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So What’s the Deal with McCain and Social Security Taxes?

July 31st, 2008 . by economistmom

The blogosphere’s been all atwitter for the past few days, asking whether Senator McCain is a “flip-flopper” when it comes to his position on Social Security.  (I first caught on through Len Burman’s post on the TaxVox blog.)  But if one really listens to what McCain’s said, and who he thinks he’s saying it to, I don’t think it sounds like flip-flopping at all.  As example, from today’s ABC News blog (my emphasis added):

“In any negotiation that I might have, when I go in, my position will be that I am opposed to raising taxes. But we have to work together to save Social Security,” McCain said at a fundraiser Wednesday evening in Kansas City.

To his “conservative base,” McCain is pledging that his (starting) position is that he does not want any tax increases.  To his wise policy advisors and his “moderate base” (those who support him as the “maverick” on fiscal policy–who would like to believe that deep down he’s still that same John McCain who voted against the Bush tax cuts because of their fiscal irresponsibility), he reassures them that he knows that he can’t stand firm on his starting position on “no new Social Security taxes” if as President (versus someone just campaigning to be President) he expects to work with a Democratic Congress and actually accomplish something.

I have faith that a similar phenomenon is going on with the Obama campaign and their “no benefit cuts” position on Social Security.  It’s not an identical phenomenon though, because a President Obama would expect to be working with a Democratic Congress as well, so there’s a bit more danger of things staying “off the table.”

Judy Woodruff Talks Budget Baselines With McCain and Obama Advisors

July 30th, 2008 . by economistmom

Here is the video of Judy Woodruff’s July 29th PBS interview with McCain economic advisor, Nancy Pfotenhauer, and Obama economic advisor, Jason Furman.  Your homework:  Can you spot the budget baseline issues?  Look for the two biggies, and try to answer these questions for yourself (perhaps looking at previous posts here at this blog as your notes):

  • On ending/winning the war and using the “peace dividend” to reduce the budget deficit:  (i) how much deficit reduction is possible from said “dividend”, and how does that compare to the policies the candidates propose that would increase the deficit?; (ii) isn’t said ”dividend” implicitly already counted in the official budget baseline, since the war costs are not assumed to go on forever in the official baseline?…and (iii) no matter what the commitment of said “dividend” to deficit reduction, should that change our view of how the entirely deficit-financed war has adversely affected the budget outlook?
  • On extending the Bush tax cuts:  (i) the current-law, official CBO baseline has the tax cuts expiring at the end of 2010, so how does letting only some of them expire ”save” the federal budget any money?  (In my opinion, Jason Furman gives an honest response.)  (ii) if McCain wants to extend all the tax cuts and add new tax cuts, what does that imply about the effect of his tax cut proposals relative to either the official baseline or the “Bush policy extended” baseline? …and (iii) are you satisfied with Nancy Pfotenhauer’s explanation of the spending cuts that reconcile the McCain tax cut proposals with their claim of reaching a balanced budget by 2013?  (Are you in disbelief, or horrified?)

Finally, look for the two mentions of the Concord Coalition–one for each advisor.  What did Pfotenhauer say to subtly diss Concord, without literally labeling us “irrelevant”? 

Would You Work Harder If You Were Paid Less?

July 29th, 2008 . by economistmom

Yesterday’s Washington Post contained an interesting “Department of Human Behavior” column by Shankar Vedantam, called “When Play Becomes Work.”  It points to yet another unfortunate feature of “growing up” (and getting old):  that as grownups we start to expect to be paid for any exertion of effort, which can sap our internal motivation when the effort is no longer “just for fun” but instead is primarily for financial reward.  Shankar explains the scientific evidence behind the (perverse-to-economists) theory that suggests at least some of us might work “harder” if we were actually paid less:

Psychologists have long been interested in what happens when people’s internal drives are replaced by external motivations. A host of experiments have shown that when threats and rewards enter the picture, they tend to destroy the inner drives. Paychecks and pink slips might be powerful reasons to get out of bed each day, but they turn out to be surprisingly ineffective — and even counterproductive — in getting people to perform at their best.

More than three decades ago, Edward Deci, a social and personality psychologist at the University of Rochester, found the first experimental evidence of a phenomenon with wide relevance to the way most Americans conduct their personal, professional and social lives.

Deci tracked a bunch of college students who were solving puzzles for fun. He divided them into two groups. One group was allowed to keep solving puzzles as before. People in the other were offered a small financial reward for each puzzle they solved.

