Why economists get so many of their predictions wrong


Economics is now so dominated by maths it’s almost become a branch of applied mathematics. Sometimes I think that newly minted economics lecturers know more about maths than they do about the economy.

Kay and King don’t object to the greater use of maths (and I think economists have done well in using advanced statistical techniques to go beyond finding mere correlations to identifying causal relationships).

But the authors do argue that, in their efforts to make conventional economic theory more amenable to mathematical reasoning, economists have added some further simplifying assumptions about the way people and businesses and economic policymakers are assumed to behave which take economic theory even further away from reality.

They note that when, in 2004, the scientists at NASA launched a rocket to orbit around Mercury, they calculated that it would travel 4.9 billion miles and enter the orbit in March 2011. They got it exactly right.

Why? Because the equations of planetary motion have been well understood since the 17th century. Because those equations describing the way the planets move are “stationary” – meaning they haven’t changed in millions of years. And because nothing that humans do or believe has any effect on the way the planets move.

Then there’s probability theory. You know that, in games of chance, the probability of throwing five heads in a row with an unbiased coin, or the probability that the next card you’re dealt is the ace of spades can be exactly calculated.

In 1921, Professor Frank Knight of Chicago University famously argued that a distinction should be drawn between “risk” and “uncertainty”. Risk applied to cases where the probability of something happening could be calculated with precision. Uncertainty applied to the far more common cases where no one could say with any certainty what would happen.

Milton Friedman in 1977. Friedman said you could attach a probability to each possible outcome and then multiply these together to get the “expected outcome”.Credit:AP

Kay and King argue that economics took a wrong turn when Knight’s successor at Chicago, a chap called Milton Friedman, announced this was a false distinction. As far as he was concerned, it could safely be assumed that you could attach a probability to each possible outcome and then multiply these together to get the “expected outcome”.

So economists were able to get on with reducing everything to equations and using them to make their predictions about what would happen in the economy.

The authors charge that, rather than facing up to all the uncertainty surrounding the economic decisions humans make, economics has fallen into the trap of using a couple of convenient but unwarranted assumptions to make economics more like a physical science and like a game of chance where the probability of things happening can be calculated accurately.

There’s a big element of self-delusion in this. If you accuse an economist of thinking they know what the future holds, they’ll vehemently deny it. No one could be so silly. But the truth is they go on analysing economic behaviour and making predictions in ways that implicitly assume it is possible to know the future.

Economists need to understand how humans press on with life and business despite the uncertainty – and usually don’t do too badly.

Kay and King make three points in their book. First, the world of economics, business and finance is “non-stationary” – it’s not governed by unchanging scientific laws. “Different individuals and groups will make different assessments and arrive at different decisions, and often there will be no objectively right answer, either before or after the event,” they say.

Why not? Because we so often have to make decisions while not knowing all there is to know about the choices and consequences we face in the world right now, let alone what will happen in the future.

Second, the uncertainty that surrounds us means individuals cannot and do not “optimise”. Economics assumes that individuals seek to maximise their satisfaction or “utility”, businesses maximise shareholder value and public policymakers maximise social welfare – each within the various “constraints” they face.

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But, in reality, no one makes decisions the way economic textbooks say they do. Economists know this, but have convinced themselves they can still make accurate predictions by assuming people behave “as if” they were following the textbook. That is, people do it unconsciously and so behave “rationally”.

Kay and King argue that people don’t behave rationally in the narrow way economists use that word to mean, but neither do they behave irrationally. Rather, people behave rationally in the common meaning of the word: they do the best they can with the limited information available.

Third, the authors say humans are social animals, which means communication with other people plays an important role in the way people make decisions. We develop our thinking by forming stories (“narratives”) which we use to convince others and to debate which way we should jump. We’ve built a market economy of extraordinary complexity by developing networks of trust, cooperation and coordination.

We live in a world that abounds in “radical” uncertainty – having to make decisions without all the information we need. Rather than imagining they can understand and predict how people behave by doing mathematical calculations, economists need to understand how humans press on with life and business despite the uncertainty – and usually don’t do too badly.

Ross Gittins is the economics editor.

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Jobs picture turns negative and there’s more bad news to come, economists warn


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A weaker labour market could factor into other economic statistics as well. The latest jobs report “offers the first concrete piece of evidence that the Canadian economy likely contracted in December,” said Nikita Perevalov, director of economic forecasting at Bank of Nova Scotia, in a report on Friday.

And COVID-19’s drag on the economy is poised to have longer-lasting effects.

The workforce participation rate dipped in December by 0.2 percentage points, to 64.9 per cent. The drop in labour force participation rates was “mostly comprised of male youth and working women, likely frustrated by the job search and staying home to take care of suddenly homebound children, respectively,” according to Leah Nord, the Canadian Chamber of Commerce’s senior director of workforce strategies and inclusive growth.

“The enduring impacts of the increasingly long-term unemployed and workforce drop-outs will cast a long shadow upon the recovery, as re-entry into what will assuredly be a very different labour market presents significant obstacles,” Nord added in a statement.

A recent report from Royal Bank of Canada’s economics unit found that, between February and October, 20,600 women “fell out” of the country’s workforce. Meanwhile, moves like Ontario’s recent extension of online learning for elementary school students will weigh on working parents.

“This trend of increasing employment that we saw through till November, we wouldn’t expect it to return anytime soon,” Nord said in an interview.

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Return of the Obama Economists


If Joe Biden is trying to distinguish his emerging Administration from Barack Obama’s, he hasn’t succeeded in the choice of economic advisers he rolled out Monday. They’re Obama veterans who believe in more spending, more regulation, higher taxes, and easier money. Let’s hope the result is better than what became known as “secular stagnation” during the Obama years.

Janet Yellen, the Treasury nominee, is an economist with a distinguished political resume. She’s a Keynesian from the James Tobin school who believes in spending as fiscal stimulus and low interest rates. As Federal Reserve Chair in Mr. Obama’s second term, she was slow to raise interest rates and reduce the Fed’s bond purchases. She’ll likely favor a 2009-style policy mix next year with a spending blowout while urging the Fed to monetize it.

