Tuesday, July 30, 2013

Death of a City: Lessons from Detroit

While Koreans have been focusing on former President Chun Doo-hwan’s art collection, missing presidential transcripts, and what might be or might not be misogynistic drunks abusing a woman, most Koreans remain blissfully unaware of a slow death that occurred far, far away from Korea’s borders; a death that Koreans should know and care about.

It wasn’t the death of a celebrity, or a politician, or an activist. It was the death of what was once a great city, a city that Koreans wanted to model their country after once upon a time. The great city that died had a name. Its name was Detroit.

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Detroit, once known as Motor City, where the world’s first great automakers were born – Ford Motor Company, General Motors, and Chrysler – was the symbol of American manufacturing and represented the American Dream. It was a metropolis that was once home to 1.9 million people but on July 18th 2013, Detroit filed the largest municipal bankruptcy case in U.S. History.

The economic and political similarities between Korea and Detroit are slim. Detroit’s population crashed when white Americans who were middle to high income earners moved away from the city to live in its suburban areas, leaving Detroit’s population mostly black and mostly poor. Korea, on the other hand, is nearly heterogeneous and its coming population crash will be because of age and low birth rates rather than anything else. Whereas Detroit’s manufacturing industry has all but plummeted, Korea’s manufacturing industry, though having slowed down recently, remains stable.

However, there are lessons that Korea can learn from Detroit’s mistakes.

1) Unions played a leading role in destroying Detroit; a similar fate awaits Korea

One of the most powerful unions in the United States is the United Auto Workers (UAW) and it is credited for having helped to create the American middle class by extracting high wages for its members in its negotiations with auto companies. Labor leaders claimed that those high wages gave workers financial stability that they otherwise would not have had.

Ironically, it was those high wages that forced auto companies to seek to move their production lines and factories outside of Detroit as entrepreneurs and business owners abandoned Detroit in favor of other areas, notably low-taxing, ‘right-to-work’ jurisdictions such as Texas, or to other countries altogether. The Motor City now only has one factory within its borders: Chrysler’s Jefferson North plant.

After the end of the Second World War, when American auto companies had little foreign competition to worry about, unions could afford to collectively bargain for higher wages for their members. However, in the modern world, where international competition is the norm, American auto makers could no longer remain competitive while paying tens of thousands of their employees exponentially higher wages than their international competitors did.

When those auto companies left Detroit for greener pastures, those union jobs that were so highly sought after disappeared.

Korea, for its part, saw massive economic growth from the 1960s to the 1980s through labor-intensive manufacturing – an economic plan that was enforced by the government with the intention of pursuing an export-oriented development strategy, which led to an industrial modernization that other developing countries are keenly studying. That economic growth that Korea enjoyed is now referred to as the “Miracle on the Han River.”

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Along with industrial modernization, Korea also saw the rise of unions. The two most powerful Korean umbrella groups, the Korean Confederation of Trade Unions (KCTU) and the Federation of Korean Trade Unions (FKTU), have long been responsible for engaging in fierce protests to such an extent that foreign multinational corporations almost always list militant unions as a major factor that prevent them from investing in Korea.

For example, on July 27th 2013, it was reported that even amid speculation that General Motors could be considering to reduce the size of its footprint in Korea, union workers participated in a 13-day partial strike in order to force General Motors to agree to pay each of its employees bonuses of up to ₩10 million (US$9,000) as well as promising not to have any layoffs at the plant. Never mind that this strike caused production losses and will make it even more expensive to manufacture cars in Korea.

Newton’s Third of Law of Motion states: “When one body exerts a force on a second body, the second body simultaneously exerts a force equal in magnitude and opposite in direction to that of the first body.” The same applies to international investments. As unions continue to secure lavish benefits for their members by treating companies as limitless cash cows, these elevated costs of employment will contribute to the ever-increasing cost of production. Furthermore, by threatening to use violence to get their way, more multinational corporations will reconsider investing in Korea and take their prized capital and knowledge with them.

Currently, with countries that have untapped labor resources such as Cambodia and Vietnam opening their borders to foreign investments, Korean workers cannot afford to make themselves less competitive in the international market.

