The Blue Money Report - Current - Financial Commentary about Money, Investing, and Washington

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Today's Commentary: 11.15.02
The Economics of Family, Part Two

"During the last 3 calendar years, that is, January 1999 through December 2001, did (you/name) lose a job or leave one because: (your/his/her) plant or company closed or moved, (your/his/her) position or shift was abolished, there was insufficient work, or another similar reason?" If the answer to that question was "yes," then the respondent was asked to identify which reason, among the following, best described the reason for the job loss:

Plant or company closed down or moved
Plant or company operating but lost or left job because of:
Insufficient work
Position or shift abolished
Seasonal job completed
Self-operated business failed
Some other reason

Respondents, who were part of the January 2002 Current Population Survey (CPS), the monthly survey of about 60,000 households that provides the basic data on employment and unemployment for the nation, who provided one of the first three reasons--plant or company closed or moved, insufficient work, or position or shift abolished--were then asked questions about the lost job, including how many years it had been held; the year the job was lost; its earnings, industry, and occupation; and whether health insurance had been provided.

Nearly two-thirds of the long-tenured displaced were reemployed at the time of the survey.

Nearly half of the long-tenured displaced workers cited plant or company closings or moves as the reason for their displacement.

Forty-three percent of displaced workers who had worked for their employer for 3 or more years had received written advance notification that their jobs would be terminated.

One-third of long-tenured displaced workers lost jobs in manufacturing. This proportion continued to be much larger than the industry's share of long-tenured employees.

Just over half of long-tenured workers who were displaced from full- time wage and salary jobs and who were reemployed in such jobs had earnings that were lower than those on the lost job. Among this group of reemployed full-time workers, about 3 in 10 experienced earnings losses of 20 percent or more.

Sixty-four percent of the 4.0 million long-tenured displaced workers were reemployed when surveyed in January 2002.

~ Bureau of Labor Statistics

Other questions were asked to determine what transpired before and after the job loss, such as: Was the respondent notified of the upcoming dismissal? How long did he/she go without work? Did he/she receive unemployment benefits? And, if so, were the benefits used up? Did the person move to another location after the job loss to take or look for another job? Information also was collected about current health insurance coverage (other than Medicare and Medicaid) and current earnings for those employed in January 2002.

According to the Bureau of Labor Statistics, 4.0 million workers were displaced from jobs they had held for at least 3 years. 6.0 million persons were displaced from jobs they had held for less than 3 years (referred to as short-tenured). Combining the short- and long- tenured groups, the number of displaced workers totaled 9.9 million, up from 7.6 million in the prior survey.

The problem with that information provided by the BLS is does not reflect what is still happening and what is about to happen in the near future.

Alan Greenspan spoke before the Joint Economic Committee recently and used phrases like "soft patch" suggesting something short of a sinkhole but more than a muddy puddle on a dirt road. He continued with: "Households have become more cautious in their purchases, while business spending has yet to show any substantial vigor,'' suggesting what everyone fears, and you should take note of, we are not in a recovery.

CEOs are not about to start reinvigorating the economy if the customers aren't there. No amount of tax cuts for businesses, permanent or not, will cause any business leader to stick their highly compensated neck out and gamble on customers who have started to drift away from their all out spending spree. That said, CEOs also suggested that further layoffs are in the works as they adjust their bottom line using the one strategy left, employee cutbacks.

Unfortunately, layoffs are not nearly as lucrative as they were at the beginning of this downward cycle. A good many companies who had offered rather rich severance packages are finding less incentive to send employees packing with little more than the bare minimum. If that. The costs of hefty goodbyes has diminished recently and the truly sizable ones have come under shareholder scrutiny, many of which were negotiated during those thrilling days of yesteryear.

Still the average worker can't expect much more than two weeks for each year worked. This can mean quite a lot for an older employee but becomes a double edge sword. Finding placement in a similar job with comparable pay when you reach your fifties has become increasingly difficult. Workers who changed jobs frequently when it was fashionable to chase a better offer at the next company need only look for some accumulated sick and vacation pay.

Unemployment can often be the lifeline that keeps the worker afloat for a little longer. The maximum benefit received from this benefit varies from state to state, as does the length of time the benefits are available. Currently, all states have extended benefits from the original program designed in 1935, some now offering as much as 30 weeks (Massachusetts and Washington) with newly added extended benefits allowing the program to fund some unemployment insurance programs to as much as 46 weeks.

In too many instances, the employee is well aware in advance that the layoffs or job elimination is about to happen. Looking to a retirement plan as a safety is a patently desperate move that needs some rethinking. The penalties are far to great to allow the employe to get what they need from their plan.

Early withdrawal will cost you 10% in penalties. This would come at a time when the plan is under some serious pressure from poor performing markets. Taking your vested money from your former company when you leave is not only wise but prudent. But it needs to be reinvested until you find new employment. It should never be viewed as a fallback account.