Mr. Biden has also signed up Jared Bernstein, an architect of the Obama stimulus who famously predicted in January 2009 that spending would keep unemployment below 8% and hit 7% by autumn of 2010. Not quite. The jobless rate hit 10% in October 2009, stayed at 9.9% through April 2010, and didn’t fall below 7% until November 2013. Mr. Bernstein put his trust in the Keynesian “multiplier” that $1 of new spending yields as much as an extra $1.57 or more of additional GDP. Wrong again.

Mr. Bernstein will join the White House Council of Economic Advisers, where his boss will be Princeton economist Cecilia Rouse. She’s a veteran of the Clinton and Obama White Houses. Her academic work has focused on microeconomic subjects such as education and the labor market, and her research is skeptical of the benefits of school choice.

Mr. Biden’s National Economic Council that coordinates economic policy at the White House will be led by Brian Deese, another Obama veteran. Mr. Deese helped to design the 2009 auto bailout that was controversial for gutting bondholder contracts. In political exile he has worked for BlackRock , where he is the global head for sustainable investing—the political portfolio for environmental, social and governance (ESG) issues.



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No evidence that increased unemployment benefits act as disincentive for job seekers, economists say | Welfare


There is “no evidence” the coronavirus supplement stopped jobseekers looking for work and even a “substantial increase” in unemployment benefits would not provide a disincentive to take a job.

Those are the conclusions of the labour market economist Jeff Borland presented to a Senate inquiry into extending the supplement to March at the reduced rate of $150 a fortnight.

The evidence, supported by the social policy academic Peter Whiteford, contradicts concerns from Coalition backbench MPs and anecdotal evidence from employers that jobseekers are turning down work.

Scott Morrison has warned temporary economic supports must be pared back to prevent disincentive effects, reasoning that drove the government to cut the supplement from $550 a fortnight from September.

Borland told the Senate community affairs legislation committee that there was “no evidence the higher jobseeker rate in 2020 has had any appreciable effect on incentives to take up paid work”.

Borland found that although the rate of people moving from unemployment to employment froze at the start of the pandemic, as soon as the economy reopened in May “the rate of that flow … returned to its previous level” compared with the preceding three years.

Nor were job vacancies taking longer to fill, which would be expected if jobseeker acted as a disincentive, he said.

Borland said although there was “anecdotal” evidence from some employers, they could be attributing regular difficulty filling positions to the supplement.

“There are always some employers who have difficulty” filling positions, he said, citing employment department data from before the pandemic showing some 45% of employers complained of difficulty filling vacancies despite 20 applicants on average for each job.

Whiteford noted that if jobseeker goes back to its old rate of $40 a day it will be 40% of the minimum wage, providing an “extremely high” incentive to find work.

But even if jobseeker was raised to the rate of the age pension, at 65% of the minimum wage, workers would still be “much, much better off” in full-time work, he said.

In November, Morrison said Australia’s safety net could “potentially” act as an impediment to employment “as we hear from so many employers around the country who are seeking people to go into jobs”.

In June Guardian Australia revealed claims that jobseekers were turning down work were based on a handful of responses from among 2,324 surveyed employers.

The shadow social services minister, Linda Burney, said the government “continues to contradict the evidence of the experts by cynically insinuating that Australians out of work are choosing unemployment”.

“With 1.8 million Australians expected to be on unemployment by the end of the year, the reality is that there are simply not enough jobs for everyone who needs one.”

The Greens senator Rachel Siewert said it was “outrageous that the government have continued their ideological attacks on people on income support in the face of the worst recession of a generation”.

Despite the government insisting no decision has been made about the future of jobseeker payments, the coronavirus supplement extension bill stipulates that after 31 March the supplement will be repealed.

The bill permanently removes Covid-19 exemptions to the liquid assets test waiting period and the assets test, meaning singles with $5,500 of liquid assets and couples with $11,000 would have to wait up to 13 weeks to get jobseeker.

Earlier in the hearing, the Australian Council of Social Services chief executive, Cassandra Goldie, urged the Senate to oppose the bill on the basis it should instead push for jobseeker to be raised to the rate of the aged pension.

Corey Irlam, the deputy chief executive of the Council of the Ageing, said a return to the old rate of jobseeker would drive older Australians, who face great difficulty re-entering the workforce over the age of 55, further into poverty.

Paul Zahra, the chief executive of the Australian Retailers Association, said the coronavirus supplement had been the “quiet achiever” of the pandemic, helping support an anticipated 2.8% increase in Christmas trade compared with 2019.

Given 58% of jobseeker payments were spent in retail, Zahra said the ARA estimated that the supplement was worth $8.5bn per year to the sector, helping to support 130,000 jobs.



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Australia lending $1.5 Billion to Indonesia

money loan

A Symbolic Gesture

Treasurer Josh Frydenberg and Indonesian Finance Minister Sri Mulyani Indrawati announced in a joint statement, that Australia will provide $1.5 billion to Indonesia as a loan.

On the statement, it was emphasized that the loan builds on their highly valued economic relationship and a strong record of bilateral cooperation. This is yet another largely symbolic gesture.

This was after Indonesia falls into its first recession in 22 years while it grapples with the surge of Coronavirus cases. The statement read “COVID-19 poses an unprecedented challenge to the Indo-Pacific and the world”.

Given that Indonesia is an important regional strategic partner to Australia, the said loan would be used to support Indonesia’s budget and was repayable over 15 years. As stated “Indonesia’s recovery and ongoing prosperity is critical to the stability and security of our region.”

It is devastating to hear that holiday island of Bali has been the worst affected due to a halt in international tourism. It suffered from a 12.28 per cent drop in gross regional domestic product in the third quarter of 2020, following a fall of 10.98 per cent in the previous quarter.

 On a bigger picture, Indonesia’s gross domestic product shrank by 3.49 per cent in the said period, following a 5.32 per cent contraction in the previous quarter.

A landmark free-trade agreement between Australia and Indonesia came into force in July this year, but has not been as fruitful as expected due to domestic expenditure to mitigate the effects of the pandemic.

Economists are saying that it will not have a major impact on Indonesia’s current economic troubles. For instance, Arianto Patunru, an Indonesian economist, told ABC that the loan is largely a “symbolic sign.” “To put that into perspective, the Indonesian Ministry of Finance needs to raise funding of around $US8-10 billion per month to deal with COVID-19,” he said.

