Things I Don't Understand

A little piece on an odd decision Adidas by Mike Rogoway:

Adidas America wants to sell its north Portland headquarters to raise money for operations, then lease back the property in a long-term deal.

This confuses me. Long-term interest rates are at historic lows, so how is it that this is a good way to raise capital? Either Adidas should be able to borrow directly or at the very least should be able to use the property to secure a very low interest loan against it.

But I am not a finance guy...still I wish someone would explain this to me.

Moles are not Rational

My experiment with the economics of moles has ended, predictably, badly.  By slightly raising the marginal cost of lining in my yard, I had hoped convince my subterranean friend by use of an annoying emitter of sound waves to seek out more pleasant pastures...like my neighbor's yard.  But alas, not only has my mole remained after three weeks of use, but he is quite happily continuing to dig within a few feet of the 'sonic spike' itself.  The picture above is not the best, but these are two new mole mounds with the solar panel of the 'sonic spike' visible at the edge of the grass.

Clearly my mole has not had an Econ 101 class and doesn't understand decisions at the margin.

But I have made a scientific breakthrough!  Moles are not rational creatures.

Addendum: When you post an entry, Blogger informs you of the having successfully posted on a separate page in which they embed a Google Ad clearly targeted by keywords from your post.  Ironically, the ad associated with this post was headlined" "SONIC MOLE CHASERS WORK" and clicking through takes you here.  You have been warned.

Election 2010: Measures 73 & 76

It may seem strange to write a single post about Measures 73 and 76 as they are so different, but they do have one common aspect that I dislike: they reduce the flexibility and responsiveness of government to deal with changing economic circumstances.

My wife is passionate about environmental and education issues and she considered a 'yes' vote on Measure 76 a no-brainer.  Who doesn't like funding for parks and beaches and wildlife?  So I posed a question: "at this moment, if there was one thing you had to cut for a couple of years until the economy improves, which of the two things, education and parks, do you think can best weather a temporary cut?"  My answer is clear: parks and wildlife.  There is convincing evidence that temporary disruptions like shorter school years, larger class sizes, etc. create long-term consequences for kids.  Thus if I have to make a difficult choice, I would protect schools above just about anything else.

I also don't like the idea of telling the criminal justice system how to do their jobs, having virtually no knowledge of the actual tradeoffs between spending more money on education, early childhood intervention and other things that will spur economic growth and thus provide non-criminal opportunities, versus spending more money on incarceration.  Measure 73 not only ties up money that might be better spent elsewhere, but it also reduces the ability of the justice system to deal on a case-by-case basis with recidivists.

Which is why I am weary of Measures like 73 and 76 which essentially tie-up state resources.  I believe that the state government needs more flexibility, not less, to deal with serious downturns like the one we are in.  I have faith that the good folks who make up our state legislature take their jobs seriously and try and do their best with the evidence they have (though I am always advocating for better evidence for them to work with).  In short, I believe in representative democracy.  Normally the trade-offs would not be so stark, but this recession is, and will continue to be, very severe and the cuts are going to have to be deep.
 
That said, there are arguments for both that essentially come from the same principle: there has been a failure of government (or the criminal justice system) to properly deal with to things that have substantial externalities.  Parks, beaches and wildlife have substantial positive externalities and as such are chronically underfunded.  Sex offenders and drunk drivers cause substantial negative externalities to society and as such there we have a system that allows too much of them.  I don't necessarily disagree with either statement.  But public education may have the biggest external benefit of all and to address the aforementioned two at the expense of education is the real trade-off.

In the end, things that look good in isolation start to become less clear when the trade-offs are explicit - which is a big point of economics in general.  Will schools benefit if these two do not pass?  I don't know, but given that K-12 is THE massive chunk of the state's general fund and a major part of the lottery fund account, it is hard to see how they won't.

Hard choices.

Picture of the Day: Venezuela

From N Greg Mankiw's blog:

This here is a market in Caracas selling oil.  They post the 'just price' and the (much higher) 'capitalist price' and let you know just how much you would have been screwed by the system were it not for the Chavez regime.

