By John W. Schoen
updated 4/26/2004 12:00:20 PM ET 2004-04-26T16:00:20

March 26, 2004

Thursday’s report that the U.S. economy grew at 4.1 percent in the last three months of 2003 has Sam in Chicago wondering: What, exactly, makes GDP grow? Meanwhile, Andrew in Florida has asked the Answer Desk for a stock market forecast. (OK -- just this once -- we’ll go out on a limb.)

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

What makes GDP grow?
An economic anomaly that has bugged me over the years is that concerning GDP. The U.S. is proud that we have been growing faster than Europe (for the most part) and upset that we no longer can grow as fast as some Asian countries. I wonder how much of the GDP (ours and theirs) is related to population growth or lack thereof?
          Sam A. -- Chicago, Ill.

If the U.S. economy is growing at 4.1 percent , and China’s is growing at an estimated 7 percent, you might think their economy is almost twice as “strong” as ours. But the comparison is somewhat less important when you look at the total numbers.

U.S. gross domestic product (the value of all the stuff we make and the services we provide) came to about $10.5 trillion last year. So if we grow by 4 percent, we’re churning out $420 billion more stuff and services this year than we did last year. If China, which produced just shy of $6 trillion in 2002, grows 7 percent this year, you get roughly the same increase in output: $420 billion.

But it takes China (pop: 1.28 billion) roughly 4 times as many people to produce that extra $420 billion than the U.S. (pop: 290 million) needs to do so. That’s another way of saying American workers are more productive. (The bad news is that since we can make the roughly same amount of stuff with fewer workers, the number of U.S. manufacturing jobs is shrinking.)

Worker productivity in the U.S. has also been growing more quickly than in Europe or Japan in the past decade or so. (You can check out the data on the EU’s Web site.) That’s been a big factor in the relatively strong performance of the U.S. economy during that period compared to those countries. And the employment rate — the portion of the population actually going to work every day — is lower in Europe than in the U.S. Same thing for China. As for population growth, it turns out that the United States it growing more quickly (an estimated 0.92 percent in 2003) than China (0.6 percent).

So it’s more important to look at how productive people are in a given country — and how many are working — than at how many there are, or how fast the population is growing. But before you pat yourself on the back for being so productive, remember that U.S. gains in productivity are due in large part to the capital available to U.S. businesses to invest in technology. If China continues to draw investment at the current rate, expect the productivity gap between our two countries to narrow.

China’s growth is also creating more competition for two precious commodities that are needed to fuel any economy: Cash and oil. To maintain its productivity growth, the U.S. will have to continue to consume huge amounts of capital (in part because our government can’t seem to manage its finances like the rest of us) along with oceans of oil to keep our economy humming. As China continues to industrialize, it’s appetite for cash and oil will continue to grow. And if the price of capital (interest rates) and oil go up too fast, everybody’s economic well-being could suffer.

In the meantime, the number you care most about is per capita income (roughly the average person’s buying power.) At the moment, that number stands at about $37,600 in the U.S. – roughly 8 times that of China’s $4,700. In Japan, the number is about $28,700; in Germany, France and the U.K. it’s about $26,000. (We got all of these numbers form the CIA’s World Factbook.) 

Major Market Indices

By the way, you might be surprised to learn that the U.S. does not have the highest per capita GDP. That honor goes to tiny Luxembourg (pop: 454,157). They happen to have lots of banks and not a lot of people, so there seems to be plenty of money to go around.

All-purpose market forecast
Will the Dow Jones Industrial average ever go up to 11,750 again; will the Nasdaq ever close up over 5,000 again, and will the S&P 500 ever close up over 1,500?
          Andrew F. --  Tampa Bay, FL

Yes. Just don’t ask us when.

March 19, 2004

With oil and gasoline prices hitting record highs this week, a number of readers, including Michael in Illinois, want to know what's driving them higher. And Hank in Oklahoma City doesn't think he should have to have an MBA to follow what's he reads in the news. (Neither do we.)

Pain at the pump
Given that gas pump price has changed by as much as 20 cents in a single afternoon, what factors determine the gas-pump price?
         Michael G. -- Granite City, Ill. 

That’s a pretty big jump. You have to wonder if the station was missing a few of those plastic numbers they use to post prices and just bumped to the next highest number they had.

Gasoline prices have been rising coast to coast — up a quarter a gallon, on average, since the beginning of the year. So, unless you ride your bike to work, you’ve got to be wondering what’s behind the surge.

Unfortunately, there’s a pretty long list of reasons. For starters, oil prices are up sharply — this week, they hit $38 a barrel, the highest since 1990 at the start of the Gulf War. Why? Two reasons: Supplies are tight, and OPEC has said it’s going to cut production further in April. Also, demand is strong because the world economy is back on track after a recent slump. Add to that a jump in demand from China — now the second largest oil importer behind the U.S. (When you hear politicians arguing about American manufacturing jobs moving to China, remember: All those new Chinese factories consume lots of energy.)

But it gets worse. Oil only makes up about half the cost of gasoline. Usually at this time of year, refiners are switching from making heating oil to gasoline, so they can stock up for the summer driving season. But, as they say in Boston, it was “wicked” cold this winter. So more heating oil means less gasoline.

Finally, gasoline is a very local product: Even though you can fill up in New York, Chicago and Los Angeles and your car runs fine, the gasoline sold in those cities are not the same. There are some 20 different blends using additives that are required to make gasoline burn cleanly and meet air-quality standards. Sometimes, those additives are in short supply. So there could be plenty of gasoline in Iowa, but tight supplies of the right blend for California will send prices soaring there.

No matter how many reasons we can come up with, many consumers believe the explanation is much simpler: Price gouging. While many states have laws on the books to prevent it, it’s not always easy to define. (Not so with price fixing, where dealers get together to keep prices high. That’s an easy call for prosecutors.)