However, the gesture by Australia will still assist Indonesia in calming the markets and restoring investor confidence, Mr Patunru added.

Used or not, the loan gives a signal to the market, and it is very essential. Whilst Indonesia is dealing with its economic problems, they also wanted to take care of the investor’s attitude and confidence. So at least, these investors don’t pull out their investments with this funding.

How Economists’ Faith in Markets Broke America


A little more than a generation ago, a stealthy revolution swept America. It was a dual changing of the guard: Two tribes, two attitudes, two approaches to a good society were simultaneously displaced by upstart rivals. In the world of business, the manufacturing bosses gave way to Wall Street dealmakers, bent on breaking up their empires. Organization Man,” as the journalist William H. Whyte had christened the corporate archetype in his 1956 book, was ousted by “Transaction Man,” to cite Nicholas Lemann’s latest work of social history. In the world of public policy, lawyers who counted on large institutions to deliver prosperity and social harmony lost influence. In their place rose quantitative thinkers who put their faith in markets. It was The Economists’ Hour, as the title of the New York Times editorial writer Binyamin Appelbaum’s debut book has it.

Together, Lemann and Appelbaum contribute to the second wave of post-2008 commentary. The first postmortems focused narrowly on the global financial crisis, dissecting the distorted incentives, regulatory frailty, and groupthink that caused bankers to blow up the world economy. The new round of analysis broadens the lens, searching out larger political and intellectual wrong turns, an expansion that reflects the morphing of the 2008 crash into a general populist surge. By excavating history, Lemann and Appelbaum remind us that Transaction Man and his economist allies were not always ascendant, and that they won’t necessarily remain so. This frees both writers to ask whether an alternative social contract might be imaginable, or preferable.

FSG

The first section of Lemann’s elegant history conjures up the corporatist order that preceded Transaction Man’s arrival. The story is shaped around Adolf Berle, a lawyer who, with the statistician Gardiner Means, wrote The Modern Corporation and Private Property, a classic study of the concentration of power in the hands of company managers. Before the publication of that masterpiece, in 1932, other authors had drawn attention to what one of them called the “prestidigitation, double shuffling, honey-fugling, hornswaggling, and skullduggery” employed by corporate executives to dupe their supposed masters, the shareholders. Berle went further. He laid out in detail how shareholders, being so dispersed and numerous, could not hope to restrain bosses—indeed, how nobody could do so. Enormous powers to shape society belonged to company chieftains who answered to no one. Hence Berle’s prescription: The government should regulate them.

Berle’s pro-regulatory stance won him an introduction to Franklin D. Roosevelt, and he became an influential New Dealer. But his vision truly triumphed after World War II, when regulation of corporate behavior was supplemented by the rise of labor unions. In the winter of 1945–46, more than 300,000 members of the United Auto Workers union staged a successful strike at General Motors that lasted 113 days, and a few years later, in 1950, the company resolved that further confrontations would be too painful. In what became known as “the Treaty of Detroit,” GM’s bosses granted workers regular cost-of-living pay increases, a measure of job security, health insurance, and a pension—benefits that were almost unheard-of. General Motors had “set itself up as a comprehensive welfare state for its workers,” in Lemann’s succinct formulation.

Berle celebrated the Treaty of Detroit by propounding a pro-corporate liberalism. The corporation had become the “conscience-carrier of twentieth-century American society,” he marveled. Many contemporaries agreed. “The large mass-production plant is our social reality, our representative institution, which has to carry the burden of our dreams,” the rising management theorist Peter Drucker wrote. Anticipating the “end of history” triumphalism of a later era, the sociologist Daniel Bell feted the corporatist order in a book titled The End of Ideology.

Of course, corporatism proved less robust than these writers expected. Berle’s “clash of the titans” liberalism, built on checks and balances among big corporations, big government, and big labor, fell afoul of American individualism. Conservatives railed against big government for stifling freedom. Liberals denounced big corporations for reducing employees to automatons. Both sides came to see big labor as the protector of special interests. In 1965, as Lemann reminds us, the novelist Norman Mailer had one of his characters interrupt a lovemaking session to pluck out his partner’s diaphragm—“a corporate rubbery obstruction.”

Yet the chief threat to Berle’s vision came not from America’s suspicion of concentrated power. It came from economics.

Appelbaum opens his book with the observation that economics was not always the imperial discipline. Roosevelt was delighted to consult lawyers such as Berle, but he dismissed John Maynard Keynes as an impractical “mathematician.” Regulatory agencies were headed by lawyers, and courts dismissed economic evidence as irrelevant. In 1963, President John F. Kennedy’s Treasury secretary made a point of excluding academic economists from a review of the international monetary order, deeming their advice useless. William McChesney Martin, who presided over the Federal Reserve in the 1950s and ’60s, confined economists to the basement.

Little, Brown

Starting in the 1970s, however, economists began to wield extraordinary influence. They persuaded Richard Nixon to abolish the military draft. They brought economics into the courtroom. They took over many of the top posts at regulatory agencies, and they devised cost-benefit tests to ensure that regulations were warranted. To facilitate this testing, economists presumed to set a number on the value of life itself; some of the best passages of Appelbaum’s fine book describe this subtle revolution. Meanwhile, Fed chairmen were expected to have economic credentials. Soon the noneconomists on the Fed staff were languishing in the metaphorical basement.

Read: [How the Fed failed to learn from history]

The rise of economics, Appelbaum writes, “transformed the business of government, the conduct of business, and, as a result, the patterns of everyday life.” It was bound to have a marked effect on Berle’s pro-corporate liberalism. Lemann hangs this part of his story on Michael C. Jensen, an entertainingly impassioned financial economist who reframed attitudes toward the corporation in the mid-’70s.

Jensen agreed with Berle’s starting point: Corporate managers were unaccountable because shareholders could not restrain them. But rather than seeing a remedy in checks exerted by regulators and organized labor, Jensen proposed to overhaul the firm so that ownership and control were reunited. Executives should be rewarded more with stock and less with salary, so that they would think like shareholders and focus on the profits that shareholders wanted. Managers who failed to generate a good return would see their stock prices languish, which would create tempting takeover targets. A market for corporate control would redouble the pressure on bosses to behave like owners. Successful takeovers, in turn, would shift corporations into the hands of single, all-powerful proprietors, capable of overseeing management more effectively than scattered stockholders could. In sum, Jensen’s prescriptions inverted Berle’s. The market could be made to solve the problem of the firm. Government could pull back from regulation.