Giants

As someone who had a peripatetic childhood there are very few constants that I clung to and that remained with me until adulthood.  But perhaps the one true constant was, and is, the San Francisco Giants.  Born, and raised until I was 11, on the peninsula just south of San Francisco, I spent many a frozen evening at Candlestick Park watching the fog pour into the stadium through the breezeways in the upper deck while the likes of Willie McCovey, Jack Clark, Bill Madlock, Vida Blue and my personal favorite (for no real reason - I was a kid after all) Mike Ivey plied their trade below.

Later, I would develop a fondness for Milwaukee's County Stadium and the Brewers and Civic Stadium and the Beavers (I tried the Mariners but the Kingdome, even with a young Griffey, Jr., was just depressing), as my family split and went different directions. But I would continue to return to the nest thanks to return trips to visit relatives in SF and always carried the Giants as my birthright.  Recently, visits to my in-laws who live in Marin County are highlighted by ferryboat rides to McCovey cove to see the Giants play in the spectacular PacBell SBC AT&T Park, which (by any name) is by far the best in baseball.

I was in my apartment in Portland when I was in college for the 1989 World Series. My roommate was from the East Bay, but a Giants fan nonetheless, and when the earthquake hit we both ended up trying to contact our families to make sure all were okay and accounted for. Alas, the Giants did not put up much of a fight in that series, but frankly it didn't really matter.

I was alone in a hotel room in Williamstown, Massachusetts during game 6 of the 2002 world series - hiding out and blowing off a dinner banquet for the conference I was attending.  I was beside myself with excitement and anxiety until the bottom of the seventh inning of game 6 when Dusty Baker took out Russ Ortiz with a 5-0 lead.  I had a bad feeling and when it all unraveled I knew it was all over.  I couldn't hardly watch game 7.  

But it was hard to feel sorry for myself as my father, a Boston native, was still suffering each and every season with his beloved Red Sox.  He was an early adopter of satellite radio when he discovered that it meant he could listen to each and every Red Sox game in Portland.  He grew up across from a park in a nice neighborhood a short walk from the Fenway and used to tell me of Red Sox players who, while walking home from games and practices, would stop and play catch with the boys playing in the park - including the great Ted Williams.  The intimacy I have with the Giants can't compare to those more innocent times, but still, the Giants were an anchor to a kid without a geographic center.

But now the Red Sox have won twice since the 2002 World Series and I can start to feel like maybe it is my time - even though I am about 20 years ahead of my father when his dream was finally realized.  Still, I have a feeling of dread, the Texas Rangers seem like an offensive juggernaut and I think it could all end quickly and badly.  At least the National League finally won the All-Star Game.  So I protect myself with a healthy dose of pessimism (this too learned from my dad over my lifetime).

Anyway, tonight starts what might end up being a fortnight of tortuous suffering. But nevertheless I say: Go Giants!

Addendum. Despite my love for the Giants, this is a stupid statement:

"People on the East Coast think of the West Coast as this new place, but San Francisco is a really old American city," said Brian Murphy, the dulcet morning drive-time sports voice on KNBR radio. "This city has a thriving history that goes all the way back to 1860. … So whereas L.A., and Seattle, and Portland, and Phoenix are all sort of post-World War II towns, this town's history runs way deeper than most of America realizes."

Portland, a post-WWII city? Say what? Oregon City is the oldest city in the West. Portland was incorporated in 1851. Revel in the glory of the Giants, but don't be condescending or vainglorious.

And actually the modern history of the city goes all the way back to the Presidio and the San Francisco Mission in 1776 (see, I attended grade school in California!) so the 1860 date is pretty arbitrary.

Port of Portland Showing Healthy Gains in 2010

One thing I like to check on from time to time to get a sense of the direction of the Oregon economy is the Port of Portland marine statistics.  What a recent glance reveals is that 2010 is showing a very healthy improvement over 2009.  In fact in terms of total tonnage through the first nine months of 2010, the Port is 36% higher than last year and in just about every other metric the Port is experiencing strong gains.  Thanks, China.