The psychologist later evaluated the volunteers: He found that people given a financial incentive were now less interested in solving puzzles on their own time. Although these people had earlier been just as eager as those in the other group, offering an external incentive seemed to kill their internal drive.

Beliefs about the utility of rewards and punishments in motivating human behavior are deeply ingrained, and most people don’t know that more than 100 research studies have shown that motivating people in this manner can have the unintentional effect of undermining their internal drives.

The striking thing about the research, said Roland Benabou, an economist at the Woodrow Wilson School of Public and International Affairs at Princeton University, is that it is so starkly at odds with bedrock economic principles.

“A central tenet of economics is that individuals respond to incentives,” Benabou noted in one research study. “For psychologists and sociologists, in contrast, rewards and punishments are often counterproductive, because they undermine intrinsic motivation.”

This pure, potentially adverse psychological effect of making rewards “too financial” in nature definitely is something new for economists to consider, as “starkly at odds” with what we are taught in our microeconomic theory courses.  (In economist’s lingo, it offers the rather startling possibility that the wage rate doesn’t just affect our budget constraint, but our utility function as well.  It sounds a bit like a case where the free market can transform us into “monsters”–or at least lazy “Pavlovian” humans.) 

But don’t get us economists wrong–we already understand that people get “utility” from (value) things other than what money can buy (yes, really).  When it comes to what people choose to do for a “living”, most people at least implicitly weigh the costs (pecuniary or not) versus the benefits (pecuniary or not) of accepting certain employment and do not just go work for the highest bidder.  (I’d even like to think that not everyone who earns gobs of money is doing it just for the money–and hence won’t be subject to the bad psychological transformation–but simply enjoys the good fortune of getting paid so much for doing what they would be willing to do for much less.)  It’s the economist’s concept of “compensating differential” that tells us that we often choose a job with lower pay but higher “quality of worklife” (assuming we can’t find that job with both higher pay and higher quality of worklife, that is). 

(Tip to employers:  don’t go throwing this “compensating differential” term around when trying to sell a potential employee on your lower-pay-but-higher-quality position you’ve offered him (unless the potential employee is a US-trained labor economist), lest you be misunderstood as offering to match the higher salary some other employer has offered him…. This advice is based on a true experience of my husband.)

Working mothers (UPDATE:  ok, maybe some working fathers, too), especially, understand the concept of “compensating differential” and often make the conscious tradeoff of accepting a lower salary for greater flexibilty and quality of (work and home) life.  (In fact, I just made that tradeoff in leaving Capitol Hill for the Concord Coalition.)  Because we have responsibilities to our families, it’s not simply a case of ”do what you love, and the money will follow” (which would say “don’t worry about how much you’ll get paid”)–but instead “can I afford to do what I love?” (which says “I want to do what I love, but I need to be able to pay the bills”).  In EconomistMom terms, the “income effect” of how high or low are the wages we command probably matters as much or more than the incentive (or “substitution”) effect, in terms of the positions we choose to accept, the tradeoff between the higher and lower paying jobs we’re willing to make.  The “price” of a higher-quality-but-lower-wage job is the differential between that lower wage and our higher wage alternatives (so the smaller the difference, the more attractive the lower-wage job), but the better quality job is a “luxury” good that we are better able to afford and more likely to choose the higher our overall household income (including our own (lower) wages).  And just like luxury goods, sometimes people see a higher price as a signal of higher quality (whether real or not), so that a higher price can sometimes create more demand, not less, for the product–or in this case, for the lower-wage job.  So both the incentive effects and income effects suggest that a higher wage offered on the higher-quality-but-(still) lower-wage job would make one more likely to choose such employment.

Once we’ve placed ourselves somewhere on the high wage vs. high quality employment possibilities frontier (chosen our job), the level of wages one receives on the job can matter as well for how “hard” we work at the job.  Whether the job is high paying or low paying, there’s a positive correlation between wages and effort.  If we’re ever cognizant of the fact that we’re earning less than our full market potential, then our wage rate can still matter for our on-the-job morale (”is that all I’m worth to them?”), and we might take advantage of opportunities to boost our ”effective wage” by effectively working fewer hours, for example, or by expending less effective effort by, for example, babysitting one’s son at the office.  (Not that I’d ever do that here at Concord…) 

That some people in fact choose their employment based on the “do what you love (as long as you can afford it)” model might in fact comfort employers who cannot afford but lower wages, but who want to know they’re recruiting a committed workforce.  It’s great from both the employer’s and employee’s perspectives if it’s true that the employee has so much passion about their work that they’d be willing to do their job for free or at least a lot less money–i.e., that the work feels like play.  …Well, as long as the boss doesn’t take you up on it.  ;)

Where I.O.U.S.A. Is Showing on August 21

July 29th, 2008 . by economistmom

Will the special one-night screening and simulcast panel discussion of I.O.U.S.A. on Thursday, August 21st (one night before the theatrical release) be coming to a theatre near you?  Go to the Fathom Events website to find out; you can plug in your zip code.