For ideas to have influence, Lemann observes, “there has to be a confluence between the ideas themselves, the spirit of the times, and the interests of powerful players who find the ideas congenial.” Berle had been lucky that his treatise on the corporation appeared when Roosevelt was launching his run for the presidency. Jensen was equally fortunate in his own way. Shortly after the publication of his research, the invention of junk bonds made hostile takeovers the rage. During the ’80s, more than a quarter of the companies on the Fortune 500 list were targeted. Jensen became the scholar who explained why this unprecedented boardroom bloodbath was good news for America.

And to a considerable extent, the news was good. Shielded from market discipline, the old corporate heads had deployed capital carelessly. They had expanded into new markets for reasons of vanity, squandered money on fancy management dining rooms, and signed labor contracts like the Treaty of Detroit, which—however statesmanlike—stored up liabilities to retirees that would ultimately hobble their companies. From 1977 to 1988, Jensen calculated, American corporations had increased in value by $500 billion as a result of the new market for corporate control. Reengineered and reinvigorated, American business staved off what might have been an existential threat from Japanese competition.

Yet a large cost eluded Jensen’s calculations. The social contract of the Berle era was gone: the unstated assumption of lifetime employment, the promise of retirement benefits, the sense of community and stability and shared purpose that gave millions of lives their meaning. Berle had viewed the corporation as a social and political institution as much as an economic one, and the dismembering of corporations on purely economic grounds was bound to generate fallout that had not been accounted for. Meanwhile, Jensen’s market-centric mind-set permeated finance, enabling opaque risks to build up in banks and other trading houses. As the collapse of Enron and other corporate darlings revealed, a good deal of non-market-related accounting fraud compounded the fragility. Even before the 2008 crash, Jensen disavowed the transactional culture he had helped to legitimize. Holy shit, Jensen remembers saying to himself. Anything can be corrupted.

The wider story of the market-centric worldview provides the meat of Appelbaum’s narrative. It is a tricky tale to tell, because many of the myths of the era fall apart on close inspection. Contrary to common presumption, the economics establishment in the 1990s and 2000s did not believe that markets were perfectly efficient. Rather, influential economists took the pragmatic view that markets would discipline financiers more effectively than regulators could. Alan Greenspan, the Fed chairman who is often painted as the embodiment of the pro-market age, had been preoccupied with the destabilizing inefficiencies in finance since the 1950s. Lawrence Summers, the Harvard economist who became Treasury secretary under Bill Clinton, had contributed to the academic literature on the limits of market efficiency. The fact that such sophisticated people presided over a dangerous buildup in financial risk suggests that something larger was at work than a naive faith in markets.

Appelbaum’s strength is that he generally acknowledges these complexities. He is happy to state at the outset that market-oriented reforms have lifted billions out of poverty, and to recognize that the deregulation that helped undo Berle-ism was not some kind of right-wing plot. In the late ’70s, it was initiated by Democrats such as President Jimmy Carter and Senator Ted Kennedy.

But Appelbaum makes it his mission to highlight instances where the market mind-set went awry. Inequality has grown to unacceptable extremes in highly developed economies. From 1980 to 2010, life expectancy for poor Americans scandalously declined, even as the rich lived longer. Meanwhile, the primacy of economics has not generated faster economic growth. From 1990 until the eve of the financial crisis, U.S. real GDP per person grew by a little under 2 percent a year, less than the 2.5 percent a year in the oil-shocked 1970s.

Read: [Why the poor die young]

As Appelbaum shows, economists have repeatedly made excessive claims for their discipline. In the ’60s, Kennedy’s and Johnson’s advisers thought they had the business cycle tamed. They believed they could prevent recessions by “fine-tuning” tax and spending policies. When this expectation was exposed as hubris, Milton Friedman urged central banks to focus exclusively on the supply of money circulating in the economy. This too was soon discredited. From the ’90s onward, economists oversold the benefits of targeting inflation, forgetting that other perils—the human cost of unemployment, the destabilization wrought by financial bubbles—might well be worse than rising prices. Meanwhile, Greenspan and Summers ducked the political challenge of buffering new kinds of financial trading with regulatory safeguards. To be fair, the Wall Street lobbies presented more of an obstacle to regulation than critics acknowledge. Still, Greenspan and Summers miscalculated.

The upshot was the whirlwind of the past decade: the greatest financial crash in recent memory, and a crisis of legitimacy in the world’s advanced democracies. After decades in which economists’ influence expanded rapidly, the striking thing about the Trump administration and its foreign analogues is that they have largely dispensed with economic advisers. The United States has lived through the era of corporatism, the era of transactionalism, and the economists’ hour. The intellectual marketplace awaits a fresh approach to the structuring of work and the good society.

Lemann and Appelbaum wisely don’t pretend there are easy solutions. The benevolent corporatism of the Treaty of Detroit reflected a world in which American industry faced little foreign competition and new technologies were generally developed by firmly established businesses. By contrast, today’s fierce international competition and disruptive innovation oblige businesses to cut costs or go under. The dilemma is that, even as they compel efficiency, globalization and technological change exacerbate inequality and uncertainty and therefore the need for a compassionate social contract.

Lemann explores one response to this dilemma through the figure of Reid Hoffman, who founded the online professional network LinkedIn and is the third starring character in Lemann’s history of grand conceptions. It is an inspired piece of casting. As a stalwart of Silicon Valley, Hoffman hails from the complex of start-ups that are intent on disrupting what remains of the old-line corporate establishment. At the same time, as the creator of LinkedIn, he represents a purported antidote to the insecurity that results from the disruption.

The promise of online professional networking is that, by building a raft of cyberconnections, workers will safely navigate the rapids of the new economy. Each person’s network, not any one firm, will be the guarantor of employment. Corporations are freed to pursue efficiency as they see fit; individuals nonetheless enjoy some of the security of the old corporatist era, because they have a new tool to help them. LinkedIn thus becomes the psychological center of the world of work—the successor to the corporation. One of Hoffman’s books is titled, rather appropriately, The Start-Up of You. Whereas Transaction Man treated workers as costs on a spreadsheet, Network Man wants to empower them.