A Note on Public Sector Worker Pay

I have no beef with Ted Sickinger's nice piece on compensation for public and private workers.  He does as good a job as one could ask for in trying to make sense of the issue, and I especially like how the article emphasizes the entire compensation package, not just salary.  For me, the generous benefits helped to make up for the fact that the pay I accepted was far below competing offers from places in California, Ohio and North Carolina.  [But they suck and Oregon is sweet!] I also really like the fact that he brought up education and job skills as they are very important considerations in any discussion of pay.

But if one were to really want to get to the bottom of the question of whether Oregon's public workers are overcompensated you would have to do more than compare averages across states and across private and public sectors.  You would need to be able to say something about productivity - are we getting as much bang for our buck as other states and the private sector.  As productivity is generally positively related to education, experience and job tenure, that would be a good place to start.  If you have data on individual workers you could control for these individual characteristics and then get a much clearer idea of where relative pay stands.  Even better, of course, would be an actual measure of productivity, but as we are talking about a vast array of jobs, doing so would be too difficult.

In the end, Sickinger's piece gives a nice bit of background information, but still leaves us essentially clueless about the question of whether public sector workers are overpaid or underpaid.  Though it may not matter that much given the amount of cutting the state is going to be forced to do.  Still, lawmakers should be aware of efficiency wages: you may cut so much that productivity per dollar actually drops.

My guess as an economist is based in the belief that the public sector has to compete for the same workers as the private sector and so, in equilibrium, productivity weighted compensation should end up roughly equal.  Pay too little and you will see that workers keep leaving for better paying jobs.  Pay too much and you will have a hard time showing how well you have managed your money as a boss.  In the end, I doubt there is much difference.

Oregon Tax Climate Ranking Unchanged

According to a report released today by the Tax Foundation, Oregon's tax climate ranking among all 50 states remained unchanged from 2010 to 2011 at 14th. Oregon's ranking did fall from 2009 to 2010, from 8th to 14th, after the passage of Measures 66 & 67, but it remains in the top third of all states.

State Business Tax Climate Index Fiscal Year 2011
	2011 Rank	2010 Rank	Change from 2010 to 2011	2009 Rank	2008 Rank	2007 Rank	2006 Rank
Alabama	28	19	– 9	20	23	22	16
Alaska	2	3	+ 1	4	3	4	3
Arizona	34	28	– 6	24	25	29	29
Arkansas	39	40	+ 1	35	37	36	35
California	49	48	– 1	49	49	48	42
Colorado	15	13	– 2	13	10	11	13
Connecticut	47	38	– 9	37	38	39	41
Delaware	8	8	0	10	9	8	9
Florida	5	5	0	5	5	5	5
Georgia	25	29	+ 4	27	28	21	20
Hawaii	22	24	+ 2	22	18	16	24
Idaho	18	18	0	29	21	26	30
Illinois	23	30	+ 7	23	24	31	26
Indiana	10	12	+ 2	14	13	12	12
Iowa	45	46	+ 1	44	46	45	44
Kansas	35	32	– 3	31	31	35	33
Kentucky	19	20	+ 1	34	27	28	38
Louisiana	36	35	– 1	33	34	33	32
Maine	31	34	+ 3	40	35	37	43
Maryland	44	45	+ 1	45	47	24	25
Massachusetts	32	36	+ 4	32	33	34	36
Michigan	17	17	0	21	17	23	28
Minnesota	43	43	0	41	42	43	39
Mississippi	21	21	0	19	22	19	19
Missouri	16	16	0	16	16	15	14
Montana	6	6	0	6	6	6	8
Nebraska	29	33	+ 4	42	40	41	45
Nevada	4	4	0	3	4	3	4
New Hampshire	7	7	0	7	7	7	6
New Jersey	48	50	+ 2	50	50	50	48
New Mexico	33	23	– 10	26	29	25	23
New York	50	49	– 1	47	45	46	49
North Carolina	41	39	– 2	39	41	42	40
North Dakota	20	25	+ 5	30	32	32	31
Ohio	46	47	+ 1	48	48	47	47
Oklahoma	30	31	+ 1	18	19	20	21
Oregon	14	14	0	8	8	9	10
Pennsylvania	26	27	+ 1	28	30	30	22
Rhode Island	42	44	+ 2	46	44	49	50
South Carolina	24	26	+ 2	25	26	27	27
South Dakota	1	1	0	2	2	2	2
Tennessee	27	22	– 5	17	20	17	18
Texas	13	11	– 2	9	11	10	7
Utah	9	10	+ 1	11	12	18	15
Vermont	38	41	+ 3	43	43	44	46
Virginia	12	15	+ 3	15	15	14	17
Washington	11	9	– 2	12	14	13	11
West Virginia	37	37	0	36	36	38	34
Wisconsin	40	42	+ 2	38	39	40	37
Wyoming	3	2	– 1	1	1	1	1

