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Archive for February, 2019

I’m not an optimist about the future of Europe, mostly because welfare states are unaffordable in nations suffering from demographic decline.

Given the grim trends on the continent, I expect many other nations (probably led by Italy) will experience the fiscal and economic mess that we’ve seen in Greece.

Let’s dig into this issue by reviewing a story in the New York Times about economic stagnation in Europe, focused mostly on Spain.

After decades of living comfortably in Spain’s upper middle class, the middle-aged couple are struggling with their decline. Spain’s economy, like the rest of Europe’s, is growing faster than before the 2008 financial crisis and creating jobs. But the work they could find pays a fraction of the combined 80,000-euro annual income they once earned. …Since the recession of the late 2000s, the middle class has shrunk in over two-thirds of the European Union…they face unprecedented levels of vulnerability.

So why are middle-class workers in such bad shape?

As you read the article, you find references to factors such as the “financial crisis” and “weakened social protections,” but no coherent explanation for why the private sector is languishing.

Unless you read all the way down to the 22nd paragraph, where you finally get an interesting detail that probably explains much of Spain’s economic malaise. Taxes are so absurdly high that a guy with a modest income only gets to keep one-third of the money he earns! This is such a jaw-dropping factoid that I’ve made it an image rather than an indented excerpt.

Wow, the confiscatory tax rates that Alexandria Ocasio-Cortez and Bernie Sanders want to impose on “rich” people in the United States already are already being imposed on low-income taxpayers in Spain.

No wonder Spaniards are so inventive about avoiding taxes.

And this story is a perfect example of why I constantly warn that European-type redistribution policies in the United States would result in much higher taxes for lower-income and middle-class taxpayers.

By the way, you probably won’t be surprised to learn that the current Spanish government (just like a previous Spanish government) wants to make a bad situation even worse.

Prime Minister Pedro Sánchez… The Socialist leader grabbed power last summer with the fragile backing of Podemos, the left-wing anti-austerity party. Warning of middle-class frustrations, his embattled government ordered a 22 percent rise in the minimum wage in January, and has vowed to reverse some labor laws, increase social spending and raise taxes on companies and the rich.

There’s an election in April, so we’ll see whether Sánchez’s plan to impoverish his country actually gets adopted.

My only prediction, based on what’s happened in the past, is that tax increases will not be successful.

P.S. The story has two additional excerpts that help to explain Spain’s anemic performance. We have very strong evidence in the United States that unemployment benefits subsidize joblessness. Spain appears to be learning the same lesson, though the government still pays people to be unemployed for 1-1/2 years.

Unemployment benefits…that state money, with budget cuts, now lasts 18 months, down from 24.

I’ve also written about how so-called labor-protection laws discourage hiring. Well, seems like Spain is a very grim example of how this type of intervention backfires on intended beneficiaries.

…temporary and part-time contracts…can lead to steady work and better incomes. But companies and Europe’s public sector have mostly used them to dodge protections for permanent employees. In Spain alone, 90 percent of new jobs in 2017 were temporary.

P.P.S. Spain has a member of the Bureaucrat Hall of Fame, though the guy who “put a decimal point in the wrong place” probably also deserves induction.

P.P.P.S. Here’s a sobering look at pre- and post-1990 growth in Spain and Poland.

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When I wrote about Alexandria Ocasio-Cortez’s so-called Green New Deal, I mostly focused on the very expensive fiscal implications. I also noted that AOC’s proposed 70 percent tax rate on the rich wouldn’t even pay for a tiny fraction of the multi-trillion dollar cost (in other words, you and me would be pillaged).

Others focused on some of the inane goals of the legislation, such as phasing out cows and air travel.

But the part of the plan that produced the most controversy was the promise to provide “economic security” to those “unwilling to work.” This generated so much mockery that it no longer appears in any supporting documents and some supporters even claim that it never was part of the plan.

But some true believers aren’t backing down. Let’s look at some excerpts from Christine Emba’s recent column in the Washington Post.