One in four American adults says they use LinkedIn, and many recruiters go to the site regularly. But LinkedIn is not a solution to worker insecurity writ large, still less to inequality. On the contrary, a world in which people compete to gather connections may be even less equal than our current one. A few high-octane networkers will attract large followings, while a long tail of pedestrians will have only a handful of buddies. At one point in its evolution, LinkedIn published the size of each user’s network as a spur to add to the total. Later, realizing the anxiety this bred, the site capped the number of connections it published at 500 per member.

Read: [The secret shame of middle-class Americans]

Lemann is under no illusions that online networks are the answer to the search for security and dignity, and he concludes with a different proposal. It is a sort of anticonception conception: Rather than buy in to a single grand vision, societies should prefer a robust contest among interest groups—what Lemann calls pluralism. Borrowing from the forgotten early-20th-century political scientist Arthur Bentley, Lemann defines groups broadly. States and cities are “locality groups,” income categories are “wealth groups,” supporters of a particular politician constitute “personality groups.” People inevitably affiliate themselves with such groups; groups naturally compete to influence the government; and the resulting push and pull, not squabbles among intellectuals about organizing concepts, constitutes the proper stuff of politics. Lemann has a particular respect for the interest groups that fight for Chicago Lawn, the struggling working-class neighborhood that appears at intervals throughout his book, mostly as the victim of some remote transaction. Organizing in one’s interests, he suggests, “is the only effective way to get protection against the inevitable lacunae in somebody else’s big idea.”

Lemann is aware of the risks in this conclusion. He cites the obvious objection: “The flaw in the pluralist heaven is that the heavenly chorus sings with a strong upper-class accent.” In a contest of competing interest groups, the ones with the most money are likely to win. Rich seniors will protect their health benefits at the expense of public housing; the estate tax will vanish, and so will the dream of good preschools for poor children. Appelbaum notes in passing how the beer magnate Joseph Coors helped found the Heritage Foundation to promote a conservative pro-business agenda, and how another businessman, Howard Jarvis, spearheaded the California proposition that reduced property taxes. For those who regard inequality as a challenge, an interest-group free-for-all is a perilous prescription.

Lemann’s pluralism also prompts a deeper reservation. His vision frames politics as a zero-sum affair, dismissing as futile the quest for “a broad, objectively determined meliorist plan that will help everyone.” But this postmodernist pessimism goes too far. Some policies are better than others, and to give up on this truth is to throw away the sharpest sword in the fight against inequality. The government should bankroll good schools because, objectively speaking, good schools will boost both economic growth and social equity. Likewise, competition is generally a force that gets the best out of people, whether they are public-school teachers or tech monopolists. America’s health-care system is ripe for reform because it is both socially unjust and scandalously costly.

At the close of his book, Appelbaum presents a series of persuasive recommendations, confirming that Lemann is wrong to despair of reasoned, technocratic argument. If policy makers want ordinary Americans to appreciate the benefits of open trade, they must ensure that displaced workers have access to training and health care. Because some interest groups are weaker than others, government should correct the double standard by which the power of labor unions is regarded with antipathy but the power of business monopolies is tolerated. Well-heeled professional cartels, such as associations of real-estate agents who extract 6 percent commissions from hapless home sellers, should be eyed with suspicion. Progressives should look for ways to be pro-competition but anti-inequality.

Yet however reasonable Appelbaum’s arguments, readers are also left with a question about the future. Although he sets out to write the story of the economists’ hour—an hour that he thinks ended in 2008—it isn’t so clear that the economists have departed. They may not have the ear of populists, but their resilience shouldn’t be underrated. Indeed, throughout Appelbaum’s narrative, many of the knights who slay the dragons of bad economic ideology are economists themselves. The story of the past generation is more about debates among economists than about economists pitted against laypeople. Perhaps, with a bit of humility and retooling, the economists will have their day again. If they do not come up with the next set of good ideas, it is not obvious who will.


This article appears in the September 2019 print edition with the headline “How the Dismal Science Broke America.”





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Economists deliver verdict of corona-budget


Saul Eslake sees JobKeeper as a key recovery tool.Credit:Jesse Marlow

“My reservations are primarily that the budget is very heavily reliant on businesses, in particular, and households responding as the government expects to the incentives.”

Eslake is referring to roughly $35 billion in tax cuts and incentives for business – including a subsidy for hiring jobless under 35s; an asset write-off scheme to minimise tax bills; and the ability to “carry back” losses against previously booked profits for a cash refund of tax paid.

In addition, households will enjoy $17.8 billion in extra income tax relief, with tax cuts set to flow as early as next month.

The government is gambling that businesses and households will take the bait and spend, rather than save, the money.

“They may do so, and I hope they will,” says Eslake. “There were other strategies which could have given greater confidence that the money would actually be spent: namely, providing it in the form of time-limited, tradeable vouchers.”

PwC chief economist Jeremy Thorpe is more optimistic, awarding the budget a solid “B” grade.

“In the current environment, the prioritisation of jobs growth is spot on,” says Thorpe. “The challenge is to give both consumers and businesses confidence to spend and invest. I suspect both groups would come away from the Budget more optimistic than they went in.”

I presented the team with the following grading system to score the budget:

A – This is the budget the nation needs right now

B – It’s not perfect, but this budget will stand us in good stead

C – I have some reservations about what the government has done

D – I have significant reservations about whether this budget will deliver what the nation needs right now

F – This budget fails to deliver the support our economy needs right now

“I’d go with B,” says tax expert Miranda Stewart. “Definitely not perfect! But spending and stimulus is needed right now, as are subsidies for ongoing jobs.”

Deloitte Access Economics director Chris Richardson.

Deloitte Access Economics director Chris Richardson.Credit:Alex Ellinghausen

Deloitte Access Economics’ Chris Richardson also gives the budget a “B”, noting that the government could have spent even more, given the cost of borrowing is so low.

There’s plenty to worry about in a pandemic, but the extra government debt is not one of them. Yes, debt is up, but interest rates have dropped so spectacularly that the cost of debt [interest payments] in the next four years will be LOWER than they were in 2018-19. It’s a phantom menace.”

