By John W. Schoen
updated 3/5/2004 10:28:44 PM ET 2004-03-06T03:28:44

As the government reports on how many new jobs were created last month, Bob in Pennsylvania wants to know if we shouldn’t be paying more attention to just how much those new jobs are paying. And while the rest of us are focused on the current unemployment rate, Mrs. Ungricht’s seventh grade class in Lehi, Utah wants to know why unemployment spiked in 1937. (It’s okay, kids, we promise it won’t be on the next test.)

Pay gains?
I frequently read the government jobs report looking how many jobs were gained or lost during a period of time. This, supposedly, is a good sign that our economy is growing or shrinking depending on the net jobs lost or gained.
Does this or some other report reflect the types and average salaries of jobs lost vs. jobs gained? Is losing a $75,000 job and being hired for a $30,000 job simply indicated as one job lost and one job gained in the jobs reports, effectively offsetting each other?
If the average salary of a lost job is more than that of a replacement job, wouldn't that be a negative sign for our economy?
It seems that this would be a more accurate reflection of the state of our economic health.
          Bob M. -- York, Pa.

There are several government surveys that measure the health of our paychecks, and for those of us who are still employed, those numbers are at least as interesting as the monthly jobs data.

While it may seem like people are losing high-paying jobs and finding lower-paid work, the reports show that overall, wages have been rising slowly. According to the Bureau of Labor Statistics, average weekly earnings rose by 2.9 percent in 2003. 

What those numbers don’t show, however, is how much employers shelled out for benefits like health coverage and pension. These “total compensation costs” rose 3.8 percent in 2003.

The numbers also don’t show how much work you’re actually doing for that weekly wage. One of the reasons the economy can keep growing without creating more jobs is that worker productivity keeps going up. That’s just another way of saying we’re all working harder, or smarter, or both. According to the BLS, productivity was up 4.5 percent for 2003.

So even if your boss is paying you 3.8 percent more in wages and benefits, you’re producing 4.5 percent more work. Which means that, on average, we’re all working harder for our money.

History lesson
My seventh grade students and I have noticed that in 1937-1938, the U.S. jobless rate spiked from 14.3% to 19.0%. 

We'd like to know what history has said about the reason for that significant shift.
          Mrs. Margo Ungricht, Lehi Junior High School -- Lehi, Utah

If you go back a few more years, you’ll find that the unemployment rate spiked even higher – to nearly 25 percent – in late 1932. There were a number of causes of the economic recession in the 1930s known as The Great Depression, and explaining those causes has provided jobs for many economists in the seven decades since then.

Those economists have a number of different theories, but most agree that much of the blame rests with a variety of mistakes made by the U.S. government. Among them was a Federal Reserve Bank policy of keeping money “tight” — which made it harder for businesses to expand and hire more workers. The government also encouraged businesses to keep wages high — which also made it harder for businesses to hire more workers. And the government raised taxes — by 1936 the top rate was 79 percent — which reduced the amount of money people had to spend, further slowing business activity.

Major Market Indices

As the 1930s progressed, the government began to spend heavily to try to get the economy going again. By 1936, things had begun to improve, so then-President Franklin Roosevelt decided it was time to cut spending and balance the federal budget. That turned out to be another big mistake: The economy slid back into recession, bringing about the spike in unemployment your class is curious about.

Here’s a timeline of other key events during that period.


February 27, 2004

The ballooning federal budget deficit seems to be weighing on Answer Desk readers’ minds this week. Jack in Illinois wants to know why the government can’t come up with an accounting system that makes the federal budget look more like his family budget – plain and simple. And April in Saudi Arabia wonders: If government accounting amounts to voodoo economics, why do we bother with budgets at all?

As always, if you'd like to write to us, please include your first name and hometown.


OK, here's a government-budget-type fiscal question.  As currently structured, the federal and state governments, and many local governments, operate on an "accrual" basis (to borrow a term used by accountants). Same for most larger businesses.  One benefit is that this allows anticipated income and expenses to be added to current balance sheets.  However, it also introduces the opportunity for lots of financial shenanigans.  Operating on a "cash" basis (another accountants term) requires that income and expenses only be counted when they're actually realized, rather like a household budget.  So why isn't the Federal (and state) budget done on a cash basis?  If I spend more than I took in during my last pay period, I know that I'm living beyond my means, how badly I'm doing so, and what I need to do to correct it.  Why can't the government budget be based on the prior-years' fiscal receipts actually collected?  Or am I being far too logical about this? 

