low taxes on capital income have against considerations of equity, considerations of implementation. can people convert regular income into interest income or capital gains income, and thereby evade taxes? there are complex issues on both sides. to try to answer your question, you know, i think there's certainly, while there's some disagreement in the literature i think there is some effect of the rate of return on -- on -- which after tax rate of return on investment decisions, but there is a lot of disagreement how strong it is. >> do you see the problems as it is, not just that the rate on capital gains is so much lower are than the rate on earning, and we could discuss that at length, because we've seen a real turnaround in the last 50 some years on what we do tax, and one that feeds those who say

income earners are at a disadvantage in terms of what we made, how we tax the profits and investments. the problem amplified -- we debated this, the carrot interest loophole that involves tapping the difference. what's your opinion? >> time expired. >> can he answer the question? >> i'm going to punt anyway, i think. it's a complicated -- question. >> dr. price. >> thank you, mr. chairman. i hope -- well i won't -- i do want to comment an warren buffett. pa kur peculiarly, pays himself an income of $100,000, who's never contributed anymore to the federal government, doing all he cannot to pay taxes to skirt his responsibilities. so that's a complete aside and i

apologize for it. mr. chairman, i thank you for coming and i want to talk, i want to turn our attention to the european situation. the european situation to quote your testimony is, "leading to substantial increases in sovereign borrowing costs, kearns about the health of european banks and associated reductions in confidence and the avail ability of credit in the euro area rolfing these problems will require action on the part of the european authorities." my first question is, do you believe that loans to european countries today carry a greater risk than they did two or three years ago? >> when you say to countries, do you mean to the governments? >> yes. >> surely they do, and you can see it in the interest rates that they have to pay. >> and would you, please, explain what the exposure of the united states, the american taxpayer, is to that -- that

credit challenge that they have? >> well, in the official sector, the united states is a 15% shareholder of the imf. the imf is involved in programs for the three small countries that, greece, portugal and ireland. the imf does have a very good record of being paid back. they have a senior position in the -- in the debt of the, of those countries, and they are very much engaged in making sure that those countries are taking appropriate policies. the -- as i've explained in previous venues, the federal reserve has a swap line with the european central bank that is not an obligation of any european government directly.

the european central bank is highly credit worthy. it is owned by the central banks of all the countries in the eurozone, and moreover, they give us euros as collateral. so it's a swap of currency rather than a loan, per se. they lend -- they lend the proceeds on to their banking system in dollar, and there are some important reasons for that. but just from an exposure point ever view, they take all the credit risk, all the interest rate risk and exchange rate risk. so i think it's a good bargain for us. >> are you able to quantify the exposure of the u.s. taxpayer to the risk, through the imf and elsewhere? >> through the imf? >> i don't have -- >> i don't have the number exactly. in the tens of billions. t. may even be higher than that, i think. is there -- do you believe that it's appropriate for the united states, for the fed, and hence

the united states taxpayer, to have a greater exposure through the imf? or are we at about where we ought to be? or should we decrease our exposure? >> i think the imf play as very important role in helping to stabilize countries that are in stress. the administration, the treasury secretary is our director, and he has the most direct responsibility for the imf and has been very clear that he's not supportive of any increase in the u.s. contribution to the imf, and so i would leave that to his judgment. his view, as i understand it, you should speak to him, of course, his view is that it's up to the europeans first to take the necessary actions to stabilize the situation. >> let me switch very quickly in the brief moments that i have left to the comments you made about health care and medicare,

medicaid. our discretionary budget is about $1 trillion. the amount of the deficit is greater than $1 trillion. so one could do away with all discretionary spending, isn't it correct you could do away with all discretionary spending and not even get to a balanced budget without addressing medicare, medicaid, social security and -- >> well, part of the $1 trillion deficit is due to the fact that the economy is in very weak condition, and the cbo suggested that if the economy were to return to normal, say, by 2017 that the deficit would be more are in the order of 4% to 5%, in the odor of today's term, $60 billion to $75 billion. what i said before is true. that -- that discretionary spending cannot bear the entire brunt of deficit closing. not a possible. >> mr. tonko?