Where are the Wage Gains? Cities at the Heart of the Information Economy

Another gem by Ed Glaeser in the New York Times' Economix Blog:

Santa Clara County, which contains Silicon Valley, experienced 8.7 percent wage growth from 2009 to 2010. San Francisco County had 5.4 percent wage growth. These two counties were third and fifth on the list ranking areas by wage growth.

The success of these areas is particularly remarkable because they started off with higher wages. Typically area incomes revert to the mean, but in the recent recession, at least some places that started with higher earnings have gotten richer over time. This matches a post-1990 pattern in which the incomes of initially richer areas have risen more quickly.

***

The bad news is that more money has been earned by fewer people. The rise in the incomes of these coastal cities has not been accompanied by increases in the number of employed people. Employment in Manhattan dropped by 1.7 percent over the year and employment in San Francisco fell by 3.1 percent.

***

These wage gains are only the latest bit of evidence confirming that America’s economic future depends on its information-intensive cities. Our country is never going to be able to compete with Asia as a producer of ordinary manufactured goods. If the products are old, then they will be produced where costs are lowest. Our economic eminence depends on continually coming up with new ideas in software, biotechnology and finance.

One implication of this is that our future will never seem as certain as it did when America had enormous dominance across vast markets for manufactured goods. In those days, we could be pretty sure that incomes would continue to rise if we just kept doing what we were doing. Now we need to hope that the uncertain process of American innovation will continue forward on its jerky path.

A second implication is that America’s future depends on its schools. This recession has also emphasized the enormous handicaps facing less-skilled Americans. Only 39.5 percent of adult Americans without a high school degree currently have a job, according to the bureau, while 73.1 percent of adults with college degrees are employed. If we want the United States to be strong, we must make sure that we have more college graduates and fewer high-school dropouts.

The final implication is that cities remain vitally important to our economy. That importance reflects the fact that places like Wall Street and Silicon Valley create skills that are even more valuable than those taught in our schools. Globalization and new technologies have made knowledge ever more valuable, and we are a social species that acquires skills by hanging around other smart people.

This is the hope for Portland, that investments like those by Intel, Solar World and Vestas will lead to a regional economy based on technological innovation and high-tech manufacturing. By creating a critical mass of focused human capital, it is hoped that we will be able to crate and sustain a comparative advantage in such activity. It is a gamble for sure what with huge investments being made by China in specific human capital, but seems to me about as good a bet as one could make. What can government really do to engineer this? Not a lot, except make sure the fundamentals are right: education, R&D and infrastructure.

Read the entirety of Glaeser's article here.