As things stand: “We may need to do more to drive unemployment back to 5.5 per cent,” says Richardson.

On the harsher end of the grading scale, both the University of NSW’s Gigi Foster and the Grattan Institute’s Danielle Wood score the budget a B-minus.

Says Wood: “It was absolutely the right call to change course on fiscal strategy and recognise the need for sizeable stimulus – so marks for that. But I don’t think the mix of policies was right to provide the biggest economic kick.”

Instead of incentivising business to invest, the government could have done more to stimulate household consumption or directly create jobs.

Putting almost all the direct job-creation dollars into hard-hat professions – infrastructure, construction, manufacturing, defence, utilities and energy – suggests a real blind spot,” says Wood. “Services jobs are jobs too and have been hit hardest by this recession. And spending on government services creates more jobs per dollar than spending on infrastructure.”

All three female economists also note the absence of action on childcare costs.

“In the May budget, the absolute priority must be some proper attention paid to childcare,” says Stewart who is worried about the work disincentive high costs create for second earners.

'Better mix of policies needed': Danielle Wood of the Grattan Institute.

‘Better mix of policies needed’: Danielle Wood of the Grattan Institute.Credit:Dominic Lorrimer

“A quick run of the numbers with Stage 2 tax cuts shows that a second earner on the median female wage, with two kids and a partner full time on the median male wage, would keep less than $31 dollars on all days of work from one day a week after taxes, net childcare cost, and losing family benefits are taken into account,” says Stewart.

“That’s a whopping effective tax rate of 85 per cent. On Days 4 and 5 of work, she faces an effective tax rate of 95 per cent. The main cause is net childcare cost. The tax cuts do nothing to help this moderate income earning family.”

Foster agrees: “Out-of-pocket childcare costs are a tax on working. Free childcare is therefore a massive stimulus to young workers. Fully-funded, high-quality, accessible childcare offers a triple benefit for Australia: it releases labour and raises welfare today, it creates jobs everywhere (including in the regions), and it creates a more productive, happier, healthier next generation. What’s not to like?”

Asked for the number one outstanding policy issue not addressed in this budget, the team are unanimous: JobSeeker.

Says Eslake: “I really don’t understand why this wasn’t addressed in the budget – how much more new information could possibly be required before making a change that has been recognised across the political spectrum from the ACTU and ACOSS to the BCA and John Howard?”

Richardson is perhaps the most passionate on the topic: “Cutting the unemployment benefit back to $40 a day come Christmas (as is currently scheduled to happen) would be outstandingly bad policy. Not only strikingly unfair in a year in which “all in it together” is deservedly a catchcry, it is also really dumb regional policy.”

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National MPs should be lobbying hardest for an increase, he says: “Suburb by suburb, town by town in the bush, the coronavirus crisis has seen most jobs lost where unemployment rates were already the highest. That says a stronger JobSeeker takes care not only of Australia’s most needy families, it also takes care of Australia’s most needy communities.”

Eslake wants JobSeeker set at around 80 per cent of the single age pension “and then we don’t have to have this argument ever again”.

In summary, then, a solid effort, but more work needed.

As Thorpe colourfully concludes: “The economy is still in trauma and this Budget has been about cauterising the economic wound. In this environment, stabilising the economy has been the priority; it was not really the time for major structural reform. The next budget (or before) will need to be framed around structural reforms to supercharge economic growth: industrial relations reform; regulatory reform; tax reform; and so on.”

See you next semester.

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Our economists deliver their verdict


Saul Eslake sees JobKeeper as a key recovery tool.Credit:Jesse Marlow

“My reservations are primarily that the budget is very heavily reliant on businesses, in particular, and households responding as the government expects to the incentives.”

Eslake is referring to roughly $35 billion in tax cuts and incentives for business – including a subsidy for hiring jobless under 35s; an asset write-off scheme to minimise tax bills; and the ability to “carry back” losses against previously booked profits for a cash refund of tax paid.

In addition, households will enjoy $17.8 billion in extra income tax relief, with tax cuts set to flow as early as next month.

The government is gambling that businesses and households will take the bait and spend, rather than save, the money.

“They may do so, and I hope they will,” says Eslake. “There were other strategies which could have given greater confidence that the money would actually be spent: namely, providing it in the form of time-limited, tradeable vouchers.”

PwC chief economist Jeremy Thorpe is more optimistic, awarding the budget a solid “B” grade.

“In the current environment, the prioritisation of jobs growth is spot on,” says Thorpe. “The challenge is to give both consumers and businesses confidence to spend and invest. I suspect both groups would come away from the Budget more optimistic than they went in.”

I presented the team with the following grading system to score the budget:

A – This is the budget the nation needs right now

B – It’s not perfect, but this budget will stand us in good stead

C – I have some reservations about what the government has done

D – I have significant reservations about whether this budget will deliver what the nation needs right now

F – This budget fails to deliver the support our economy needs right now

“I’d go with B,” says tax expert Miranda Stewart. “Definitely not perfect! But spending and stimulus is needed right now, as are subsidies for ongoing jobs.”

Deloitte Access Economics director Chris Richardson.

Deloitte Access Economics director Chris Richardson.Credit:Alex Ellinghausen

Deloitte Access Economics’ Chris Richardson also gives the budget a “B”, noting that the government could have spent even more, given the cost of borrowing is so low.

There’s plenty to worry about in a pandemic, but the extra government debt is not one of them. Yes, debt is up, but interest rates have dropped so spectacularly that the cost of debt [interest payments] in the next four years will be LOWER than they were in 2018-19. It’s a phantom menace.”

As things stand: “We may need to do more to drive unemployment back to 5.5 per cent,” says Richardson.

On the harsher end of the grading scale, both the University of NSW’s Gigi Foster and the Grattan Institute’s Danielle Wood score the budget a B-minus.

Says Wood: “It was absolutely the right call to change course on fiscal strategy and recognise the need for sizeable stimulus – so marks for that. But I don’t think the mix of policies was right to provide the biggest economic kick.”

Instead of incentivising business to invest, the government could have done more to stimulate household consumption or directly create jobs.

Putting almost all the direct job-creation dollars into hard-hat professions – infrastructure, construction, manufacturing, defence, utilities and energy – suggests a real blind spot,” says Wood. “Services jobs are jobs too and have been hit hardest by this recession. And spending on government services creates more jobs per dollar than spending on infrastructure.”