>> thank you, mr. chair. dr. bernanke, chairman bernanke, thank you for appearing before the committee. i represent a part of upstate new york that hosts the third fastest growing high-tech jobs hub in the country, and we have a higher share of our workforce in green collar jobs than anywhere else in america and the innovation economy in our region isn't just a talking point. it's a reality paying bills for many, many families. came about with a huge bit of planning and the investment from both public and private sectors in providing the industrial clustering that's currently under way. so i'm interested in your comments about the investments that need to be part of the response to a troubled economy, that encourage investments in a

& & -- r & d, an ideas economy and also the requirement of sound public infrastructure. after 20 years of investment through work in the policy development in the state assembly and when i was at, served in the development authority, we saw what happened when people prodded altogether and now enabled us to experience this comeback. interestingly when i arrived here i saw a lot of tug against investment and these given dynamics that you made mention of. can you develop further for us the benefit, the value added that comes with this focus on r & d on skill set and infrastructure? >> yes. there's a lot of evidence that clustering can be beneficial issue described. if you have a number of high-tech industries. for example, close together. they can share ideas, and

suppliers, workforce and the like. the public secretary hear a role there. one of the great strengs of united states is our university system. many of the high-tech cluster, i don't know about the one you're speaking of, have grown up in the context of a strong university, where there's a lot of exchange between scientists or other professionals in the university and in the private sector. and, of course, the u.s. government is, you know harks many supports -- supports university education in many direct and indirect ways andalities supports public education for younger people, and the high-tech industries require skilled workers. a range of people, but certainly people who are conversant with math and science. it's very important.

so there's some important roles. infrastructure, you know, i think while that's certainly a topic of debate, about how much and what kind, i think most people agree that there's certain kinds of infrastructure that the government has a role in providing from roads to airports to -- public crime and fire fighting services and a variety of things. so, you know, to the extent that can support activity that's useful. research and development is an interesting question. i recently gave a speech on this topic and talked about some considerations about what role if any the government should play there, and i think that, again, it's an issue debated among economists but some argument to the fact that basic, in a purely, without any government intervention that pure will you basic research may be underprovided because the people who are doing that don't share in all the benefits from

that. so there may be some case through government encouragement of basic research and, of course, you have r & d tax credit. that's certainly one way. there are other ways as well, to support national science foundation and so on to support research and development. so i think the lesson of experience is that industrial policies which attempt to dictate exactly what companies, exactly what products are not generally very successful. there often is a role for government partnerships to help create the basis where private sector can be very productive, particularly in high-tech areas. >> do you have any sense of how we might fair with the international community in terms of r & d investment? >> we do pretty well. including both public and private. we are certainly the biggest

absolute amount of -- we have the biggest amount of, in absolute term, of research and development investment, and we have a pretty high percentage of gdp as well. some emerging markets like china are beginning to approach us, at least in terms of shared gdp, but we remain and r & d leader. >> mr. flores? >> thank you, mr. chairman. thank you, chairman bernanke for joining us today. i want to follow-up on some of the questions we've had earlier today, and to talk about policy responses. as you said you're worried about the federal government's fiscal sustainability as we move forward. looks to me like we don't have to re-invent the wheel when it comes to policy responses. look it's a the chart on the screen. you can see the differences in recoveries during the 2007-2011 time frame, versus 1982 to 1986. there was an article -- an op-ed in the "wall street journal" by

phil greene and mike slong saying if we just followed the same policies reagan followed when he inherited a really bad economy, we would have about 17 million more americans working today, and that our gdp per family would be about $23,000 higher. the bake question, we all recognize that the constitution says the federal government has certain basic responsibilities. it's explicit we have to provide for national security. some people feel we need to provide for basic research, funding, and i agree with that. that particular idea. but then everything sells really sort of on the table, when you look forward. so my questions are fairly simple. i'd like you to give me the abbreviated abridged reader's digest response if you can. who's the better allocator of capital to the greater public good? is it the private sector or the federal government? >> well, as i was saying

earlier, there are some area where is the federal government is the only provider. it's hard to get the private sector to provide -- >> roads, but for -- you know, e e innovative and industries, private sector better. china is an example of a country which has a -- a communist party running the show, but they allow private sector activity to have a very large role in development of new industries. >> right. you've got a difference between private sector investments, like keystone pipeline, versus public sector investments like solendra. the federal government does a pretty poor job of allocating resource. do you see any way to dissuade us to private resources instead of the federal government? >> well, again, the private sector, because of the profit motive and so on is often better

in innovating. but, again, i don't want to get into the keystone situation. i don't know enough about it, but i do know it involves a multistate right of way and all tho those- >> i wasn't trying to get -- as an example, i'm just saying. on one hand a private investment of $7 billion and thousands of jobs created. on the other hand you've got a half million taxpayer dollars to spend and no jobs today. >> you can -- to be fair, you can point to situations where government investments in the space program or in the internet -- >> i've paid off, for the public. but clearly a market economy and want to use the market wherever appropriate. >> good. exactly. >> looking at the stimulus plan, you know, if you use the most aggressive, optimistic numbers of jobs creators saved that have