Portland Home Values: The August Case-Shiller Update

Here are the numbers, nicely displayed thanks to the Wall Street Journal:

Home Prices, by Metro Area

Metro Area  ↓	August 2010	Change from July	Year-over-year change
Atlanta	109.09	-0.8%	-2.0%
Boston	158.35	-0.3%	1.5%
Charlotte	116.6	-0.4%	-3.4%
Chicago	126.7	0.4%	-2.9%
Cleveland	107	-0.3%	-0.4%
Dallas	119.41	-1.1%	-1.7%
Denver	128.57	-0.1%	-1.2%
Detroit	71.54	0.5%	-0.1%
Las Vegas	101.03	0.1%	-4.5%
Los Angeles	175.55	-0.4%	5.4%
Miami	147.47	-0.3%	-1.0%
Minneapolis	126.53	-0.3%	2.9%
New York	175.27	0.2%	0.1%
Phoenix	108.84	-1.3%	0.4%
Portland	147.02	-0.9%	-2.3%
San Diego	163.99	-0.6%	6.9%
San Francisco	142.83	-0.3%	7.8%
Seattle	145.93	-0.8%	-2.4%
Tampa	137.53	-0.5%	-4.1%
Washington	188.26	0.3%	4.8%

Source: Standard & Poor’s and FiservData

The news is bad: Portland is losing ground and in the top group for lost value. Not at all surprising given the unemployment situation.

Zooey: 1996 - 2010

We had to make the excruciatingly difficult decision to put our dog of almost 15 years down this weekend. If she had been stricken by an aggressive disease and was suffering visibly it would have been easier.  But she was mostly just old and was no longer able to get up on her own, was losing control of her bowels and had great difficulty walking.  How do you know when the time is right?  I have no answer.

What I know is that she was a great dog.  A Labrador through and through: she loved swimming and fetching (and the combination especially). A chance to swim would excite her more than anything else in the world.  The picture above is her about two or three years old in the Wildflower Preserve in Ithaca, New York at a popular dog swimming hole with rocks she could launch herself from.  I love this picture because I can't think of another one in which she looks as completely happy - dripping wet, big stick in mouth, tail wagging vigorously, ready to do it again...and again and again and again...

We got her as a puppy and had the choice of the litter.  How to make such a choice was answered (in typically social scientist fashion) by the puppy personality test from the wonderful book "The Art of Raising Your Puppy" by the Monks of New Skete. We wanted a moderate dog, not too dominant but self-confident, so we gave her and her sister the test (she had eight brothers, be we wanted a female) and she got mostly 3s.  Perfect.  And thus she was: wonderfully confident, a little willful but not too much - and, typical of Labs, the friendliest dog you could ever meet.

We got her the first summer we spent in Ithaca, between my first and second year in the economics PhD program at Cornell.  I had to study for the make-or-break exam in macroeconomics that summer and so little Zooey would sleep in her crate next to my desk and I would study and every hour or two we would take a break and go outside.  I passed the exam and the rest is history.  She was my constant companion ever since, was a gentle and proud caretaker of my sons and a constant reminder to get outside and enjoy nature.

I will miss her and I don't much feel like blogging...

O Rei is 70: Happy Birthday Pelé

QPR

Don't look now, but Queens Park Rangers are dominating the League Championship in England and are on course to be promoted to the Premiership next season.  Many matches ahead, but things are definitely looking good.  This would have made my Granddad, who was born and raised in Hammersmith and a QPR man, very happy.  If they end up promoted, games between his QPR and my Arsenal will leave me conflicted.

Friday Reads

It is Friday and a significant portion of the work I had planned to complete this week remains sitting on my desk, so I'll punt to something I rarely do: link to other posts.  This is THE sure way to drive traffic on your site, so they tell me, but I really don't care about how many people read my blog in general, I just care about who reads my blog.  And I am very, very happy with the interesting, thoughtful people who visit this space.  So, interesting, thoughtful people, here are some interesting reads - go and think:

Mark Thoma has a nice post on an article from the SF Fed.  Here is a nice (and scary) little graph on deflation risk - are we really different than Japan?  [Lost decade anyone?]

Justin Wolfers on Freakonomics has a ver nice lesson on detecting momentum in data and comments on Nate Silver's error of deduction when he suggests that there is no such thing in polling data.