All three female economists also note the absence of action on childcare costs.

“In the May budget, the absolute priority must be some proper attention paid to childcare,” says Stewart who is worried about the work disincentive high costs create for second earners.

'Better mix of policies needed': Danielle Wood of the Grattan Institute.

‘Better mix of policies needed’: Danielle Wood of the Grattan Institute.Credit:Dominic Lorrimer

“A quick run of the numbers with Stage 2 tax cuts shows that a second earner on the median female wage, with two kids and a partner full time on the median male wage, would keep less than $31 dollars on all days of work from one day a week after taxes, net childcare cost, and losing family benefits are taken into account,” says Stewart.

“That’s a whopping effective tax rate of 85 per cent. On Days 4 and 5 of work, she faces an effective tax rate of 95 per cent. The main cause is net childcare cost. The tax cuts do nothing to help this moderate income earning family.”

Foster agrees: “Out-of-pocket childcare costs are a tax on working. Free childcare is therefore a massive stimulus to young workers. Fully-funded, high-quality, accessible childcare offers a triple benefit for Australia: it releases labour and raises welfare today, it creates jobs everywhere (including in the regions), and it creates a more productive, happier, healthier next generation. What’s not to like?”

Asked for the number one outstanding policy issue not addressed in this budget, the team are unanimous: JobSeeker.

Says Eslake: “I really don’t understand why this wasn’t addressed in the budget – how much more new information could possibly be required before making a change that has been recognised across the political spectrum from the ACTU and ACOSS to the BCA and John Howard?”

Richardson is perhaps the most passionate on the topic: “Cutting the unemployment benefit back to $40 a day come Christmas (as is currently scheduled to happen) would be outstandingly bad policy. Not only strikingly unfair in a year in which “all in it together” is deservedly a catchcry, it is also really dumb regional policy.”

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National MPs should be lobbying hardest for an increase, he says: “Suburb by suburb, town by town in the bush, the coronavirus crisis has seen most jobs lost where unemployment rates were already the highest. That says a stronger JobSeeker takes care not only of Australia’s most needy families, it also takes care of Australia’s most needy communities.”

Eslake wants JobSeeker set at around 80 per cent of the single age pension “and then we don’t have to have this argument ever again”.

In summary, then, a solid effort, but more work needed.

As Thorpe colourfully concludes: “The economy is still in trauma and this Budget has been about cauterising the economic wound. In this environment, stabilising the economy has been the priority; it was not really the time for major structural reform. The next budget (or before) will need to be framed around structural reforms to supercharge economic growth: industrial relations reform; regulatory reform; tax reform; and so on.”

See you next semester.

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Economists cast doubt on rosy economic preditions


Tuesday’s budget predicted real gross domestic product to bounce back strongly after this year’s sharp contraction caused by the disruptions of COVID-19. It forecasts a strong growth rate of 4.75 per cent next financial year.

But Westpac warns that “fragilities in the economy pre-COVID” including very weak wages growth and legacies from the COVID recession could see that budget forecast “fall short.” Westpac expects growth to be a more subdued 2.9 per cent in 2020-21.

NAB anticipates both a bigger economic contraction than the budget forecast this financial year and a less pronounced improvement next financial year.

“Fundamentally, we are much more worried about the outlook than the forecasts published by the Treasury,” NAB’s budget analysis said.

The budget warned there was a “high degree of uncertainty around the outlook” because of the unpredictable ways the pandemic had affected economic activity. A key source of doubt is the timing and efficacy of any COVID-19 vaccines and other medical treatments. The budget papers assume that a COVID-19 vaccination program will be in place by late 2021, although that may prove to be best-case scenario.

The budget predicts a relatively rapid improvement in employment compared with previous recessions. It forecasts the unemployment rate to peak at 8 per cent in late 2020 before falling to 6.5 per cent next financial year and to 5.5 per cent in 2023-2024.

But Nicki Hutley, a partner at the forecaster Deloitte Access Economics, said she was very sceptical of that scenario.

“I’m prepared to say that I’ll eat a hat if we get to 5.5 per cent unemployment in the timeframe they have put,” she said. “I’d love to be wrong, but given other things that are going on and how sluggish the economy was before the pandemic…that’s all a bit rosy.”

Both NAB and Westpac also expect the unemployment rate to fall more slowly than the budget forecasts.

The budget predicts federal deficits totaling $480 billion over the next four years and for federal debt to reach an unprecedented $1.14 trillion.

If the forecasts made in the budget prove to be overly optimistic government expenditure will be even higher than expected putting further strain on federal finances.

Treasurer Josh Frydenberg and Prime Minister Scott Morrison outside Parliament House.Credit:Alex Ellinghausen

“That means the fiscal path back will take longer,” said Mr Oster.

Budget forecasts for household consumption, which fell by 2.6 per cent last financial year, were also questioned by experts. It is expected to contact by 1.5 per cent in 2020-21 but then to rise by 7 per cent the following year.

Although, on some forecasts economists said the budget may have been overly cautious. A budget review by the Commonwealth Bank said the outlook for iron ore and coking coal prices over the next two years were “too conservative.”

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Economists reveal their ‘dream budget’ to save the Australian economy


A recession entirely of government making now requires a recovery plan of the same origin.

Tax cuts or vouchers?

Asked for their one “burning” policy recommendation, interestingly, both Wood and Eslake nominate the same big, bold idea: a voucher program, whereby Australians have to spend the money by a certain date and with a list of certain industries.

Eslake wants it instead of tax cuts; Wood in addition to pulling forward Stage 2 of the government’s already planned income tax cuts.

“Hospitality, tourism and the arts have been the sectors hardest hit,” says Wood. “Tax cuts help indirectly but there is so much leakage, both to savings and to overseas-made goods.”

“Voucher systems or discount schemes can be targeted at hard-hit sectors to provide some short-term momentum. And every dollar spent hits the economy,” she adds, pointing to Britain’s ‘Eat Out to Help Out’ scheme and tourism vouchers made available by the Tasmanian and Northern Territory governments.