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2) Detroit and Korea both have shrinking populations

Since the 1950s, as Southern blacks left their homes to settle in Detroit for the high-paying blue-collar jobs that were available in the auto industry, there began what is known as a “white flight,” as Detroit’s white population began to move out of the city and into the suburbs. This exodus accelerated in 1967 when a race riot broke out, which resulted in the deaths of 43 people and the injury of over a thousand people.

Detroit’s former mayor Coleman Young estimated in his autobiography, “Hard Stuff,” that Detroit lost 110,000 jobs in the decade after the riot.

In its heyday in the 1950s, 1.9 million people used to call Detroit their home. Now Detroit is home to a mere 700,000 people. Although much can be said about Detroit’s voluntary re-segregation and its social impact on race relations, such a topic will most likely be given lower priority as the much more immediate concern regarding Detroit’s plummeting population is that its shrinking tax base simply cannot support the massive pension debt obligations that the city has accrued over the decades or provide even a minimum level of city services such as utilities or law enforcement. In fact, it is estimated that nearly half of Detroit’s debt is to underfunded pension plans and retirees with the bulk of the remaining debts owed to municipal bondholders.

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The city of Detroit and its school system, which are now the biggest employers in the city, is now supporting more retirees than it has workers, with 18,000 retirees to the city’s 10,000 active public employees.

The characteristic of Korea’s population decline is certainly different from Detroit’s. However, Korea faces similar eventualities as Detroit faces due to a shrinking population.

Due to reasons such as low birth rates among Koreans and Korea’s rapidly aging population, more people are reaching retirement age and will no longer be economically productive. In conjunction with falling birthrates and an aging population, it means that social systems can no longer be nearly as well financed under the current tax system.

The Korean government is thus far attempting to deal with Korea’s economic problems by introducing economic stimulus programs. However, it was reported that Korea’s debt-to-GDP ratio for 2012 stood at 283 percent, an appalling figure that far surpasses the level that Korea reached before the euphemistically called “IMF Crisis” of 1997. As the population ages, the Korean government will have no choice but to continue to borrow more money, which means that Korea’s debt will keep growing – and is, in fact, already much higher than Greece’s debt-to-GDP ratio of 157 percent.

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Further exacerbating Korea’s population decline is the rising number of highly skilled Koreans who are willing to emigrate and not ever return. From 2000 to 2003, the ratio of Korean citizens who obtained U.S. doctoral degrees who did not return to Korea upon completion of their education rose to 46.3 percent. From 1992 to 1995, only 20.2 percent remained overseas permanently. The National Science Foundation Network in the United States conducted a study in 2004 that showed 73.9% of Korean doctoral degree holders in the U.S. were planning to remain in the U.S.

With the Korean government deciding to dedicate more of the country’s budget on social welfare and public construction projects and paving the way to update and redesign welfare policies every five years, which can only mean an inevitable increase in the number of civil servants and bureaucrats, while at the same time failing to combat low birth rates, looming pension disaster, having no real long-term solutions to reverse Korea’s brain drain, and also failing to fully liberalize Korea’s immigration policies or help immigrants to thrive once they arrive in Korea or combating pathological racism, the future does not bode well.

3) Uncontrolled public spending sunk Detroit’s budget; and it also threatens Korea’s

Despite Detroit’s shrinking population and its sordid finances (at the time of declaring bankruptcy, Detroit’s city officials declared that the city was in debt of up to US$18 billion and that it had unfunded pension liabilities of up to US$3.5 billion), 21,000 Detroit retirees still receive about US$1,600 a month.

Detroit cannot afford to pay its retirees what it promised them. It is certainly unjust to the people who were promised a pension but the reality is that there is no money. And those pensioners do not seem to wish to let something as petty as reality get in their way of being paid with non-existent money, as was shown by a judge’s ruling that Detroit’s bankruptcy filing violated the Michigan Constitution, which bans any action that threatens to cut the pension benefits of public employees.