been promulgated, the cost of the stimulus plan divided by the number of joshgs $400,000 per job. would you say the private sector could have done better than that if we'd have said some form of tax reform or tax reduction, we'll leave the stimulus dollars in the hands of the taxpayers instead of cycling through washington. would that have create add better economic outcome for the united states? >> lard to say. we were in a deep recession, you know. and one of the differences between this recession and the '82-86 was that the fed had, fed's tightening to reduce inflation was one of the main reasons for the '82 inflation. when they cut rates, a big reason. this case, rates zero. can't do as much as they did in the mid-80s. so i'm sorry. so -- your question -- so the other thing, like i said i would comment, is that -- is that, you

know, dividing the number of, dividing the total costs by the number of jobs, is to me not exactly the right way to think about it, because the total cost involved also the provision of whatever was built or constructed. >> i wasn't trying to get into the nats like that. what would have produced a better economic benefit for the average american? a., you know, $800 billion in the hands of the taxpayers or, b. -- >> if i could quickly respond. times when fiscal policy can help create better employment but the private sector clearly is where the decisions about what industries what products and so on should take place. >> very good. thank you. >> mr. chair, back to the chart that we just had. could i ask to have that put up again, even though it was not my chart? >> chairman bernanke, some of my

colleagues are talking about the reagan recovery a lot more, but i think when you think about recoveries you have to also talk about how you got in the position you're in. you talked about how the fed had interest rates to work with during the so-called -- the recovery. not so-called. we did recover during the recession. that was pointed out. but i think it's important historically to point out that with what we're facing right w now, we have two wars that went on credit cards. we had a housing collapse, which really it broiled us into, as you pointed out, housing being the last leg, maybe, of this recovery moving forward. so you really can't compare the two and say that the same solutions would have worked for this recovery, and then the other question, i might ask you, is, would you say that 2007 is a

fair starting point for talking about where the recovery started on this chart? >> no. december, 2007 is beginning of the recession subpoena the recovery began, according to the nber, in june of 2009. but you know, i think thas been a unique experience, this last crisis. we've nerve her a housing boom and bust and such an impact on the financial system as this particular example. financial crisis was extraordinarily severe. we did come very close to a total global meltdown, and while people can disagree about how much that's held back the recovery, i'm sure that tight credit and mortgages and small businesses and other areas has been part of that, and i think the monetary policy issue is an important one. i mean, mortgage rates in early '80s were 18%, or something like

that. letting interest rates come down as the fed lightened up, as inflation came down, was certainly part of why the economy why the economy bounced back as quickly as they did and housing is one of the areas that bounced back. so, you know, obviously there is some comparable of all recessions. but there are important differences as well. >> thank you, mr. chairman. mr. chairman, in my remaining time, i'd like to kind of go back to some of the discussion that we've had about our interaction with the economies on an international market. and we're facing some decisions and i believe that we need a balanced package of revenue, spending cuts and that as a robust discussion about how we move forward. but there's many in congress, some of my colleagues who want to, you know, implement deep, deep cuts. going back to some of the discussions that you were having, i had an interesting meeting with ford motor company

a couple years ago. they said if we had an energy plan that would allow ford to determine to go gang busters whether it's going to be electric, whether it's going to be biofuels, whatever, if we have an energy policy that countries like japan have an energy policy, the eu came out deciding to go diesel that, would really help our business sector be part of global competition in the way forward with competitiveness. can you maybe talk about energy policy and a determinant for our kun troy re country to embrace one, to allow businesses to move forward together? ford really said when they knew that they had to build diesel, they could build the best diesel car. they were totally competitive in europe. but the lack of us having an energy policy for a nation as large as ours really left them up in the air. >> well, i think companies would

like to have clarity about what energy sources are going to be used, how the government is going to tax or subsidize different types of energy. i think the main issues there, frankly, are environmental as much as anything else. you know, japan, for example, has decided to phase out its nuclear power because of the concern -- the safety concerns. the eu decision on diesel i think was generated primarily by environmental issues. so those are the kinds of issues that -- that scenario where government, you know, may make some decisions about energy policy because certain types of energy may be judged or better for the environment. putting that aside, you know, we do need to maintain a robust energy markets. we were talking about this