Jack H.  -- Belleville IL

The idea behind accrual accounting is that if you can see a big expenses (or windfall) coming ahead of time, you can better prepare for it when it happens. Spreading the cost of, say, owning a car over the life of that car gives you truer picture of what it costs you every year. Using cash accounting, the “auto” line in your household budget would spike every time you bought a car and then drop to nothing in between. That’s not very realistic.

Alas, it turns out that the federal government doesn’t even do this: The federal budget is, in fact, calculated using cash accounting. If accrual accounting were used, the deficit would be even worse. According to Harvard Law School professor Howell E. Jackson, the federal budget deficit as of last October 1 (the start of the fiscal year) would have been $930 billion – not $400 billion. On big reason is that cash accounting ignores the huge increases in health care and retirement spending the government faces in the decades ahead: Social Security, for example, is taking in lots of cash from Baby Boomers, who are supporting relatively small cash payments to retirees. In 15 years, the cash (benefits) will be flowing out much more heavily, with cash (taxes) coming from a smaller ratio of workers paying into the system. Accrual accounting might catch this; cash accounting doesn’t.

But even if the government were to shift to accrual accounting, there are other, even better opportunities for financial shenanigans that make it difficult to track — let alone manage — the government’s finances.

Take the spending process, for example. Suppose Congress decides to spend more money on, say, education, and I sit on an appropriations committee. It’s a simple matter to add an amendment calling for, say, subsidies for ostrich farms in my district. (If you vote against the bill, I’ll hold a press conference accusing you of being “against education.”) Imagine trying to balance your household budget if you told your wife she couldn’t pay the electric bill without also buying you a new set of golf clubs. She says: Fine, as long as you throw in a trip to Hawaii, we’ve got a deal.

But it gets worse: There’s no one person or group in charge of spending. The President sends a budget up to Capitol Hill, but it’s really nothing more than a political statement of what the White House thinks should happen. The House and Senate can do whatever they want. And the House Appropriations Committee alone has 13 separate subcommittees, each of which write a separate bill that gets rolled up into the proposed federal budget. Now getting your gas bill paid also means buying each of your 13 kids a new iPod.

Then there are the government “trust funds” — including those twin peaks of the federal deficit, Social Security and Medicare.  The impact of these “off budget” items dwarfs the garden-variety pork that has become a routine part of the budget process. But technically, they’re not part of the budget. (At Enron, they called these “off-balance sheet items,” but it’s pretty much the same idea.)  If your family budget assumes it can pay for everyone’s favorite goodies with money sitting in an IRA or the kids’ college fund, you can still balance your books.

But Congress has figured out an easier solution: Just raise the debt ceiling. So now everyone’s happy: You’ve paid the gas bill, bought yourself new golf clubs, and taken a relaxing Hawaiian vacation with your 13 kids all happily zoned out on their iPods. When the credit card bill comes, just tell the bank to raise your debt limit so you can keep spending. As long as the bank buys this idea (and as long as people keep buying U.S. Treasury debt), it’s pretty hard to demonstrate to your family — or American voters — that there’s a problem.

That’s not to say nobody’s trying. And your family budget may be a good model. A few weeks ago, a group of House Republicans introduced the Family Budget Protection Act of 2003, which they say would force the federal government to handle our money the same way an average family has to.

We wish them well.

Link to Prof. Jackson's study:

Link to Family Budget Protection Act:

Why bother?

Ignoring for a moment the question of why anyone would strain themselves to take anything Dubya says seriously (few Americans here in the Middle East were fooled by his WMD talk and chest pounding), why do Presidents submit budgets anyway?  Aren't those numbers all hypothetical numbers based on speculative scenarios that are almost certain not to happen, so that the government can later say, "Well, don't blame me that Congress didn't enact my legislation." etc., etc?  If it's all just "play money" anyway, why bother?  Is it just a photo-op for the government and something to fill journalist's columns?

April -- Dhahran, Saudi Arabia

When you look at the way the government accounts for and spends our money (see above), you might be tempted to dismiss the federal budget as an exercise in futility. But you have to start somewhere. The President’s budget is just that: A start.

Things might be different if Presidents were granted the “line-item veto” that would allow them to approve pieces of what Congress approves and strike down others. But, for now, it’s package deal. Congress gets to tell the White House: Take it or leave it, pork and all.

So the White House proposal is more than a budget; It’s a political game plan. Given the enormous partisan cross-currents on Capitol Hill (even within the Republican Party), the White House budget represents the President’s best effort at keeping all of those warring constituencies in line — and still getting a budget approved before the government runs out of money each year.

