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  • The Rise of Municipal Bonds

    It seems that while a lot of us weren't paying close attention, many US cities provided a better return for investors in 2011 than we were anticipating. Municipal bonds are rising in price, according to the Wall Street Journal 's Liam Denning . And while there is still a fair bit of risk, especially in bond tied to real estate related projects, the fear that there were going to be massive defaults in the last year did not turn out to be true. The potential for higher yields, it seems, drove investors to the muni bond market. Those yields, Denning tells Mean Street host Evan Newmark , are not likely to remain so high:

  • Daniel Gros Defends Austerity in Europe

    Policy leaders in Europe pushed austerity measures last year for EU nations with high levels of debt. Now, as growth has flattened on the continent, some are concerned that austerity is a weight on GDP. Daniel Gros , Director of the Center for European Studies, isn't buying that argument. At Project Syndicate , Gros writes that a drop in government expenditures does not spell a significant enough slowing of economic activity to have a long term negative effect. Gros: In Europe, the concern today is instead with the debt/GDP ratio. The worry here is that the GDP drop resulting from “austerity” might be so large that the debt ratio increases. This matters, because investors often use the debt ratio as an indicator of financial sustainability. Thus, a lower deficit might actually heighten tensions in financial markets. However, a lower deficit must lead over time to a lower debt ratio, even if this ratio worsens in the short run. After all, most models used to assess the economic impact of fiscal policy imply that a cut in expenditure, for example, lowers demand in the short run, but that the economy recovers after a while to its previous level. So, in the long run, fiscal policy has no lasting impact (or only a very small one) on output. This implies that whatever short-run negative impact lower demand may have on the debt ratio should be offset later (in the medium to long run) by the rebound in demand that brings the economy back to its previous output level. Moreover, even assuming that the impact of a permanent cut in public expenditure on demand and output is also permanent, the GDP reduction remains a one-off phenomenon, whereas the lower deficit continues to have a positive impact on the debt level year after year. Read Austerity under Attack here .

  • Real GDP Rose 2.8 Percent in 4th Quarter; 1.7 Percent for 2011

    Real GDP increased 2.8 percent in the fourth quarter of 2011, according to a new report from the Bureau of Economic Analysis . For the year, real GDP rose 1.7 percent. From the report: The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, residential fixed investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an acceleration in imports, and a larger decrease in state and local government spending. Here is a look at the ups and downs of real GDP over the last 4 years: Real GDP increased 3.0 percent in 2010. The BEA report lists drops in inventory investment and government spending--"the annual decline was the largest decline since 1971"--as primary reasons for the slowdown. Read the full release from the BEA here .

  • Brookings Experts on What They Think Obama Shoud Push for in Speech on Jobs

    Ahead of President Obama's highly anticipated policy speech on jobs, the Brookings Institution held a roundtable conversation on possible policy measures the Obama administration might make in order to improve the bleak economic picture. Michael Mussa , senior fellow at the Peterson Institute for International Economics , made the case for infrastructure spending. Mussa argued that passing the highway bill is among the most expedient, and least controversial paths to increasing public hiring: You can watch other excerpts from the discussion here , and read a full transcript here .