The Oregon Office of Economic Analysis has a nice post on the output gap.

Ben Jacklet in Oregon Business Mag has a nice comment on the Intel News.  [Which by the way is a subject I have spoken about to three or four reporters and thus I decided not to post on it here.]

You can read my erudite analysis of the Intel investment in Mike Rogoway's article in The Oregonian.

Picture of the Day: Bundle Up

Eco-nomics: Brazil, India and Environmental Accounting

From the BBC:

The Brazilian and Indian governments are among those keen to use findings from The Economics of Ecosystems and Biodiversity (Teeb) project.

Nature's services must be counted if they are to be valued, its leader said.

Pavan Sukhdev, a Deutsche Bank capital markets expert who leads Teeb on secondment to the UN Environment Programme (Unep), said that if society did not properly account for services that nature provides, they would be lost.

In an earlier analysis, Teeb calculated that the economic value of services being lost - including water purification, pollination of crops and climate regulation - amounts to $2-5 trillion dollars per year, with the poor hardest hit.

And the first thing for governments to do, he said, was to carry out national equivalents of the global Teeb study - to analyse the real value of ecosystem services to their economies.

"Conventional methods of accounting such as GDP accounting will not capture them - so we need... to rapidly upgrade the system of national accounts," he said.

"You cannot manage what you do not measure."

***

Mr Sukhdev said that so far, 27 governments from Africa and Latin America, and one from Asia, had approached the Unep team for help in "greening" their economies.

Many of these are looking to translate the global Teeb findings findings into their national context, with Brazil and India in the vanguard.

Some governments give "huge subsidies" to oil and gas production, said Mr Sukhdev
India's Minister for Environment and Forests, Jairam Ramesh, said his country was planning a national economic assessment along Teeb lines.

"We are committed to developing a framework for green national accounts that we can implement by 2015, and we are confident that the 'Teeb for India' study will be the key facilitator," he said.

And Braulio Dias, secretary for biodiversity and forests in Brazil's Environment Ministry, said his country was also looking to Teeb for a change of direction - in fact, without the pending election, it might be happening already.

"The tradition of many countries including Brazil has been one of utilising regulation - command and control instruments - and we need to work more on incentive measures and get the different sectors on board," he told BBC News.

"The Teeb approach is very useful to make them understand the implications of loss of biodiversity, and also the return on investment in terms of biodiversity conservation.

"We have several bills before the national congress to establish a national mechanism for payment for ecosystem services - if they're approved, I think we will have a better possibility of implement some of those economic measures."

***

Read the rest of the story at the BBC's website. But if this signals a change in the view of environmental protection and its realtionship to economic growth on the part of two of the fastest growing economies in the developing world, it is very good news. It is these types of countries - fast growing - industrial economies that pose the biggest threat to the earths climate in the 21st century.  That said, I am skeptical that this is much more than window dressing at the moment.

Oregon Unemployment Stuck at 10.6%

Once again, Oregon's unemployment rate hasn't budged - for yet another month it was at 10.6% in September.  Worse, the state shed another 1,800 jobs - however the shedding of government jobs was responsible for the negative number.  The private sector added 1,600 jobs in September on a seasonally adjusted basis.  So that is something, but not enough.

Are Microloans Bad for Growth?

Micro-finance, starting with the Grameen Bank in Bangladesh, have very successfully overcome information and collateral problems in very poor areas. This access to credit, and many anecdotal stories of such credit allowing recipients to escape poverty, have made micro-finance institutions the darling of the development NGOs.  Now there is a new breed of for-profit micro-finance institutions as well as peer-to-peer lending organizations like Kiva.  In fact, here is a Kiva promotional picture that is a perfect example: a loan to buy a sewing machine.  Such an investment raises personal productivity a little and may help generate income above the poverty level, but such investment might also be in lieu of going to school.

Whether these microloans are effective poverty alleviation programs is still a hotly debated question, thought the balance of the evidence seems to be that they do increase consumption of recipient households. My new colleague at OSU, Elizabeth Schroeder, has a very important paper that finds significant effects.