The rollout of the progressives’ Green New Deal has been less than smooth. One major reason: the release of an FAQ that listed “economic security” for those “unwilling to work” as one of the program’s goals. “Unwilling”? The now-retracted FAQ made other eyebrow-raising claims, but conservatives pounced on that word in particular. …welfare as a reward for laziness, it was called extreme, absurd…a “Communist Manifesto, 21st Century.”

Give Ms. Emba credit.

She didn’t pretend, like many other folks on the left, that the promise of no-strings handouts for the indolent wasn’t part of AOC’s original plan. For this reason, we should probably add her to our collection of honest leftists.

But while I applaud the honesty at the start of her column, the analysis that follows is profoundly awful.

She basically argues that the success of welfare should be judged by whether recipients are happy to get free money.

…is the idea of unconditional economic security really so extraordinary? …A state-dispensed, unconditional cash stipend for every single citizen — whether willing to work or not — has been touted as a way to…perhaps end deep poverty …most Americans look askance at the idea of giving anyone anything free, let alone something as intangible as well-being. It’s life, liberty and the pursuit of happiness, after all. Actually getting it is up to you. But what if we thought differently? Well-being — happiness in some sense… Health is a key measure of well-being. Adequate food and housing support it. …Which outcomes do we really care about? …Work isn’t all that matters. Improving well-being is a more than respectable goal.

And she even cites the failed program from Finland to justify her position.

Finland recently completed a landmark basic income project… One of the main goals of the Finnish project was to test whether a basic income would promote employment. …the program wasn’t much of a success: During the first 12 months, at least, basic income recipients fared no better or worse at finding employment than a control group. But it made a radical difference in other ways. “The basic income recipients of the test group reported better well being in every way,” chief researcher Olli Kangas told Reuters.

For all intents and purposes, Ms. Emba is lowering the bar for success. Basic income no longer should be supported because it will encourage more work (as some claim). Instead, we should support it because non-working people will be happy to get more handouts.

Let’s think about what that means. I wrote about socialism a week ago and I shared a very persuasive cartoon that shows why the theory has an inherent practical flaw.

While I’m tempted to recycle that cartoon again, this Wizard-of-Id parody makes the same point.

The bottom line is rather grim. A society that taxes productivity and subsidizes idleness over time will get less of the former and more of the latter.

P.S. While recipients express positive thoughts when they get more handouts, Arthur Brooks has explained that depending on others is not a route to a genuinely happy and fulfilled life.

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Over the past four days, I’ve looked at the supposed socialism of Venezuela, the Nordic nations, Greece, and France.

And I chose those nations deliberately because I used them as examples in this clip from a recent interview.

All of them are sometimes labeled as socialist countries, but if you look at the rankings from Economic Freedom of the World, you notice that this analysis doesn’t make much sense.

For example, the Nordic nations have a lot of economic liberty and are only slightly behind to the United States, which is why I explained last year that if those nations are socialist, then so is America.

And there is a big gap between the Nordic nations and France. And then another big gap before getting to Greece, and also a big gap before reaching Venezuela at the bottom. Should all of those nations get the same label?

So where do we draw the line to separate socialist nations from non-socialist nations?

I confess that I don’t have an answer because (as I’ve noted many times) we don’t have a good definition of socialism.

If socialism is central planning, government-determined prices, and government ownership of the means of production, then the only nations that really qualify are probably Cuba and North Korea. And they aren’t even part of the rankings because of inadequate economic data.

But if having a welfare state is socialism, then every jurisdiction other than Hong Kong and Singapore presumably qualifies.

Given this imprecision, I’m very curious to see where people think the line should be drawn.

P.S. This is why I usually just refer to statism or statists.

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My multi-part series on Socialism in the Modern World has featured Venezuela, the Nordic nations, and Greece.

But no discussion of dirigiste policy would be complete without a look at France.

After all, not only does France have a history of imposing 100-percent-plus tax rates, it also hold the dubious honor of being Europe’s biggest welfare state.

And it has the highest overall burden of government spending.

These are not good numbers, especially when you consider the demographic changes that are happening in Europe.

Sadly, there’s a long history of French statism. Andras Toth of the Carl Menger Institute explained some of the France’s grim economic history.

