ABCDE BUSINESS sunday, august 1, 2010 CAR PAGES
Outmatched in its class Among the many excellent sedans on the market, the 2010 Chrysler Sebring is just ordinary.
Plus, ads for thousands of vehicles.
THE BIG MONEY
Why job retraining isn’t working Despite joblessness, key fields want for workers. G3
IN OUTLOOK 5 myths about the Bush tax cuts What extending them would — or wouldn’t — do. B3
G AX FN FS LF PW DC BD PG AA FD HO MN MS SM
MARKETS S&P’s big rally stalls
Economic reports and earnings forecasts from technology firms disappoint investors. G6 YTD: Dow
NASDAQ S&P 500 +0.36% -0.64% -1.21%
Gauging the power of small business POLITICAL MYTH
VS. THE ECONOMICS
Would a $30 billion loan program help create jobs?
by Edmund L. Andrews The Fiscal Times
He may be locked in combat with Wall BILL CRAMER/WONDERFUL MACHINE Cindy Lohman of Great Mills was shocked to learn her son’s life insurance funds were not in an FDIC-protected bank account. He died in 2008 in Afghanistan.
A SOLDIER DIES. AN INSURER PROFITS. Families in the dark as companies hold billions in payouts, and earn interest, in unprotected accounts
by David Evans Bloomberg News
T 1 A family
purchases a life insurance policy with a $100,000 death benefit.
he package arrived at Cindy Lohman’s home in Great Mills, just two weeks after she learned that her son, Ryan P. Baumann, a 24-year- old Army sergeant, had been
killed by a bomb in Afghanistan. It was a thick, 9-by-12-inch envelope from Pru- dential Financial, which handles life in- surance for the Department of Veterans Affairs. Inside was a letter from Prudential
about Ryan’s $400,000 policy. And there was something else that looked like a checkbook. The letter told Lohman that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit. “You can hold the money in the ac- count for safekeeping for as long as you like,” the letter said. In tiny print, in a disclaimer that Loh-
man says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Fed- eral Deposit Insurance Corp. Lohman, 52, left the money un-
touched for six months after her son’s August 2008 death. “It’s like you’re paying me off because
my child was killed,” she said. “It was a consolation prize that I didn’t want.” As time went on, she said, she tried to use one of the “checks” to buy a bed, and the salesman rejected it. That happened again this year, she said, when she went to a Target store to buy a camera on Armed Forces Day, May 15. Lohman, a public health nurse who helps special-needs children, said she had always believed that her son’s life in- surance funds were in a bank insured by the FDIC. That money — like $28 billion
in 1 million death-benefit accounts man- aged by insurers — wasn’t actually sit- ting in a bank. It was being held in Prudential’s gen-
eral corporate account, earning invest- ment income for the insurer. Prudential paid survivors such as Lohman 1 percent interest in 2008 on their Alliance Ac- counts, while it earned a 4.8 percent re- turn on its corporate funds, according to regulatory filings. “I’m shocked,” Lohman said, breaking into tears as she learned how the Alli- ance Account works. “It’s a betrayal. It
insurers continued on G4
How insurers profit from death benefits Te life insurance industry is holding and earning investment gains on at least $28 billion that belongs to survivors. It does so by using what it calls retained-asset accounts, allowing insurers to send out “checkbooks” rather than checks.
2
Aſter the policyholder dies, the insurer tells the survivor that it has deposited the $100,000 into a retained-asset account paying
as little as 0.5 percent interest and sends out a so-called “checkbook.”
3
Te insurer actually holds the $100,000 in its own general
account and earns about 5 percent annually on
the money, mostly from bond investments.
4
When and if a
beneficiary writes a check, the insurer releases money to cover
amounts up to the $100,000. BLOOMBERG NEWS
Street and the Business Roundtable, but President Obama spoke nostalgically last week about the virtues of small business. “Helping small businesses, cutting tax- es, making credit available,” Obama said Wednesday after meeting business own- ers at the Tastee Sub Shop in Edison, N.J. “This is as American as apple pie. Small businesses are the backbone of our econ- omy. They are central to our identity as a nation. They are going to lead this recov- ery.”
