increase of some sort. are those two things in and of themselves, spending restraint and revenue increases of the kind we're talking about sufficient to deal with the long-term structural deficit that you have described? >> no. i don't think they are, and i think standard cbo calculations would support that discretionary spending is not particularly high as a share of gdp relative to history. i think you could cut discretionary spending pretty close zero and not solve the problem in the long term. so focusing on discretionary spending is probably not going to be by itself sufficient on

the spending side. >> and i don't mean to put words in your mouth, or only on the revenue side, the tax side? >> i was going to say on the other side, there are many arguments for and against changing the taxes on higher income individuals, but that by itself is not going to close the budget deficit either. we need a much broader set of policies. i -- i think the elephant in the room is really health care costs. under the, as i mentioned in my testimony, you know, we're heading towards 9% or 10% of gdp just from federal spending on health care and then another 8% or 9% eventually in appreciate sector health care spending. so that's a broad issue that affects the budget and affects the efficiency of our economy, that i don't think we're going to get a real solution there

without some kind of way of addressing that problem i. agree very much with that and obviously had an effort in this committee to do exactly that and the so-called ryan budget. i suspect we'll have something similar again this year. i hope we look at social security as well. i know that decision hasn't been made. i think that's the crux of the issue, but you know, we have a lot of commissions that put out a lot of ideas. are you aware of any other elected officials that have actually passed or proposed, has the president laid out a set of long-term reforms and entitlement spending or anybody else other than my friend the chairman here? >> i don't know of any comprehensive plan. again, as you point out, there have been a number of commissions which have even those commissions are not fully you know, detailed. i mean, for example, i don't think bowles-simpson had tight say about health care and how to

control that spending, but that's where -- i mean, i think that's -- that's where, you know, a lot of the serious work has been done is in think tanks and the like. >> thank very much. thank you, mr. chairman. >> thank you, mr. chairman for bringing us together today. chairman i want to associate myself with the comments of mr. cole as to keeping a steady head through this real, real financial crisis, economic crisis. and i can appreciate that it's not a very easy task. nor is it an easy task for this committee. first chart up there, mr. chairman, we've heard a lot about how some people can pay 1 15%, a tax rate, around 10%, or 13% lower than firefighters, teachers and police officers, as an example.

particularly in north jersey. i understand you can use a 15% rate on investment income rather than the higher 35% top rate on wage income. we've been told that increasing the rate on capital gains will discourage investment. warren buffett said that he had worked with investors for 60 years, and he's yet to see anyone not even when capital gains rates were 39.9%, back in the mid-70s, he's never seen someone shy away from a sensible investment, because of the tax rate on the potential gain. people invest to make money, and potential taxes have never scared them off. unquote. now, according to the national income and product accounts

tables, the top tax rate on investment income significantly changed over the past 80 years which you're very familiar with, which i've heard you speak about many times. it was as high as 39.7% in 1976, and now it's, today, 15%. yet investment grows with the cycle. chairman, in your opinion, do changes in the capital gains tax rate mainly affect investments already made rather than new investments being considered and the latter is what drives growth? what's your opinion? >> well, you're pulling me into a complex topic. the -- so the economy theory

says that -- that you should, tax consumption rather than saving, or investment, and that's the rationale for lower are rates on capital gains and capital income. that's a thee retticcal result, there's a variety of estimates how strong the effect is, which you're alluding to. it's hard to pin it down exactly. but the many other issues related to this which make it -- i don't want to be pinned down on this simple response, because on the one hand, low investment, tax and investment income, can be justified by theory, the need for personal corporate tax integration and so on, but you know, i think congress has an appropriate task to try to balance whatever benefits that