If there is an example of a dirigiste, interventionist state, then that is France in Europe. France was the birthplace of the mercantilist, absolutist monarchy in the early modern period. …the practice of mercantilist protection and monopolization of key industries, including the state-mandated “industrial development policies” …Under the rule of the famous finance minister, Jean-Baptiste Colbert… France sank into a series of crises and lost her preeminent position in Europe. …The modern French state is the stepchild of the political culture of the Bourbons. It is the prime example of dirigisme. It redistributes as much as 56 percent of annual GDP and imposes the highest tax burden in Europe. The French state directly manages key industries and sustains one of the largest welfare states in Europe. It also imposes complicated bureaucratic red tape on economic actors, trailing way behind the Scandinavian states and Germany as far as ease of business is concerned.

Though he also explains that the current president seems to understand that France needs less government and more economic freedom.

Macron was the first French politician to build his election campaign on reform and competitiveness in order to keep up France’s position in the world. Those who voted for him knew what to expect. As a member of Hollande’s team, he proposed increasing the work week from 35 to 37 hours to lessen the tax burden on higher incomes, and the competitiveness package he developed aimed to lessen the protection of workers and companies in order to promote growth. …France is again at a crossroads: She has to choose between the policies of Jean-Baptiste Colbert and those of Anne-Robert-Jacques Turgot, the great French liberal economist who was the economic minister of France between 1774 and 1776 and who argued for free trade, less taxation, and less regulation.

I also sympathize with what Macron is trying to achieve (at least with regard to domestic reforms).

But I fear it may be too little and too late.

Especially since the New York Times reports that Macron is increasingly unpopular.

…attacks…that Mr. Macron is a self-seeking servant of society’s fortunate… The undisguised hostility has made clear that, less than a year into this new presidency, anti-Macron sentiment is emerging as a potent force. It is being fueled by a pervasive sense that Mr. Macron is pushing too far, too fast in too many areas — nicking at the benefits of pensioners and low earners, giving dollops to the well-off and slashing sacred worker privileges.

Though he does deserve some of his unpopularity. He imposed green taxes late last year that triggered nationwide riots from motorists and other unhappy citizens.

But he’s also unpopular for some of his good policies, which leads me to fear that France may be past the tipping point, meaning that genuine and meaningful reform no longer is possible because too many voters are on the government teat.

I hope that’s not the case. France used to be one of the most wealthy and powerful nations in the world. But now its living standards are barely average according to the OECD’s AIC numbers.

Because of the ongoing debate about what the term actually means, it’s unclear whether France’s tepid economic performance can be blamed on socialism.

But we shouldn’t doubt that the country is paying a considerable price for having too much government.

P.S. My favorite cartoon about French socialism actually features Barack Obama.

P.P.S. One of the world’s greatest economists was French, but politicians in France obviously ignored Bastiat just like they ignored Turgot.

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In Part I of this series, we examined the horrific tragedy of Venezuelan statism, and in Part II of this series, we looked at the Scandinavian “free-market welfare state.”

Today, Part III will look at the ongoing deterioration of Greece.

I’ve written many times about how the mess in Greece was caused by an ever-rising fiscal burden.

Let’s look at two charts, drawing from the government spending section of Our World in Data, that confirm my argument.

This first chart shows the overall burden of government spending starting in 1880. As you can see, spending generally consumed a bit more than 20 percent of the nation’s economy (other than during wars) all the way from 1880 to the mid-1960s.

And then the spending burden exploded.

What drove that unfortunate increase in the spending burden?

We get that answer in our next chart, which shows that redistribution outlays have skyrocketed in recent years.

In other words, the welfare state is 100-percent responsible for the Greek fiscal crisis, whether you look at short-run data or these long-run numbers.

Has all this additional spending generated any good results?

Hardly.

As government has become larger and crowded out the private sector, that has dampened hopes for the Greek people. As reported by the Washington Post, they are responding with fewer children and more emigration.