It’s true that Congress inevitably has its own ideas, and the budget it sends back down the Hill often bears little resemblance to what the White House sent up it. (Few in Congress even know everything that’s in the budget: There’s rarely enough time to read the final version before the vote takes place.) And yes, by offering his plan first, the President can point back to it later when voters complain about the final outcome.

But the budget proposed by this President is no more or less grounded in reality than any other White House in modern history. The rules of federal budget accounting ought to make the truth easier to find than weapons of mass destruction. But as long as the White House budget is a primarily political document, ordinary accounting rules won’t always apply.

And as for the news media’s interest: We can think of a lot more interesting photos than a shot of the White House budget – and lots of other, more interesting things to write about.

February 20, 2004

The Martha Stewart trial has Rajat in Dallas wondering if he has to hold on to his company's stock -- even if he knows it's in trouble. Meanwhile Aerin in Singapore is new to investing and wants to know how to get started.

As always, if you'd like to write to us, please include your first name and hometown.

Why can't I sell?
Suppose a person works for a company and owns some of its shares. Now, during the course of his normal work he comes across information that the company is not going to do well for whatever reason. Does he hang on to his shares and eat the inevitable loss or does he sell them and get caught in a scandal about how he misused inside information?
          Rajat S., from Dallas, Tex.

Unfortunately, that water cooler conversation about the big contract that just fell through -– at least until it's all over the Wall Street Journal -- is exactly what government prosecutors have in mind when they talk about “inside” information. When it comes to your own company’s stock, you’re the ultimate insider.

Most trades by company insiders are perfectly legal. If you're an officer or director of a company or you own more than 10 percent of the shares, you have to file every transaction involving your company’s stock with the SEC. Some investors like to look at these legal insider trades for clues about how a company is doing.

But if the CEO has learned what’s known as “material, non-public” information, and goes ahead with a trade anyway, that’s illegal. “Material” just means the information is big enough to move the stock price. And “non-public” means it hasn’t been widely reported. Usually, information isn’t considered public until two days after it’s been disclosed in the financial media.

The reason insider trading is illegal is that it’s really a form of fraud. There’s not much difference between dumping a stock that you know to be in trouble and, say, selling a used car that you know is a lemon without telling the buyer. No transaction is really fair unless both the buyer and seller have the same information.

The larger reason is that, if stock investors think the game is rigged, they won’t play. If that happens, companies have a harder time raising capital. Some people will always suspect that the “smart money” on Wall Street always has inside information. And there’s no doubt that some people may get away with insider trading -– just like some people may get away with cheating on their taxes. But the advances in the past decade in computer monitoring and analysis of stock trading have made it a lot harder to get away with.

Getting started
I am totally new to the world of investing and saving and all, and I am interested to know more about what you see for Singapore in 2004.
          Aerin -- Singapore

We’re afraid we're not well enough read about the Singapore market to offer any useful advice. (And, in general, we avoid giving specific investment recommendations.)

There are, however, some general pieces of advice about investing and saving that have always traveled well. First and foremost, get started today -- even if you're not sure where to put your money. Start with the safest investments -- bank CDs, government bonds -- and then learn all you can about other investments that look interesting.

Pay yourself first: set aside what you can afford each month, and have it deducted from your paycheck before you pay your bills.

Don't invest until you feel confident you fully understand the risks -- and opportunities.

Avoid investing with someone who is paid to "sell" certain types of investments. Always ask first how a “financial advisor” gets paid.

Never buy a stock from a broker who calls you first.

Remember that higher return almost always means higher risk. The question is: how much risk can you afford? When you're younger, you can generally take more risk. But everyone is different: you may never feel comfortable with stocks, for example, and there's nothing "wrong" with that.

To find out more about how you feel about risk, try the MSN Risk Tolerance test :

February 13, 2004

This week's monster media merger bid — Comcast's $54 billion offer for Disney — has Tommy in Pennsylvania wondering: Just where does all that money go, exactly?  Meanwhile, Natalee in the sunny U.S. Virgin Islands wants to know who owns Fannie Mae. And Geraldine in New Mexico is locked into a mortgage rate and is looking for away out. (Wish we had better news.)

Is 'deal money' real money?
Where does the money go? When one company buys another for a price of, for example, $50 billion, be it cash, or stock or a combination thereof, how are the stock holders of the acquired company enriched? … An example, using the proposed Comcast $54 billion acquisition of Disney, which will be an all Comcast stock deal…it seems as though Comcast will just print more paper to cover the stock transaction. How would this work if Comcast simply wrote a check for $56 billion?  Would each Disney shareholder then received a cash amount valued at 0.78 of each owned Disney share?
Tommy T. --  Langhorne, Penn. 