Although Detroit has one of the highest income tax rates in the U.S. (most likely levied such high rates because the city government needed to boost tax revenue amid falling population rates), such measures were not enough to help pay for Detroit’s excessive spending. For instance, in 2011, Detroit employed about twice as many municipal employees per capita as cities with comparable populations. It failed to attract or retain businesses as it continued to push for populist policies such as favoring unions as opposed to free trade (Detroit has 48 unions!) and funding needless public projects such as stadium subsidies whose promises of future economic growth are dubious at best.

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As stated earlier, the Korean government has decided to dedicate more of the country’s budget on social welfare and public construction projects. For example, there are currently fourteen regions that are planning to construct dams or are already in the process of building one. It has promised higher state pensions, additional childcare funding, and has pledged to invest ₩33.9 trillion on “economic revitalization” measures, including ₩9.4 trillion to build new inner-city rental housing and an additional ₩8.1 trillion on research and development.

In 2007, it was estimated that the Korean government’s national expenditures as a percentage of its total GDP stood at around 29.3 percent. Considering the recent pledges that have been made by the conservative ruling party, which hardly seems conservative at all in its economic views, that figure has to be much higher now and will become even higher in the future.

But, of course, all of these expenditures have been calculated and pledged with one assumption that is seldom ever mentioned. They are based on the assumption that the North Korean government might not some day implode.

A long term process of rabid unionism, de-population, and public spending of this magnitude, which promises fewer local economic interactions to sustain a vibrant market economy, and a smaller revenue base with which to provide core government services, inevitably spells trouble. It did for Detroit and unless mitigated, a similar fate awaits Korea.

Unless unions can learn that their demands for better wages and employment conditions ought to be be grounded on solid evidence of improved workplace productivity and the reality of economic conditions, further legal steps ought to be taken to limit the power of unions. Means such as passing legislation that allow union members to avoid paying dues in order to limit the near monopolistic power held by unions, establish and enforce “right-to-work” laws, calling out minimum wage laws as unions’ less-than-altruistic attempt to protect their own members from competition as minimum wage laws increase the expense of hiring unskilled workers, which makes hiring skilled union members more attractive and could raise the earnings of union members who compete with minimum wage workers.

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Active steps ought to be taken to reverse the current low birth rates among Koreans, reverse Korea’s brain drain, and attract immigrants to Korea. In order to reverse low birth rates, as a short-term solution, the government ought to grant special tax breaks for families with more than one child. However, the long-term solution is to lessen the perception of overly expensive college education as being prerequisite for economic success and promoting technical training for specific fields that are required in the manufacturing industry.

Furthermore, the anticipated depletion of the country’s pension system, coupled with the lessons of relying on the state for pension payments as provided by Greece and Detroit ought to tell the government that there are two possible solutions to this. Firstly, the government has to make a bipartisan decision, as unpopular as it will be, to raise the retirement age even under the threat of being voted out of office by the welfare-state addicted public. Secondly, Koreans ought to begin to get used to the idea of investing in tax-deductible mutual funds and private pension plans.

In order to reverse Korea’s brain drain, the government ought to reward returnees with bonuses and tax breaks, encourage universities to invest more in research projects, guarantee greater academic freedom, and reform higher education in order to improve and strengthen the colleges, universities, and research institutes in Korea.

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And in order to attract immigrants to Korea, the Korean government ought to encourage the renunciation of ethnic-nationalism, incorporate qualified individuals from various ethnic and cultural backgrounds into various levels of public administration in order to integrate immigrants into Korean society more effectively, offer legal services to people with visa-related questions and connect them with local businesses and community groups that are interested in hiring or helping them, connect low-income immigrant and minority entrepreneurs with lenders who offer loans without collateral, and offer to first and second generation immigrants classes that focus on teaching the Korean language.

For its part, the government ought to cut taxes across the board, streamline regulations, and create business-friendly environments (something that Detroit failed miserably at doing) without resorting to corporate welfare such as granting subsidies.

What happened in Detroit was proof that the laws of economics and reality cannot long be ignored without fear of repercussions. We can try to avoid reality, but we cannot avoid the consequences of avoiding reality. And the city’s decay – physically, financially, and morally – was a tragedy precisely because it was a tragedy that could have been avoided.

To safeguard our prosperity and our posterity, Koreans should be economically mindful of doing everything that Detroit failed to do.