If you have borrowed from your account while you were employed, shame on you. That money will cost you dearly when you do leave as the plan will demand you repay yourself. If that isn't possible, expect to be penalized an additional 10% on the balance of the loan.

The best insurance is planning. Too often we have looked at those suggestions of two to three months of salary in reserve as a waste of good spendable cash. We are not a nation of savers, and putting that kind of money away for a rainy day is done by far too few individuals. If you are still working and are unsure of the future of your job, now is the time to adjust how you spend you money. If the cash you receive in unemployment benefits is needed for more than basic necessities such as mortgages and food, you should attempt to change some bad habits now.

If you are thinking of refinancing your current mortgage, opt for the thirty year. Although the idea of a fifteen year payout is attractive, the higher monthly payment you will be locked into can be an incredible burden if you should become unemployed. The lower monthly mortgage payment of the 30 year loan will allow you a little more flexibility. If you would still like to have your house paid off in a shorter time, prepay each month. A simple rule of thumb suggests that if you have a $1200 mortgage payment, and extra $100 will reduce the life of the loan by eight years, and extra two hundred each month will bring the loan balance to zero in 18 years. And this extra money is not locked into the mortgage.

Another simple but often overlooked suggestion is to begin living on your base pay. When overtime or bonuses become part of your everyday expenditures, problems arise when these are eliminated or reduced. Take any extra money and put it away in a taxable account such as a Roth IRA. The principle in these accounts can be withdrawn without penalty and can be just the added boost a family's budget could use if your unemployment proves long term.

Today's Commentary: 11.13.02
The Economics of Family, part one

My wife and I received a phone call last night from friends who had just returned from England after spending ten days. The first thing we both thought of, almost instantly, was the ability to take off in October. October, for those that are unaware, happens to be a month that falls in a school year. The only way someone like us could arrange such a trip was to either vacation separately from your kids or to not have them at all. Dan and Sue, for reasons we have never asked about, are childless.

This means, at least in the handbook we have, that they are rich. Rich in the sense of money available. The experience of raising children is enriching without a doubt, but the costs of indulging in the act of procreation has become a hidden drain on your purse strings. Hidden until you find out what you may have been missing.

There is an economics behind bringing children into this world few of us consider when we decide to marry (or not) and follow through on the building of a family. For a number of years, the United States Department of Agriculture has followed these costs, detailing average expenditures for their categorized income groups. Lower income groups for the sake of their study average $24,400 a year, middle income wage earners averaged $52,100 and upper income groups averaged $98,600.

Children are a serious economic burden that goes unrealized by many folks as they struggle with making ends meet.

The Cost of Raising a Child

	Incomes Averaged
	Lower	Middle	Upper

Ages 0-2	$6,490	$9,030	$13,430
Housing	2,500	3,380	5,370
Food	910	1,090	1,440
Transportation	780	1,160	1,630
Clothing	370	430	570
Health Care	460	610	700
Child Care/Education	840	1,380	2,090
Miscellaneous	630	980	1,630

The middle income group will spend $170, 460 on a child based on the latest figures from 2001. Each year the USDA updates these numbers using the Consumer Price Index.

Now consider that these costs can seriously effect how and when you retire. Take any market movement out of the picture, and you will find that squirreling away any cash for your golden years can be compromised by kids. Not that I would ever trade anyone of ours in for a healthier, wealthier retirement, the time when most middle income folks start to save comes after the kids have come and mostly gone.

What this means is that your financial goals need some readjusting. As children leave the home, most folks tend to reallocate the money to rewards rather than to a financial plan that will aggressively get them at least part of the way to where they want to go. When I say rewards, I am suggesting that many empty nesters will tend to see the money they now have as a bonus for the vacation they have not taken, or the toys they were unable to purchase. This leaves many folks short of the money they need to live a long and monetarily comfortable life.

The biggest mistake comes with the underestimation. TIAA-CREF Institute conducted a survey of 2000 households and found that far too many pre-retirees see their spending habits decrease when they hit retirement. This group, which amounted to 57% of those surveyed will probably be in for a surprise when retirement does come their way. The same study found that in actuality, the percentage of household that found their post work years spending habits dropping was closer to 31%. Compare the households that made preretirement estimates of their spending as holding steady (36%) and the reality (47%).

This is based on preplanning that is both realistic and reasonable. The sad part is that most folks find themselves with not much more that $148,000 total equity, cash and home, as the value of their retirement.

If early retirement is your goal, stay away from kids. If retirement is your goal and you do have kids, the best method to achieve your goal is to be diligent and somewhat more aggressive when the cost of those kids start to diminish. Then the real spending begins... on your future.

Today's Commentary: 11.10.02
Signs

According to David Ansen of Newsweek, director M. Night Shyamalan understood a very old lesson in his creation of the movie "Signs" released this past summer. In the review, Mr. Ansen suggested that the young director had grasped the concept: "it's what you don't see that makes the movie scary". For me, it was the look on Mel Gibson's character's face, the ex Reverend Graham Hess, when he first saw the crop circles.