During the country’s deep and prolonged crash, which began in late 2009 and worsened in 2011 and beyond, an already low birthrate ticked down further, as happened throughout the troubled economies of southern Europe. Greece was also hit by a second factor, with half a million people fleeing the country, many of them young potential parents. …Greece’s fertility rate, of about 1.35 births per woman, is among the lowest in Europe, and well below the rate of 2.1 needed for a stable population… In 2009, just before the fiercest parts of the crisis, there were 117,933 births in Greece. The number has since fallen steadily, becoming well eclipsed by the number of deaths. The birth total in 2017, 88,553, was the lowest on record.

This chart from the story is amazing, though in a very grim way.

This demographic implosion might not be a big problem if Greece was like Hong Kong and had a privatized system for Social Security.

But that’s obviously not the case. Instead, Greece is a morass of expensive entitlements.

Notwithstanding all the bad news, special interests in Greece continue to lobby for more spending and favors.

And they have allies in Europe, as indicated by this report in the EU Observer.

Dunja Mijatovic, the CoE’s commissioner for human rights, told EUobserver that Greeks are still suffering from the aftermath of international bailouts and imposed economic structural reforms. …Her comments follow the publication of her 30-page report on the impact of austerity measures in Greece, which says the fallout has violated people’s right to health, enshrined in the European Social Charter, and eroded the quality of schools. …Mijatovic, who toured Greece over the summer, says she was struck at the large cuts in areas like maternal and child health services.

Though I want to be fair.

There is occasional progress in the country, as indicated by another story from the EU Observer.

Greece has taken one step closer to the separation of church and state by removing 10,000 church employees off the public payroll. A deal agreed between prime minister Alexis Tsipras and archbishop Ieronymos II also includes a settlement of a decade-old property dispute between the Greek state and the Orthodox Church – which is one of the country’s largest real estate owners.

I consider this a small step in the right direction.

The Israeli government may even want to learn something from this reform.

And there are other hopeful signs, as illustrated by this story from Der Spiegel.

Olga Gerovasili, …administrative reform minister…is overseeing an administrative overhaul that could transform the country like nothing else has since Greece joined the EU. She wants to abolish Greek clientelism. …For centuries, the Greek administration was little more than an excuse for legal nepotism. …Relationships were more important than skills for filling official positions. …Job appointments are no longer to be in the hands of powerful local politicians… The aim of the system is also to use it to remove incompetent officials. …Another revolution. The Greek administration was legendarily labyrinthian. Files could travel for years through dozens of official offices. When bureaucrats aren’t hired for their skills, they need to justify their existence by signing as many things as possible. …Much like the nepotism, this is also to become a thing of the past.

I hope these reforms are real and permanent.

After all, a bloated and inefficient bureaucracy is one of the primary causes of excessive spending in Greece. But time will tell.

After all, it’s not easy taking away goodies from an entitled population.

“Greece finally needs to open its markets — that’s the most important thing,” says Aristides Hatzis, 51, a law professor at the University of Athens. Hatzis has written one of Greece’s most surprising bestsellers of the past few years: an introduction to laissez-faire thinking. It’s surprising because economic liberalism doesn’t have any deep roots in Greece. …”In the past decades, the governments have so overwhelmingly failed that Greeks blame everything that goes wrong on the state,” says Hatzis. …”It’s difficult to take away the privileges of influential lobby groups.” As long as that doesn’t happen, he says, the country won’t recover.

Having looked at the evolution of Greece’s economy, let’s now look at how the nation’s politicians have been responding to the crisis.

Are they liberalizing, or are they digger the hole deeper? In other words, are the good reforms larger than the backsliding, or vice-versa?

Naomi Klein will be happy with the answer. Here are two more charts, based on numbers from Economic Freedom of the World, both of which show that Greece is moving in the wrong direction.

First, we see that Greece’s score has dropped over the past 10 years.

And why has economic freedom declined?

The main cause is that fiscal policy has become much worse, thanks in large part to the IMF and various bailouts (which actually were designed to bail out irresponsible banks in nations such as France and Germany).

In any event, the nation’s politicians gladly accepted bad advice and used bailout money as an excuse to impose higher taxes, followed by higher taxes, and then decided to push taxes even higher.

The bottom line is that it is difficult to be optimistic about Greece.

Yes, there are some signs of hope. More and more people realize that big government has been bad for Greece.