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Saturday, July 6, 2013

Free Trade with China? Why haven’t we done this sooner?

After President Park Geun-hye’s official visit to China, it was reported that one of the things that President Park and Chinese President Xi Jinping discussed was the creation of a bilateral free trade agreement between Korea and China by 2015.

Predictably, though with perhaps less rabidness as existed during free trade negotiations with the United States, there were protests against this possible free trade agreement between the two countries as 3,200 protesters from across the country attended a mas rally in front of the BEXCO convention center in Busan. The go-to motto this time around seemed to be “Korea-China FTA is the death sentence to Korean farming.” That they said similar things during Korea-US FTA talks and Korea-EU FTA talks and that they still exist does not seem to have given them pause to think through their logic.

Source: http://img.yonhapnews.co.kr/etc/inner/EN/2013/07/02/AEN20130702010000315_01_i.jpg

Personally, I believe very strongly in free trade and welcome a possible free trade agreement between Korea and China. As such, the following are the reasons that explain why I support the possible FTA with China (as well as with any other country in the world) and my rebuttals against anti-free trade arguments.

1) Free trade is beneficial to consumers

People who advocate for tariffs (or ‘protection’ as it is euphemistically called) are calling for restrictions on imports. Of course, they never openly admit that the basis of their argument is self-interest. They always claim some sort of altruistic motive such as the “general interest” or national security. But is it really in the general interest?

What about the consumers’ point of view, i.e. the majority of the population who do not work in the agriculture industry? Personally, I have a limited budget and I am always looking to cut costs where I can. If I can spend less money while buying the same amount of groceries, that’s certainly an opportunity that I would jump on. People can shout patriotic bromides all they want at the top of their lungs but that does not change the fact that when it comes to personal shopping habits, people will always spend their money in the most rational manner possible, as evidenced by the increased sale of imported beef, despite the earlier hubbub that surrounded it.

The fact of the matter is that “protectionism” is really nothing more than a dual attempt to exploit consumers AND to get consumers to allow themselves to be exploited willingly all in the name of "patriotism."

This is a graph that shows the level of imported beef from Australia and the United States that Koreans consumed from 2008 to 2013.  The blue line represents Australian beef and the red line represents American beef.  This graph was taken from a study that was conducted by the Korea International Trade Association
Source: http://www.fnnews.com/images/fnnews/2013/05/01/2013050201000005400003211.jpg

2) Free trade is morally superior because it places trust in individuals rather than government bureaucracy

One of the understated premises behind protectionism is that a small handful of bureaucrats can somehow fully understand and wisely legislate how millions upon millions of people ought to deal with one another. The following video will explain how that is beyond ludicrous better than I could ever explain.

It is morally questionable as to whether or not a select group of bureaucrats ought to make our choices for us. However, those moral questions are outweighed by the more practical question of whether such acts are beneficial or even possible. Short answer – it’s not.

3) Free trade eventually transcends economic exchange

It is a grave mistake to make the assumption that trade merely involves the exchange of goods and services and money. Such an assumption could not be further from the truth. When people trade with one another, personal relationships are made. All trade is built on trust. If people cannot trust one another to deliver on goods or money to seal trade deals, then trade would become impossible. Therefore, willing or not, once people enter into trade, personal relationships that are based on trust have to be built.

Through those relationships, more so than merely material goods and money, people and ideas inevitably follow through the same open doors. Besides the superficial cultural exchanges, it allows people to share information with one another. And what could be more valuable than information in the Information Age?

If Korea never established trade relations with the outside world and resorted to the old ideas of self-imposed isolationism of the Chosun Dynasty, it is not beyond imagination that today’s Korea would be that far removed from North Korea.

Source: http://rtoz.org/wp-content/uploads/2013/02/north-korea-.jpg

4) Free trade benefits the poor

Political rulers have the ability to create laws that protect their pampered lifestyles. The wealthy are protected by their wealth. They can choose to buy or rent lawmakers and if that’s not available, they can always move to where the grass is greener.

The poor, on the other hand, are always at the mercy of the laws and their own limited budgets. You can be sure that Chun Doo-hwan and other politicians will continue to enjoy the good life and that Korea’s wealthiest will never feel the humiliating sting of an overdrawn checking account while millions of middle to low income earners are made even more miserable in the name of defending an influential lobbying group.