Danielle Wood: for vouchers and tax cuts.Credit:Dominic Lorrimer

Eslake wants the revenue which would be lost in a pull-forward of tax cuts to instead be spent on a program of vouchers which expire by a certain date.

“The great advantage of [vouchers] versus bringing forward tax cuts is that you guarantee the money will be spent. It will be spent when it is most helpful for it to be spent; and it will be spent in areas most in need of stimulus or in ways that are most likely to result in increased employment. Bringing forward tax cuts doesn’t do any of that.”

Eslake has thought it all through. The vouchers could be spent on any areas still affected by government restrictions, like tourism and the arts. Or areas that help people get back to work, such childcare or training. Or on essential bills like electricity, water and gas. They could be distributed by the Tax Office to taxpayers and through Centrelink to non-taxpayers.

Also arguing against tax cuts in this budget is Miranda Stewart, a fellow of the Tax and Transfer Policy Institute at the Australian National University’s Crawford School of Public Policy.

“There is little evidence that they will stimulate greater economic activity or consumption,” says Stewart.

However, supporting the case for tax cuts is Deloitte Access Economics’ Chris Richardson, along with PricewaterhouseCoopers chief economist Jeremy Thorpe and UNSW economist Gigi Foster.

JobSeeker and infrastructure

While divided on many things, the six economists are unanimous on two fronts: the need for greater infrastructure spending – although they differ on the format –and the need to permanently increase the rate of JobSeeker, currently scheduled to return to its old rate of $565 per fortnight come January.

Stewart is against any more one-off cash payments to households, such as the $750 coronavirus payment to pensioners. “As a general rule, I’d like to see our transfer/welfare system returning to a more normal systemic approach,” she says.

None of the economists supported an immediate extension to the JobKeeper scheme, currently set to expire on March 28 – although several said the option of extending should be kept open as required in the event of further lockdowns.

Deloitte Access Economics director Chris Richardson.

Deloitte Access Economics director Chris Richardson.Credit:Alex Ellinghausen

According to Stewart: “We should be moving towards JobSeeker as our main way of supporting those who are out of work, have lost jobs or reduced income due to the pandemic and lockdowns. It does not need to be as high as it was in July this year [boosted by a $550-per-fortnight supplement] but that inevitably means that it needs to be at a higher, liveable rate.”

And couples should be subject to individual income tests for JobSeeker, says Stewart, so that a high-income partner does not render a person ineligible for support. The work test should also be relaxed, so that the jobless can pick up more hours of casual or part-time work without being kicked off the payment.

Wood says JobSeeker should be permanently increased by at least $200 a fortnight for singles and rent assistance boosted 40 per cent; Foster wants “the bulk” of the $550 coronavirus supplement retained; and Eslake wants it set at 80 per cent of the age pension.

As for infrastructure spending, all six economists unanimously agree more spending is necessary.

PWC’s Thorpe wants “smart roads” investments to fit out roads and vehicles with the smart tags and meters needed to implement a system of road-user charging. Richardson wants similar forward thinking on congestion charging, along with smaller works projects in the bush. Eslake wants more money for repair, maintenance and upgrade of existing infrastructure, “even though that provides fewer opportunities for politicians to cut ribbons or unveil plaques with their own names on them”.

Social housing and childcare

Wood, Foster and Richardson all back more spending on social housing. Wood also suggests a program of sustainability retrofits of public buildings and cautions against simply plucking large projects from the existing transport wish-lists: “COVID will almost certainly lead to long-term changes to patterns of work and travel as well as lower population growth, so the existing pipeline of city-shaping transport infrastructure projects may no longer stack up.”

Unprompted, four of the six economists nominate childcare as an area where more government resources should be targeted in this budget.

Foster says the best way for the government to create jobs both in the short and long term would be to introduce universal childcare: “This would be a great source of employment, including in the regions, plus has huge benefits for young working families, distressed parents and of course future Australian productivity, as the period from 0 to 5 years of age is arguably the most important in human development.”

Childcare is a sector which all six economists agree needs additional attention in the budget.

Childcare is a sector which all six economists agree needs additional attention in the budget.Credit:Glenn Hunt

Getting back to business

As for stimulating business investment and activity, the economists are mixed on the best approach. Thorpe supports a further reduction in the company tax rate for small businesses, currently at 26 per cent.

“We need to shift from taxing people and business to taxing consumption,” he says. However boosting overall consumer confidence is the crucial missing ingredient to getting business to invest, he adds: “Incentives are good and necessary at the margin, but confidence that the market will be there is the key.”

As for Stewart: “I’d prefer a general tax cut for business to 25 per cent.”

Miranda Stewart: proposed a 25 per cent general tax cut for business.

Miranda Stewart: proposed a 25 per cent general tax cut for business.Credit:Vince Caligiuri

Wood says the current instant asset write-off scheme for business could be extended or eligibility broadened for accelerated depreciation. But she too adds that confidence is key: “Priority needs to be boosting demand … certainly these are much bigger barriers to investment than tax in the current environment.”

Eslake proposes a cut in company tax for all new businesses to “say, 15 per cent for the first five years”. This would be far more effective in creating jobs and innovation than tax cuts targeted at small businesses, he says.

Richardson agrees the tax burden on business needs to fall, but says this can be achieved through a business investment allowance rather than a cut to the headline corporate rate.

Foster is against cutting company tax: “Thirty per cent compares favourably with the corporate tax rates in many other countries. Plus large companies will spend resources to find ways to evade tax, meaning fiddling at the margin is unlikely to make a meaningful impact.”

Foster’s bold idea is for a HECS-style loans scheme for small businesses to encourage risk-taking and investment. Such loans could be repaid once revenues hit a threshold: “Such a scheme would take the downside risk burden onto the shoulders of government, and thereby reduce the negative impact of the uncertainty of the present environment on business’ appetite for investment.”

If the economists agree on one main thing, it’s the need for the government to step in – and step in big – to support the economy with extra spending.

Says Foster: “Let’s not worry too much about the debt levels per se. Let’s worry instead about getting the expenditure programs right to transition Australia back into full employment and a healthy, productive private sector.”

Richardson agrees: “I think the budget has to aim at getting jobs back as fast as we can.”

And Thorpe concludes: “We should not get too caught up in specific individual reforms. As we cross the bridge to recovery we need to be running, not walking.”

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