With unemployment stuck at 9.5 per- cent and job growth shaky, supporting “small business” has become a Rorschach test for both parties. The president and congressional Dem-
ocrats are racing to show what govern- ment can do. A bill pending in Congress would create a $30 billion small-business lending fund, add new tax breaks and ex- pand loan guarantees from the Small Business Administration. Republicans invoke small business to campaign against what they don’t want government to do: expand health care, tighten financial regulations or raise tax- es on the rich. So what is the economic power of small business in America? Politicians in both parties have resort- ed to overblown claims and ambiguous data about its role in job growth — calling it the engine that creates two-thirds of all new jobs — and innovation.
Small businesses are a crucial source of jobs, employing about half of all workers, according to the Bureau of Labor Statis- tics. But a raft of studies also shows that only a sliver of those companies grow rapidly or generate many new jobs. The vast majority are mom-and-pop opera- tions — hair salons, restaurants, book- keepers, car repair shops — that grow
small business continued on G5
Andrews works for The Fiscal Times, an in- dependent news organization that special- izes in fiscal and economic matters. It is funded by Peter G. Peterson, who separate- ly supports groups that advocate for long- term debt reduction.
Did TARP work? In new paper, two economists say yes
T
ARP is horribly unpopular. The stimulus is pretty unpopular. But does that mean they were bad
policies? Not according to a new paper by Mark Zandi, Moody’s chief economist and a former adviser to both the McCain and Obama campaigns, and Alan Blinder, a Princeton economist who has served as vice chairman of the Federal Reserve’s Board of Governors. Zandi and Blinder offer the first comprehensive estimate of our full response to the crisis: Absent the financial rescue and the stimulus, “GDP in 2010 would be about 6½ percent lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.” I spoke to both men last week about how they got to their estimates, why the economy is so bad if the response was so good, and where we go from here. What follows are edited excerpts from the two interviews.
Q.
This paper is heavily based on the model Moody’s uses for economic forecasting. But
these models have come under some criticism: Some say that they’re just
EZRA KLEIN Economic and Domestic Policy
abstract equations and that you can get whatever answer you want by tweaking the numbers. So what is this thing? Who uses it?
Mark Zandi: I developed the model almost 20 years ago. I’m an economic consultant. I’ve got clients in many large, private-sector institutions. And we provide macroeconomic forecasts for them. The model has been used by banks to stress test themselves. Bank of America, J.P. Morgan, SunTrust and others used it to run scenarios on their solvency under different conditions. The business community uses it to figure out how to account for macroeconomic
klein continued on G2 When the customer is wronged S
tate and local consumer-protection agencies across the country should pool their limited resources and
start an advertising campaign called “Gotcha.” It could be much like the popular “Got
Milk?” campaign. Only instead of milk-mustachioed celebrities pushing the benefits of that dairy product, everyday people could warn their fellow consumers about the shady, predatory and illegal schemes used to rip them off. We need to put a face on fraud. Such a media blitz is needed in this troubled economy as more people are scammed — often because they are trying to make quick money. But it could also be away to get the word out at a time when state consumer-protection agencies are experiencing budget cuts that make it more difficult for them to catch the lowlifes who prey on consumers. “At many agencies, complaints went up in 2009 and the resources to help consumers went down,” concludes a new report issued jointly by the Consumer Federation of America, the National Association of Consumer Agency Administrators and the North American Consumer Protection Investigators. “These are challenging times for consumers and the agencies that serve them.
MICHELLE SINGLETARY The Color of Money
State and local consumer agencies need and deserve public support to protect consumers and the integrity of the marketplace.” In addition to highlighting the top consumer complaints in 2009, the report detailed some of the challenges facing consumer-protection agencies. Agencies reported that staff
reductions and furloughs meant less time
conducting educational outreach and investigating, mediating and prosecuting complaints. For example, the report said that in the Office of Consumer Protection for Montgomery County, a hiring freeze meant departing staff members were not replaced even though the agency was given additional responsibilities. The Nevada Consumer Affairs Division
color continued on G2
BIGSTOCKPHOTO
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