Free trade gives the poor options. By being able to spend less on groceries or whatever else it is that they choose to buy, they can stretch their money to buy more goods and services, to send their children to college for just one more semester.

5) Exports vs. Imports

A great number of politicians appear to believe that exports are good while imports are bad. This is the result of a very poor grasp of economics or reality.

In regards to exports being better than imports, reality says otherwise. We cannot eat, wear, or enjoy the goods we export. Any wish to be able to do so is synonymous to wanting to have one’s cake and to eat it, too. What we are unable to enjoy that we export, however, we enjoy with imports. We eat fruits from the Philippines, wear Italian suits, use computer hardware from Thailand, and use raw minerals from China. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. To summarize, without exports, there are no imports.

If we export more than we import, politicians like to call that a “positive balance of trade,” but that is a euphemism. When we sell the Chinese more than we buy from them, we will have more money – that is true. But what will we do with that money? We cannot eat it.  Simply because we have more money doesn’t change the fact that we have less goods now because we sold a lot of it to China. With less goods to buy domestically with more money to spend, that is the perfect recipe for inflation!

By insisting on having “a positive balance of trade,” we are sacrificing real wealth for the sake of merely feeling wealthy.

Surprisingly, not very tasty or nutritious.  Who would have thought?
Source: http://thumbs.dreamstime.com/thumblarge_349/1230390009DJ14Zm.jpg

6) Free trade fosters peace

Anyone opposed to free trade will be the first to tell you that free trade does not guarantee peace.  To make their point, they might bring up the fact that trade levels between Germany and the Soviet Union were high before Germany decided to invade Russia in 1941. And it is true that free trade does not guarantee peace. In fact, nothing guarantees peace.

However, free trade strengthens peace by raising the cost of war. As nations become more integrated and interdependent on one another through trade, governments, businesses, and individuals would be less inclined to support war as they realize that they have much to lose should trade be disrupted.

That is why despite the vicious rhetoric between Korea and China and Japan whenever election seasons come by, no one even fathoms to instigate a real shooting war. There is too much to lose once a real war erupts. What free trade does is that it further cements peace between nations that are not inclined to like one another.

People who have nothing to lose are liable to do some stupid things like starting wars and making movies like "Nothing to Lose."
Source: http://www.impawards.com/1997/posters/nothing_to_lose.jpg

What free trade does is that it elevates the masses out of poverty, gives them choices, and fosters peace whereas protectionism gives political cover to political elites and well-connected lobby groups while lowering the price of war. To oppose free trade is the epitome of foolishness.

Source: http://res.heraldm.com/content/image/2012/08/13/20120813001397_0.jpg

Tuesday, July 2, 2013

Arguments against immigration: Pseudo-economic gibberish

In an earlier blog entry, I spoke about the practical reasons as to why Korea ought to embrace multiculturalism. Elsewhere on the Internet, however, I received numerous objections.

A few of the ‘arguments’ that I have heard were nothing less than incoherent racist diatribes that were peppered with misogyny. I initially thought about writing something that would not only condemn but analyze racism and sexism. However, I decided against it for two reasons. Firstly, such topics have been covered by others before with much better penmanship than I could ever hope to achieve. Secondly, considering the intellectual, philosophical, and moral bankruptcy that are required for individuals to become racists or sexists, I figured that no amount of rational or logical arguments are likely to change their ‘minds.’

Source: http://familyandautism.files.wordpress.com/2012/04/brainless.jpg?w=300

The arguments against immigration that piqued my interest the most were the economic ones. Those arguments tended to deal with wages, welfare, public expenditures, etc. The following are the economic arguments that I received and my rebuttals.

1) Immigrants from poorer countries who are willing to work for lower wages depreciate everyone’s wages.

Currently, the minimum wage rate in Korea is 4,860 (US$4.24) per hour. And it is certainly true that there are businesses that knowingly choose to employ illegal immigrants and pay them less than the legally mandated minimum wage rate. However, there is little to suggest that their low wages depress everyone’s wages. That is because immigrants from poorer countries rarely compete with Koreans over the same jobs.