But it’s not easy to get good reforms in a nation where most voting-age adults are directly or indirectly mooching off taxpayers.

P.S. Democratic socialism is better than totalitarian socialism, but it doesn’t produce good results.

P.P.S. Folks on the left argue that Greece is not a good example of socialism. They say it’s a cronyist economy rather than a socialist economy. Given the various definitions of socialism, they’re both right and wrong. I’ll simply note that there are many state-owned enterprises in Greece and the government has been dragging its feet about auctioning them to the private sector. So Greece is definitely closer to socialism than Sweden.

P.P.P.S. Here’s some Greek-related humor. This cartoon is amusing, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations. Speaking of stereotypes, the Greeks are in a tight race with the Italians and Germans for being considered untrustworthy.

P.P.P.P.S. If you want some unintentional humor, did you know that Greece subsidizes pedophiles and requires stool samples to set up online companies?

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In Part I of our series on Socialism in the Modern World, we looked at the tragic story of Venezuela.

Today, we’re going to look at what we can learn from the Nordic nations. And the first thing to understand, as I explain in this interview, is that these nations are only socialist if the definition is watered down.

As I noted in the interview, real socialism is based on government ownership and control of the “means of production.” But Nordic countries don’t have government-owned factories, government-controlled allocation of resources, or government regulation of prices.

In other words, those nations are not socialist (government ownership), they’re not fascist (government control), and they’re not even corporatist (cronyism).

So what are they?

In a column for the Washington Post, Max Boot accurately describes them as free-market welfare states.

…rigging elections and locking up or killing political opponents. This is one model of socialism — the same approach that has been applied in Cuba and the Soviet Union. But there are many other varieties that are far more benign. …the Scandinavian model. …Denmark, Norway and Sweden…show that a “free-market welfare state” isn’t an oxymoron. …By some measures, moreover, they are freer, economically…than the United States.

That last sentence isn’t a typo. The United States has more overall economic freedom than the Nordic nations, but both Denmark and Finland actually rank above America when looking at factors other than fiscal policy.

And Sweden and Norway only trail the United States by 0.03 and 0.06 points, respectively.

That being said, a big lesson to learn is that fiscal policy is a mess in the Scandinavian countries.

…there is nothing sinister about wanting to emulate the Scandinavian example. But that doesn’t necessarily mean it’s practical. The Scandinavians have lower corporate tax rates than the United States but much higher individual taxes. …The Scandinavian countries also charge hefty value-added taxes of 25 percent on consumption. The United States doesn’t have a national sales tax, and the average rate for state sales taxes is only 7 percent. In all, Scandinavians pay $25,488 a head in taxes compared with $14,793 a head in the United States — 72 percent more. This is what it takes to finance a Scandinavian-style social welfare state. It can’t be done simply by raising marginal tax rates on the wealthiest taxpayers to 70 percent, as Ocasio-Cortez suggests, because few taxpayers pay the top rate. It requires a massive tax hike on the middle class.

Amen. This is a point I have frequently made, most recently when writing about Alexandria Ocasio-Cortez’s statist agenda. Ordinary taxpayers will pick up most of the tab if the left’s agenda is adopted.

But I’m digressing. Let’s return to today’s main issue, which is the Nordic nations and socialism.

Technically, there’s no connection. As I said in the interview, those countries have never been socialist. Heck, if those nations are socialist, then so is the United States.

There is a lesson to be learned, however, and that lesson is relevant whether one uses the technical or common definition of socialism.

Simply stated, the relative success of those nations is due to free markets and a history of small government, but the imposition of big welfare states starting in the 1960s has weakened the region’s economic vitality.

This chart tells you everything you need to know.

P.S.  Actually, there is more your should know. Nima Sanandaji’s data on how Americans of Nordic descent are richer than residents of Nordic nations is very illuminating.

P.P.S. And we have specific data from Sweden showing how that nation lost ground after it adopted the big welfare state (and has subsequently gained ground thanks to pro-market reforms such as nationwide school choice and partial pension privatization).

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With the surprising success of Senator Bernie Sanders in the last presidential race and the more-recent instant-celebrity status of Representative Alexandria Ocasio-Cortez, some are wondering if the United States is about to enter a “socialist era”.