It was that same look, that same pit of the stomach emptiness (hopelessness?) feel as I sat in a darkened hotel room in Seattle on November 6th, post-election morning. The only hope for some sort of economic balance was about to be overthrown due to lack of direction (competition from the Democrats). I was watching the GOP equivalent of a crop circle with the same feeling of ominous conclusion the Rev. Hess experienced. Everything was about to be different, and we all knew what was about to happen.

Thanks in part to the simple fact that the Democrats could not make a stand without testing the "Patriotism Principle", something enacted through rhetoric suggesting that any criticism of the President and his policies was tantamount to treason, allowed the Republicans to upstage the election without much of a battle. When they debated the resolution on attacking Iraq in the Congress, publicly aired on radio and C-span, the Democrats could see the handwriting on the blank check as something other than their own. But they voted for the sake of the nation and what they believed was the patriotically correct thing to do. What they did instead, was vote for the Republican platform of Presidential infallibility.

This cost them dearly, and will cost you more than you realize. We will not delve into the war on Iraq, whether it is right or wrong, because that argument is not meant for this column. What we will do in the coming months is attempt to help you pick up the pieces of any ill-fated economic decisions that will fall-out as a result of war.

Had the Democrats been elected, they would have subjected the country to tax cuts that would have had more impact on the worker, the folks who toil for the company and their shareholders. The belief that unemployment benefits keep the country humming along in times of economic stress would have been extended. This is a short term fix that would have helped give the unemployed, a seemingly fluid number, some little extended hope. Unemployment rarely states the fact that workers who enter the workforce are finding no work either. 150,000 folks enter this arena each month, optimistic about finding jobs that do not exist. Based on those numbers, you can expect to add 1.8 million more unemployed to any totals floated out there. And these folks have no benefits with which to support themselves or the consumer oriented economy.

The Democrats would have kept the dogs of regulation hungry and mean while making sure that S.E.C. was funded with enough money to chase each and every corporate wrongdoing as if it were akin to stealing little Timmy's crutches.

The Republicans no longer need to address those "big government" issues. They can deregulate, giving corporations much more in the way of expansion and without anything but an underfunded team of watchdog accountants, companies will offer up only those who are dimwitted enough to get caught with their hand in the cookie jar.

Expect this to go arm and arm with further tax cuts to those that the Republicans feel pay far too much. Taxes paid do not translate into party contributions. Perhaps that has too crass a ring to it, but the wide ranging and far sweeping reforms destine to get the king's pen will be a surprise to all. Under a Democratic balance. many of these notions would not even be aired, popularity or not. With the help of his party, the proposals currently under construction in the Treasury may see more than the light of day. Michael Gratez, another alum from Daddy's administration has proposed a value-added tax system. For those unfamiliar with the concept that has been adopted for all European Union nations and is being considered by many developing countries is defined like this:

Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services.

It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.

It is a consumption tax because it is borne ultimately by the final consumer. It is not a charge on companies.

It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain. It is collected fractionally, via a system of deductions whereby taxable persons (i.e., VAT-registered businesses) can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved. From the European Union.

This would be in conjunction with a small income tax on upper income earners. That small tax will be the sticking point but the idea will have merit sold as a small step in the right direction. We will discuss the merits of such a system further as it becomes inevitable.

You can expect that there will be increased limits on retirement funds, which are still grossly underfunded by individuals even with the current rules. This will be coupled with a smaller tax on corporate dividends.

There is little doubt in anyone's mind that we will go to war. Because of this, the spending currently allotted to defense will increase, taking crony capitalism to new levels. The Republicans will take the only platform that they ran with and allow complete follow through in one of the few policies that is both domestic and foreign at the same time.

Welcome to the Republican Winter. Your investments will do well because the friends of big business will insist on it. Profits over the next year will increase, squeezed from payrolls and the increased prodcutivity of the workers left behind. These numbers will look especially attractive compared to this year. Further deregulation, energy expansion, and tax favoritism will find their place on the corporate balance sheet. It may not be enough to remove that bear sleeping in the rug by the front door, but it will at least take your mind off of the aggression in the Middle East.

Last week's resignation of Harvey Pitt and the slashing in the Fed Funds overnight rate to 1.25% had the desired orchestrative effects lasting just long enough to seal the deal for the GOP.

You will have little reason to save or invest in this new economic formation in Washington. You are on the edge of consumerism because you are swimming in debt. You are unsure about your current state of employment, or face dismal chances of gaining future employment. You are no longer much of a factor for two reasons: For your investments to do well, you will depend on Washington to muster some concern for your plight and there is little likelihood of that happening. And for clarification purposes, doing well simply suggests that you will no longer face the haunting feeling that making any decision might be better than making any move at all. The other factor suggests that this election forebodes more than simple crop circles. It suggests a whole new mandate.

A correction from last week's column suggested that if the Republicans gained control of the Congress with a same party President in the White House would be a political first, I overlooked the FDR control of 1934 and the Bill Clinton alignment of 1998. Perhaps because they were Democratic alignments.