Low-income and low-skilled immigrants tend to look for work in certain businesses like farms, restaurants, and factory floors. These are the kinds of jobs that most Koreans no longer generally seek. In fact, it is the presence of these workers that allows a lot of these businesses to be feasible. Without these immigrants, a lot of these businesses would not be able to compete with their foreign competitors.

As low-skilled immigrants and Koreans seldom ever compete with each other for the same jobs, the threat of depressed wages is a red herring.

That being said, there will be individual cases of workers who get put out of work by immigrant competition. However, using these anecdotal examples to argue against immigration fails to take into account that whereas these individuals’ acute suffering is immediately visible to all, the benefits of immigration are divided among the general population and is not immediately visible. Therefore, it must be taken into consideration that using these few individual cases to support anti-immigration policies are almost always nothing more than emotional arguments that often lack rational thought.

Source: http://www.dumbecards.com/cards/CM_29.png

2) An increase in immigration will create or exacerbate unemployment.

This argument is related to the first one in that the argument is based on the assumption that immigrants and native Koreans compete for the same kinds of jobs. The response to that argument need not be reiterated.

However, this argument, unlike the first, is based on a second premise – that there is only a limited amount of work that can be done. This argument is the epitome of economic illiteracy.

When immigrants look for work, they are indeed supplying a commodity in the market – their labor. However, where there is supply there is always demand and vice versa. As immigrants earn wages, they inevitably spend their money (if not all of it, at least some of it) in order to buy goods and services. Their new demand for goods and services, which had been absent prior to their arrival in Korea, will in turn create demand for new labor.

Their very presence in Korea serves to create a larger domestic population, one that is comprised of native Koreans and immigrants. This creates a bigger market, which serves as more potential customers for businesses.

Furthermore, if the premise that there is only a limited amount of available work were true, besides opposing immigration, people who adhere to that logic also ought to oppose any and all new forms of technological innovation. Every new technological advancement and new invention ought to make more and more jobs disappear, thus eventually leaving every individual replaced by robots. Therefore, for the sake of guaranteed employment for the maximum number of people, not only should they oppose new technological innovations, they also ought to push for the disinvention of current technology. Think of all the jobs that people would have if only we could disinvent the wheel!

At least we all have jobs.
Source: http://www.avforums.com/movies/images/media/10493/capture4.jpg

3) Immigrants are a drain on the economy as they become welfare recipients.

When the National Assembly approved this year’s revised budget, it was determined that the government would spend 342 trillion. Of that sum, ₩100 trillion was appropriated for welfare programs. However, what is most surprising about welfare expenditures is that, contrary to popular perception, most welfare programs focus on the elderly rather than the poor. In fact, most of Korea’s welfare spending is focused on public social expenditure (Social Security, free public transportation for senior citizens), health services (which are inaccessible without paying social security taxes), and separate old age expenditures.

Although Korea spends very little on welfare programs in general, Social Security and the health services dwarf other social programs.

However, most immigrants tend to be young. Therefore, immigrants who work in Korea often end up supporting older Koreans, rather than ‘milk the system.’ Illegal immigrants, on the other hand, either do not have Social Security numbers or they have expired or fake Social Security numbers. The ones who do not have them cannot access government services at all. Those who have expired or fake Social Security numbers, depending on circumstances, may have to pay taxes toward Social Security, but cannot collect any benefits. Therefore, as far as the Ministry of Strategy and Finance ought to be concerned, illegal immigrants are a cash cow.

As such, the argument that immigrants cost the government money in terms of welfare is inaccurate.

They got a raw deal, except less eightiesmovies-tastic.
Source: http://upload.wikimedia.org/wikipedia/en/4/45/Raw_deal.jpg

The fact of the matter is that much of the anti-immigration rhetoric is usually egged on by demagogues. They usually attempt to mask their ignorance (or insatiable political ambition) with either nationalistic zeal or workers’ solidarity; all the while accusing their opponents of “exploiting cheap labor” while sacrificing the Korean worker at the altar of capitalist greed. In reality, what they pass off as economic knowledge is no more than half-baked pseudo-economics.