My concern is that these loans, which tend to be small, high-interest and where repayment begins immediately, can distort incentives and cause recipient households to concentrate on small-scale entrepreneurial activities rather than investing in education.  In fact, there is some good evidence to suggest that this is exactly what is happening.

What concerns me the most is how this trade off affects the long-term growth trajectory of an economy in which microloans are prevalent.  So I teamed up with my macro colleague Bruce McGough and we built a model of just such an economy and with it we show how microloans can actually lead to lower growth (lower future GDP) and lower welfare.  This is a paradoxical result because we model microloans as in injection of new money from outside the economy (rather than a redistribution) and the GDP and welfare results hold despite this fact.  The mechanism that causes this is the well-established empirical fact that average, not just individual, levels of education are beneficial to growth.  By suppressing educational investment, you can lower the overall productivity of the country and leave it worse off than before.

Now the trade off I illustrate with the Kiva picture might still be the right one to make - after all school is no help if you are starving - but it is important to understand the implications.  Our paper is, therefore, a cautionary tale not a condemnation.

Read all about it here.

Eco-nomics: Oregon #1 in US in Solar Manufacturing

From the Portland Business Journal:

Oregon led the nation in solar module manufacturing for the first 6 months of 2010, according to a new report out this week from the Solar Energy Industries Association.

It's the first time the group has ranked states by their solar manufacturing prowess. Oregon tops the list followed by Ohio, Massachusetts, Tennessee and Michigan.

Given that SolarWorld opened North America's largest solar manufacturing facility in Hillsboro two years ago, the No. 1 ranking for Oregon stands to reason, but the new ranking does provide a new bragging right — and it's catching people's attention.

"Most people are shocked," said Tom Kimbra, director of policy and research for SEIA. "It's really a great success story for Oregon."

The Inventory Bounce

Dear oh dear oh dear...

More evidence today that the little spurt of growth we had at the end of '09 and begining of '10 was a classic inventory bounce whereby at the onset of a recession, businesses find their inventory getting too big because of the reduced demand, so they cut back production more than just what they need to satisfy that new demand so that they can draw down their inventory.  Then, when inventories are depleted, the have to ramp up production somewhat but just to meet the new, lower, demand.  It looks like we are back to expansion, but it was really just an illusion.

Now we actually have contraction again in industrial production:

U.S. Output Down For First Time Since Recession
by THE ASSOCIATED PRESS

October 18, 2010

Industrial production fell in September for the first time since the recession ended, as weak consumer demand led factories to pull back.

The Federal Reserve said Monday that output at the nation's factories, mines and utilities dropped 0.2 percent last month.

Industrial production grew 4.8 percent in the July-September quarter, slower than the 7 percent gains in each of the first two quarter of this year.

Factory output, the largest element of industrial production, fell 0.2 percent last month. Manufacturing posted monthly gains for the first year after the recession ended in June 2009. But since then it has fallen twice in the past four months.

Manufacturing has helped drive economic growth as businesses restocked and replaced worn-out equipment. September's decline could slow that trend. Without consumer demand to take up the slack, industry can't maintain its strong growth.

Production of construction and consumer goods dropped last month as high unemployment made Americans reluctant to spend. Lower production of automotive products, appliances, and energy offset a small gain in business equipment production. Production of machinery and electrical equipment also fell.

American factories were operating at 74.7 percent of their capacity in September, down 0.1 percent from August. That was the first drop since June 2009, when the deepest recession since the Great Depression ended.

So what is the answer? Well, to me, I think the evidence that the stimulus was not big enough is convincing (and many economists thought this at the time the policy was being debated). I have always thought that it needed to be bigger but that there is a point at which you can't just spend so much money effectively. So I thought the original stimulus bill was appropriate.

But what I have always thought and still think today, is that we are completely missing the low-hanging fruit: block grants to the states. Immediate and real stimulus to prevent states from having to make so many damaging cuts, especially to education, the very foundation of our future prosperity.