The most recent incident involving Lindsay Lohan involves more than her bad driving, which was apparently related to ethanol and other alternative fuels. She may have collided with economics.
In the wake of an automobile accident, she faces a DUI and other possible charges related to leaving the scene and to illegal substances found in the car. But while the threat of a prison sentence is serious, there may be even more lasting consequences.
Because her behavior seems to be spinning out of control, she must confront the real possibility of becoming an economic unperson, an actress whose behavioral pattern could make her an unacceptable risk for the insurance companies. And for today’s Hollywood productions the finance equation works this way: uninsurable equals unemployable.
Lohan’s difficulties have prompted analysts, commentators and fans to point out that the 20-year old actress has lacked a positive role model in her life, as both her father and mother seem unqualified for that position.
She is now in a rehab facility, and we can only hope that it is one where patients are isolated from newspapers and television news. Otherwise, in her vulnerable state and being aware of something missing in her life, there is the risk that she could latch on Congress as her role model – and end up worse off than when she started therapy.
Congress is capable of wonderful things but it does not always set a good example, especially when it comes to facing problems or accepting responsibility. Still, in its own way it can certainly make problems disappear.
Buried in the Iraq war funding bill recently passed by the House, for example, there was an interesting illustration of how to make a problem disappear, using simple, everyday math.
The story began last year. At that time, Delta and Northwest Airlines were in bankruptcy and claimed that they needed relief from their pension obligations in order to survive.
In response, federal lawmakers allowed them 17 years and a high interest rate to bring their pension plan obligations and assets into balance. Other airlines, such as Continental and American, which were struggling to avoid bankruptcy, were given 10 years and a lower rate to balance their pension funds the same way.
That didn’t seem fair to Continental and American. To them it seemed that Congress was penalizing them for using good management and painful cost cutting to avoid bankruptcy.
It was true, of course, but instead of addressing the issue, Congress opted to make the problem go away. So, written into the war funding bill is the provision that Continental, American and smaller airlines can use a higher interest rate – 8.25 percent instead of the 6 percent in last year’s law – to calculate their pension fund contributions.
The change means millions of dollars in operating capital for the airlines. The interest rate is used to calculate how much money needs to be set aside to meet a future obligation.
For a $1,000 debt coming due in 10 years, for example, at 6 percent we would have to set aside $558.39. At 8.25 percent, though we would need only $452.61. For the airlines, that makes a huge difference in their cash contributions to their pension funds.
Of course, we don’t want to start believing that this is real. That is how Congress gets itself into trouble. It is not real in any sense simply to use a higher interest rate to reduce pension fund cash flows. The pension obligation remains the same – unchanged by the magic math. In truth, it is even more under-funded than it was, but that won’t show up right away. In the short run the problem disappears, and Congress’ work is done.
Congress isn’t very good at economics and is even worse at facing up to real problems. That is clear from its current work on energy, which at this point amounts to drafting a snipe-hunt law to prosecute nonexistent gasoline price gougers.
And there is a fundamental economic problem with the proposed immigration law. If, however disgracefully, the competitiveness of American companies depends on the cheap labor provided by illegal immigrants, making these workers legal will erase this advantage. How does that help the U.S. economy? Maybe the immigration law makes sense on some other grounds, but its basic economic argument seems questionable at best.
Congress needs rehab just as much as Lindsay Lohan. Senators and representatives need to spend more time with real people instead of lobbyists. Instead of improving their tan or their golf game on somebody else’s expense account they need to listen more to their constituents. They could learn a lot from them about how to solve economic problems. Real people do it every day.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.
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