  • State Governments' Lasting Struggle for Revenue

    Jeremy Gerst and Daniel Wilson , both economists at the San Francisco Fed , have just published an Economic Letter in which they describe the struggles of state governments to make ends meet. And they share two telling graphs. First, a look at what happened to revenue when real GDP dropped: And then a look at how spending changed (or rather, didn't) as revenue dropped: The picture, Gerst and Wilson write, is not bound to look any prettier for some time: All indications are that states will be struggling to move their budgets toward balance for quite some time. Recovery of state finances historically lags recovery of the national economy. Forecasters expect the national economy to recover gradually (see Weidner and Williams 2010). Thus, it will take quite a while before states see considerable improvement in their fiscal health. Indeed, estimates from the Center on Budget and Policy Priorities show significant state budget gaps persisting through at least 2012. And a recent Rockefeller Institute report noted that most states are uncertain when revenue will return to prerecession levels, indicating the problem could continue well beyond 2012 (see Boyd and Dadayan 2010). In many respects, fiscal conditions are likely to get worse before they get better. Federal stimulus plan grants to state governments have helped states close budget gaps. However, federal stimulus funds are set to diminish in 2011 and all but disappear in 2012, leaving states to deal with their budget gaps without this federal support. Another factor that could worsen state budget problems is the depletion of rainy-day funds. At this point, even states that had rainy-day funds going into the recession have fully tapped them. Finally, some states have used accounting tricks to in effect kick the fiscal adjustment can down the road. Now these have largely been exhausted and the end of the road is in sight. Read Fiscal Crises of the States: Causes and Consequences here .

  • Roubini: Lesson from Greece on Debt and Inflation

    Nouriel Roubini warns us not to look at what is happening in Greece as a far-off event, but rather a lesson in what typically happens after a major financial crisis. The pattern: Crisis brings recovery efforts. Recovery efforts require government spending. Government debt rises. And "deficits grow to unsustainable levels that can lead to default or inflation if not corrected." Roubini: While the markets these days are worrying about Greece, it is only the tip of the iceberg, or the canary in the coal mine of a much broader range of fiscal crises. Today it is Greece. Tomorrow it will be Spain, Portugal, Ireland and Iceland. Sooner or later Japan and the US will be at the core of the problem, shaking the global economy. We need to recognize that we are in the next stage of financial crisis. The coming issue is not private-sector liabilities, but public-sector liabilities. Revived economic growth alone will not generate enough tax revenue to relieve this sovereign debt crisis. Fiscal deficits are huge and structural. They are not due solely to a cyclical downturn in growth but to long-term commitments such as pensions, social security and health care. To avoid default or high inflation, the advanced economies will require some combination of raising revenues through taxes and cutting government spending. In Europe, where tax rates are already very high, the right adjustment is cutting spending instead of raising taxes further. In the US, the average tax burden as a share of GDP is much lower than in other advanced economies. The right adjustment for the US would be to phase in revenue increases gradually over time so that you don't kill the recovery while controlling the growth of government spending. Read US faces inflation or default here . (H/t Economist's View )

  • 5.7% Growth for GDP in 4th Quarter

    The US economy grew at a rate of 5.7% in the fourth quarter of 2009, according to data released by The Bureau of Economic Analysis this morning. That represents the highest quarterly growth in 6 years, and the growth was largely on improving inventory data. From the BEA release : The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that were partly offset by decelerations in federal government spending and in PCE. The Wall Street Journal 's News Hub team--in this case Kelly Evans , Evan Newmark , and Dennis Berman --breaks down the data in their AM Report:

  • Austan Goolsbee on What He Would Do If He Got a Stimulus Plan Do-over

    Austan Goolsbee has been tasked with helping to steer the White House's economic recovery plans as chief economist of the Economic Recovery Advisory Board . As he looks back at last February, when the new administration took over Washington, he remembers the nearly-overwhelming process of picking up a recovery plan already started. And if he could go back and do it again, it sounds as though the first thing he would do would be to make his office more livable--as he now realizes that it essentially became his residence. He would also have put more money in the state fiscal relief. Here he is at O'Reilly Media 's Web 2.0 Summit , summit addressing the question of what he would do more differently if he could start from scratch and redesign the stimulus plan: Watch the full interview at Fora.tv here .

  • Economists On Fresh Air

    WHYY and NPR's Fresh Air has an economic stimulus double feature today. Terry Gross talks first with Dean Baker about how revamping health care on a national scale might boost the economy. Then Greg Mankiw takes the hot seat and does something he's been doing a lot lately: laying out all the reasons to be skeptical about government spending as a panacea for all current economic ills. You can listen online here , or download the podcast here .