I’ve criticized some of the proposals that are part of this movement, such as confiscatory tax rates and the so-called Green New Deal, so it goes with saying that I’m not a fan.

To learn more about the implications of socialism, let’s look around the world.

We’ll start with Venezuela, which is the focus of a very interesting article in the Washington Post. Here are some excerpts.

Did socialism kill Venezuela? Blessed with the world’s largest oil reserves, this South American nation was once the region’s richest per capita. Twenty years after the launch of the late Hugo Chávez’s Bolivarian Revolution, it is now one of the poorest. …In Washington…Republicans are seizing on Venezuela to score points against those Democrats who have newly embraced the term… But socialism’s role in Venezuela’s collapse, observers say, is not as clear as either side likes to think. At least fleetingly, socialist policies propped up by state petrodollars helped bolster the country’s status as one of the Western Hemisphere’s most equitable societies. But state-heavy policies that distorted prices and exchange rates, coupled with corruption, mismanagement and official repression, turned Venezuela’s economic landscape into scorched earth. …But it is also not communist Cuba or North Korea, where foreign investment and private ownership are strictly limited. …wealthy Venezuelans still own private companies and high-walled mansions in elite neighborhoods. They play golf at country clubs and are taxed at a relatively manageable 34 percent.

This is very fair reporting.

All the main points are accurate: Living standards have plummeted in Venezuela, oil money complicates the analysis, and the economy isn’t quite as statist as Cuba and North Korea.

The article goes on to cite the views of several Venezuelans.

“All the wrongs were created under Chávez,” said Henkel Garcia, head of Econometrica, a Caracas-based financial analysis firm. “The economy only survived as long as it did because of high oil prices.” …Today, roughly a third of the nation, pollsters say, still appears to back socialism — although only half that many remain loyal to Maduro. …With hyperinflation causing acute shortages of food and medicine, more and more former Chavistas, or adherents of Chávez’s ideals, are saying mea culpas and increasingly turning out against Maduro. “Before I die, I want socialism gone from Venezuela,” said Yessid Merlano, a 50-year-old waiter. …Scarcities of food and medicine first surfaced years ago but are now so chronic that he and millions of other Venezuelans have shed pounds and sought work abroad. Before returning to Caracas last year, he spent 10 months working as a laborer in neighboring Colombia, “where all I saw were Venezuelans begging in the streets,” he said. “I feel guilty that I was a Chavista,” he said. “It’s all my fault, all the suffering.”

I’m glad that many Venezuelans now realize that socialism is misguided.

Though I wonder if they will support the reforms that will be necessary once the current regime is deposed (and given the perverse incentives of politicians, I’m even more worried whether a new government will implement those reforms).

The article concludes with some damning data on the country’s economic decay.

State health care, once a pride of the socialists, collapsed as hyperinflation and shrinking resources left hospitals with shortages of syringes and antibiotics, as well as broken equipment too expensive to repair. …Chávez purged skilled managers, engineers and technicians from the state-owned oil giant PDVSA, stocking it with government loyalists. That set it up for a catastrophic failure as global prices fell from record highs. Venezuelan oil output is now at its lowest levels since the 1950s. Industries nationalized by Chávez, who expropriated 1,500 companies, collapsed as regulated prices distorted markets. In two decades, the government seized nearly 5 million acres of productive farmland that has now been largely abandoned. In 1999, there were 490,000 private companies in Venezuela. By last June — the most recent count available — that number had fallen to 280,000.

None of this is a surprise. Venezuela is a basket case.

But that’s not our topic today. We’re focusing instead on whether there are any lessons that the United States can learn from the Venezuelan debacle.

Or, to be more accurate, I think the key question is whether advocates of democratic socialism in America have learned anything from Venezuela’s miserable performance.

Plenty of leftists, including Sen. Sanders, praised the awful policies of Chavez and Maduro.

Now that the chickens have come home to roost and Venezuela’s economy has tanked, have any of them apologized? Or tried to rationalize what happened? Or even expressed second thoughts about the supposed wisdom of socialism?

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