When a merger is “valued” at, say $50 billion, it’s really just a measure of how big the deal is – how much money (whether paper or cash) will pass through a variety of hands if it goes through. Just as your real estate agent might list your house for an amount that doesn’t end up being the selling price, a corporate bid is just that – an offer. It’s up to the shareholders of the target company to decide whether or not to accept. As with any purchase, the opening bid is often raised before the deal goes through.

And just as most home buyers don’t pay entirely in cash, there are a variety of ways to finance a corporate acquisition: You can use cash from the company’s savings account, borrow money by putting up assets (either through bank loans or by selling bonds), or issue shares in what will be a newer, bigger company. Sometimes, the offer is a complex mix of all three; it’s up to the shareholders of the acquired company to decide whether or not to accept. If not enough shareholders go along, there's no deal.

In this case, Comcast is offering to swap 0.78 of a share of it stock for each Disney share. That exchange rate is Comcast's way of saying what it thinks Disney is worth. The transaction itself is fairly simple: It’s a little like me giving you $50 billion in dollars for $50 billion worth of yen or euros. The relative value of our cash will change the moment we make the trade (as the currency markets reset the value of dollars, euros and yen.) But at the moment the trade went through, $50 billion “changed hands.”

That’s why you’ll often see different numbers cited in reports about these “stock swap” mergers: Once announced, the value of the offer rises and falls as the stock used as “currency” moves up and down. If investors don’t like the deal, and send the bidder’s stock down too far, that bidder will likely have to raise its offer by putting up more stock or adding cash to sweeten the deal.

It’s true that Comcast would have to “print more paper” if Disney shareholders accept its offer, but each of those new shares would represent ownership in a company that, in theory, is worth a lot more money. But if Comcast offers to pay too much of its stock  — or the value of the company it’s paying for goes down — then Comcast shareholders would lose.

And even if everyone goes along with the idea, there’s no guarantee a merger will work out in the long run. Just ask anyone who owned Time Warner or AOL stock before those companies two merged.

Yes, but who owns Fannie Mae?
Who are the top 20 share holders of Fannie Mae?
Natalee – St. Croix, U.S.V.I.

According to our friends at MSN Money, the Fidelity mutual fund group has the largest holding with about 8 percent – or about $5.5 billion as of Sept. 30, 2003, the latest figures available. The rest of the list includes others large institutional holders, who hold 86 percent of the stock; the top ten holders collectively own more than a third.

Here’s the list.

No way out
If I locked in on a mortgage rate and the rates thereafter have dropped, what can I do to lock in on the lower mortgage rate?
Geraldine  -- Santa Fe, NM

Nothing. That’s why they call it “locked in,” which is what you are — to the higher rate.

Depending on what you agreed to in your mortgage application, though, you may be able to simply walk away from that first offer and re-apply at the current, lower rate. You’ll have to decide whether the money you save on the lower rate will make up for the money you’ve put down on your first application — which you won’t get back. And make sure you can lock in that new, lower rate, or you may wind up paying for two mortgage applications and saving nothing.

February 6, 2004

The government's latest jobs report has left Bruce in Los Angeles -- and a number of other readers -- confused. If people who are out of work get discouraged and stop looking for a job, why aren't they still included in the unemployment rate? Aren't they still "unemployed"? Meanwhile, Oracle's move to raise it hostile bid for PeopleSoft this week has Mike in Georgia wondering: Just how does a hostile takeover work? If a company doesn’t want to sell itself, can’t it just say no?

As always, if you'd like to write to us, please include your first name and hometown.

Who’s ready to work?
I think I understand how the unemployment rate is calculated -- it looks at all people either looking for work or currently working and determines the percentage of those who are not employed. Thus, when the employment environment gets better, the unemployment rate can go up, because more people get out there and try to land a job.

But when the employment environment either seems the same or is worse, the unemployment rate can go down because people stop looking for work (become "discouraged") and are therefore not counted by the surveyors. How is this measure possibly useful if it seems to indicate things are getting better when they're actually getting worse, and vice-versa? Why doesn't the rate just measure all able bodied and minded adults, adjust for the idle rich, college students, and prisoner/welfare population, and just calculate a percentage of those not working from that?