before. there's a remarkable increase in the supply of natural gas, for example, in the united states. and that's a good thing. as long as we can manage it in a safe, environmental sound way. >> thank you. >> thank you, mr. chairman. dr. bernanke, i want to drill down on something you talk about in general here today which is europe. i want to go into detail on the central bank, swaps with the dollar swap agreements. since you've been here last time, i think it's grown from the agreements with various central banks have grown to $103 billion as of last week. my first question is, where does that money come from? is that money you have in existing reserves? is that new money? where does that $103 billion come from that we participate in the agreements? >> it's -- it becomes both a liability and asset on the federal reserve's balance sheet. in some sense paid for by greater excess reserves in the banking system. and on the other side, we have

an asset which is the money given in exchange to the european central bank. >> but to the extent that it's in layman's terms, it's new money. it's not something you moved over to a swap agreement. this is money you set aside? >> we chose to do that way because monetary policy currently is obviously has great strength close to zero. it is not difficult to sterilize that to a number of different methods. >> fair enough. you stated earlier that your current intention to reinvest those, as these securities mature, i think 90% of them or less than 90 days, is your intention to reinvest those in domestic securities, reinvest them in the swap agreements? >> well, the demand -- it's the ecb and the bank of japan are the two main counter party who would determine, you know, what their request is. then we would decide whether or not to grant the request. so it's not our choice.

you know, we're not looking to invest there. if the swaps run out, then that would just be extinguished. it would mean a comparable drop in our liabilities and in our assets. >> fair enough. to the extent part of this $103 billion goes over to europe and the swap agreement comes back and are reinvested in domestic securities, does that have an expansion airy effect on the monetary swap? >> it does increase the high powered money supply a little bit. in this case it would be about 4%, 3%, 4%. it doesn't have much effect on money in circulation. only the amount of excess reserve that's the banks are holding with the fed. so we don't -- it doesn't affect interest rates. so we see it as doing is reducing financial stress, strengthening the role of the dollar and international

markets, improving funding for both u.s. and foreign banks. we don't see it as having any major implications for inflat n inflation, for example. >> how is that different than what you just described from what you were trying to accomplish with qe-1 and qe-2? >> well, the difference being that the qe-1 and qe-2, we were -- first of all, they were much bigger. second of all, we were buying medium to long-term securities on the open market. in this case, the money is going via vee the ecb who are our county party and take all the risks are going to help finance the dollar assets of european banks which is then put back basically in the ecbs. >> i understand the first half. but when the money comes back from europe and reinvest it, how is that different from qe-1 and qe-2? >> there is no change -- this doesn't involve any change in our holdings of securities. we have an asset which is the obligation of the ecb and we

have a liability which is increasing in excess reserves. unless banks are lending the reserves out, it's not turning into more money. >> you've got the option as you exercise in 2008 to lend this money directly to the european banks. you could do it to domestic subsidiaries. why aren't you doing that? why are you using the swap agreements instead of lending directly to subsidiaries? >> well, if subsidiaries of overseas banks came to the discount window, by law, we have to treat them on an even playing field with u.s. only banks. we do the no have any lending right now through the discount window from our perspective and an economic perspective, if the u.s. taxpayers perspective, doing it through a swap search better. because it's responsibility of the ecb to take the class ral to decide on where to make, you know, who did qualify for the loan, to decide how much is

needed to address the money market problems and so on. we're totally protected that way. we're protected in discount windows through collateral. i think this is a better way to do it. >> lastly, very quickly. we've established, you have the ability to lend to domestic subsidiaries but you told my colleague you had neither the aauthority nor intention to bail out the european banks. you don't have the intention or authority to do that? >> in that particular off the rortd conversation, i was asked and i said first of all, to be clear, we've done the swaps. i explained to him and talked about them. i wasn't -- they had been done well before that conversation. and then the question was, were we going to do additional things? were we going to make loans to the imf or something like that and the answer is no. >> thank you, sir. >>. >> thank you, mr. chairman. chairman bernanke, it's goiod t

see youment our friends on the other side of the aisle since the debate over the recovery act ensued have furiously tried to insist that it had no impact, it created no jobs and wasn't necessary. the recovery act lowered the unemployment rate by up to 1.8% in calendar year 2010, up to 1.4% in 2011 roeelative to whatt would have been had congress not acted at all. since that time, actually, since 2005, we created more jobs last year than we have since 2005. and since march of 2010, 3.2 million jobs have been created in the private sector. so my question to you is have we not acted and passed the recovery act, would that recovery happened as soon or even at all?