But unless you’re on a long lonely stretch of road and running on empty, it pays to shop around. Even with gas prices high, some dealers are able to undercut others.

And remember, the only alternative to letting prices rise when demand is high and supplies are tight would be to impose price limits. The result would be a different kind of pain at the pump — your local gas station would likely run out of gas altogether. (Think about the run on flashlight batteries before a hurricane.)  All things considered, you’re probably better off paying a little more if that means you can always get gas. You just may have to cut back on those off-road joy rides in your SUV.

No more MBAs
Is it your column’s policy to answer all economics questions? The reason I ask is I have all manner of economic questions and don't believe I should be forced into an MBA program to understand what I read in the news.  What do you think?
          Hank P. -- Oklahoma City, Okla.

We couldn’t agree more. That's why we write this column. We answer as many questions as we can — related to business, financial markets and the economy. And the further off the beaten path of financial reporting the better.

The only questions we don't tackle are those related to specific investment advice — like which stocks to buy or sell. And for those of you who periodically write to ask whether interest rates are headed higher or lower: Sorry, we can’t help. Our official Alan Greenspan crystal ball breaks every time we ask it that question.

March 12, 2004

With the Social Security system in danger of being swamped by aging Baby Boomers, Al in New Jersey thinks he has a solution: scale back benefits for "retirees" who keep working after age 65. (Turns out Congress has already thought of that one.)  Down the road in South Jersey, Brian is looking for some tips on helping his upwardly mobile daughter finance the purchase of a mobile home.

Solving Insolvency
My question deals with the Social Security issue. I seem to remember that several years ago a major change was made by Congress regarding the benefit amount that a recipient could receive if they continued to work past the age of 65. Prior to that change there was an income ceiling in place that specified if a recipient's income was above a certain point, the recipient would receive  prorated  benefits, not their full amount. The greater the recipient's income, the lower the benefit amount. Now under the new rules, I understand a worker can receive their full benefit with no limitations on income.

With all the controversy surrounding Social Security insolvency, this seems like an incredibly foolish decision. If this law was reversed, it could help bolster the reserves of the fund, especially with all the Baby Boomers approaching retirement age.
          Al F. – Woodbridge, N.J.

When Social Security was first introduced, it was supposed to work like an annuity: you pay money (premiums) during the years you're working. Then you retire and begin collecting monthly payments, based on those contributions, until you die. Unlike welfare, which is paid only on the basis of need (using a "means test"), Social Security was designed as an insurance policy. Insurance pays claims to everyone -- no matter how wealthy they are.

But there has always been an "earnings test" -- which means, simply put, you have to be retired to collect. If you're still working -- even after age 65 -- you're not, strictly speaking, "retired." So, for many years, you had to give back $1 of Social Security benefits for every $2 you earned. But in 2000, Congress repealed that earnings test (except for those younger than 65) to provide full Social Security benefits to everyone regardless of need.

There is, however, a catch. Beginning in 1984, Social Security benefits became taxable. Which means Congress gives full benefits to all -- but then takes back some of the money (in taxes) from wealthier recipients.

Or, as Michigan economist John Attarian puts it: "In effect, Congress had kicked means testing out the front door by repeatedly liberalizing the retirement earnings test -- only to sneak it back in through the kitchen window with benefit taxation. Somehow, it's hard to believe that they didn't know what they were doing."

For more on the history of Congressional tinkering with Social Security, check out Attarian's article "No Social Security Means Test, Eh? Guess What?".  

Upward Mobility
My daughter is looking to purchase a mobile home from a co-worker for $25,000.  No realtor will be involved.  What's the best route my daughter should take in acquiring the funds?  Should she seek out a mortgage company or a bank?  Do mortgage companies have a minimum amount one can borrow?  At least with the mortgage she'd be able to claim the interest on her taxes.  
          Brian M. -- Marlton, N.J.

When financing a mobile home, a lot depends on just how mobile it really is. Most mobile homes sold today are a far cry from the structures that populated trailer parks decades ago. "Manufactured home" (the industry's preferred term) refers to anything from a modest "single-wide" parked on a leased lot to a multi-section mansion that's pre-fabricated, shipped in sections, assembled on site and bolted to a permanent foundation for all time.

But the distinction is more than cosmetic. If the home is truly "mobile," it will be considered personal property -- like a car or a boat -- and not real estate. That means different local taxes may apply. It also means a lender will offer to finance this type of home with a personal loan, not a mortgage. That usually means you'll pay a higher rate, and the interest is not tax deductible.

So the first thing you need to determine is whether the home you're considering buying is legally classified as real estate or personal property. States and towns use various criteria to determine this: usually, a "mobile home" is parked on a lot leased by a third party and sits on a frame that allows the structure to be moved relatively easily -- even if it's sitting on a foundation and the wheels are no longer attached. The current owner should be able to tell you whether the home is classified as personal property or real estate. If not, check with the town tax assessor.

While you may be able to close this transaction without a real estate agent, you should certainly hire a lawyer who is familiar with these distinctions. (If you don't, it's a good bet the bank will hire a lawyer for you -- and send you the bill.) If the home is currently classified as "mobile" -- and you can figure out how to change that to a permanent home -- you may be able to reduce the cost of financing and deduct the interest payments.

Also, keep in mind that in some areas, mobile homes don't appreciate as quickly as houses -- and in some cases will lose value. Check for other sales of comparable homes in the same area. (These are on file with your town or county clerk depending on the state you live in.)

March 5, 2004

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.

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.


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.)

Any question is fair game, with one exception: no questions about specific investment recommendations, please -- we'll leave the stock picking to the "pros."

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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