And why were there times when our unemployment rate was in the nine and ten percent range? Were Americans then simply less likely to become "discouraged", and were therefore continually counted? Or is the current labor market, Democratic candidates' claims notwithstanding, simply not that bad?
            Bruce K. -- Los Angeles, CA

The “discouraged worker effect” you describe is well known to economists, and tends to track the strength of the overall economy. When times are bad, more people give up; when the economy gets humming, more people start checking the want ads again and pounding the pavement. Such cyclical changes in what’s called the “labor force participation rate” are not unusual, according to Wayne Ayers, chief economist at FleetBoston Financial.

“But it is clearly more pronounced this time around,” he writes in a recent online newsletter on the subject. “Unlike the pattern of the early 1990s, the participation rate has continued to fall fully two years after the recession’s official end, a reflection of falling growth in wages, rising duration of joblessness and increased outsourcing of jobs abroad.”

As you correctly point out, the question of just who is in the “work force” often can be pretty arbitrary. When a career Mom decides to take an extended leave to stay home with her young children, is she “unemployed” or not? (She's certainly got her hands full.) What about the recent college graduate backpacking through Asia for the summer before accepting a job at the local bank -– is she in or out of the “work force”? How about the 50-something corporate middle manager, living on a big fat check from a layoff buyout, but unlikely to find another similar job?  If he can make ends meet buying and selling stuff on eBay, is he “retired” – even though he’d jump at another corporate job if one was offered?

You also make a convincing argument that this number – which was more clearly defined when manufacturing played a bigger role in the U.S. economy – doesn’t do a very good job tracking an increasingly diverse workforce, many of whom are self-employed in new ways that the old formulas don’t measure very well.

That’s why most economists and Wall Street analysts ignore the unemployment rate and look at the second, somewhat more reliable monthly “payroll” survey to get some idea of whether the economy is creating or losing jobs.

Based on that survey, the Bush administration has a lousy track record. Though major tax cuts have stoked the fire and re-ignited the economy, more jobs were lost on his watch than under any president since Herbert Hoover. What’s most worrisome is that while most economic indicators are flashing green – showing a solid, growing economy – the payroll number has been stuck in neutral. So keep an eye on that monthly payroll number; it will have a much bigger impact on the presidential race than the unemployment rate.

Just say no!
Please explain to me why hostile takeover is a legal business transaction. Lately, I have seen that Oracle is trying to acquire another business in hostile way. I thought if I had a business and I did not want sell it, that was the end of it. Apparently is not like that in the business world.
          Mike -- Augusta, GA.

A “hostile” takeover is hostile only in the sense that the CEO and the board of directors don’t approve the deal. But they don’t own the company; the shareholders do. There’s no way a hostile acquirer can force shareholders to sell. But, in any takeover, there’s almost always a premium paid above the stock’s current market value. Shareholders who have little personal connection to a company are happy to take the money and run.

That’s why many companies have instituted takeover defenses – a kind of corporate Homeland Security. In some cases, for example, a family-controlled company may issue two classes of stock. One class owned by those family members gets, say, 10 votes per share on corporate matters like approving a takeover. “Outside” shareholder get only one vote. So even though the family owns just a minority of the stock, it controls the company’s fate.

Another popular defense during the mergers and acquisitions frenzies of the 80s and 90s was the “poison pill.” The terms varied somewhat, but the general idea is the same. Corporate bylaws are changed to include a provision that, if the company changes hands without board approval, the new owner has to pay each shareholder a huge stock bonus – so huge that the transaction doesn’t make economic sense for any potential buyer.

These provisions aren’t always welcomed by shareholders, however, since they can have the effect of protecting management – no matter how poorly the company is doing. Sometimes it’s better -- for shareholders, employees and customers -- for a company in decline to be taken over by new management rather than dying a slow death.

And management often decides that any new owner would be better than the hostile acquirer. In that case, they’ll try to arrange a takeover by a third company -- a so-called “white knight” -– who is more inclined to invest in its new acquisition than to slash and burn its way to profitability.


Ever wonder what a P/E ratio is and why it's so important? Are you confused about the official definition of a recession? And just what the heck is a derivative? We're here to give you the answers.'s weekly feature "The Answer Desk" helps you make sense of business, the economy and investing. So send along your questions to and we'll try to get you the answer. (Please include your home town with your question; we'll only include your first name if we use your question.)

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Each week, we'll take some of the most-frequently-asked questions and answer them here. We may not be able to answer every question, but over the weeks and months we will provide a comprehensive resource for you, explaining some more puzzling aspects of business and finance.

You can mail in questions at any time and then check this column every Friday for the answers.

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