McCain on Bush’s Sad Fiscal Legacy

July 28th, 2008 . by economistmom

In a story to appear in Tuesday’s Washington Post, by Jonathan Weisman, Senator McCain comments on the $482 billion deficit the Administration now forecasts for fiscal year 2009:

Both presidential candidates used the new budget forecasts to bash Bush’s fiscal legacy, with McCain taking the biggest swing. The presumptive Republican nominee called the 2009 deficit “a sad legacy.”

“There is no more striking reminder of the need to reverse the profligate spending that has characterized this administration’s fiscal policy,” he said.

If Senator McCain really feels that way, then why is he proposing to continue said fiscal legacy–and beyond–with his platform of “super sized” Bush tax cuts?  Apparently the McCain campaign doesn’t recognize that the largest contributors to the “sad” fiscal legacy of the Bush Administration are the 2001 and 2003 tax cuts that have cost trillions of dollars and are far more profligate than any of the spending Senator McCain thinks he can get a handle on.

In a letter last year to House Budget Committee Chairman John Spratt, CBO wrote that the 2001 and 2003 tax cuts would contribute $245 billion toward a fiscal year 2009 deficit–which we now know represents more than half of it.  And in response to anyone who might criticize that estimate as being based on “static analysis,” note that the same letter discusses what accounting for the “dynamic” effects of the tax cuts does to the cost:

That [CBO] analysis [of the potential macroeconomic feedback effects on the cost of the 2001 and 2003 tax cuts] found that, on average, the economic effects of the budget’s proposals could add up to 2 percent to their cost or offset up to 9 percent of their cost.

So in other words, CBO’s analysis suggests that the best case scenario with dynamic feedback is that the Bush tax cuts contributed “only” $223 billion to the FY2009 deficit–or slightly less than half of it (46%).  (This is consistent with the Bush Treasury Department’s own dynamic analysis, which suggested at most a 10% offset–and only if the tax cuts were paid for with spending cuts, which we know they were not.  Here is a link to a Congressional Research Service memo by Jane Gravelle which translated the output effects presented in the Treasury analysis to the revenue offset.)

So if Senator McCain is looking for ways to cut the deficit in half, I’d suggest he do some self reflection and not just hunt down those evil earmarks. 

Good News, Bad News on the Deficit from the OMB

July 28th, 2008 . by economistmom

As reported by CQ’s David Clarke, from the Administration’s Office of Management and Budget in their “Midsession Review“…First, the good(?) news:

The deficit number for the current fiscal year [FY2008], which ends Sept. 30, is now projected to be $389 billion, or 2.7 percent of GDP. That is down from the $410 billion projected initially. But it is still higher than the final fiscal 2007 deficit of $162.8 billion and [the increase from 2007] is mostly due to the economic slowdown.

(Note that although the $389 billion is down from the Administration’s earlier projection of a $410 billion deficit for this fiscal year, it’s up from CBO’s March projection of $357 billion.  Some cynics have pointed to the Administration’s past track record of repeated overstating of the deficit as a strategy designed to give the appearance of fiscal responsibility.)

…and now, the bad news:

The Bush administration is now projecting a budget deficit of $482 billion in fiscal 2009 — a record high in dollar terms.

The previous record was $412.7 billion in fiscal 2004.

David is quick to point out (as does the Administration) the fallacy in considering this a real record, however:

The better way to gauge the size of the deficit, according to economists, is as a percentage of gross domestic product (GDP). Deficits in the mid-1980s were in the 5 percent range. In that light, the fiscal 2004 figure, 3.6 percent of GDP, was not particularly high by historical standards. The projected 2009 deficit would be 3.3 percent of GDP.

The Administration’s new projection of a $482 billion FY2009 deficit represents a $75 billion increase from their February projection of $407 billion–$49 billion coming from lower revenues (a combination of the cost of the stimulus and assumptions of a weaker economy) and $26 billion from higher outlays (mostly from the supplemental appropriations act which included war funding, emergency funding, and veterans’ educational benefits).  I haven’t yet read enough of the report to be able to say if that number seems like a “low ball” or a “high ball” number.

UPDATE (10 pm):  Apparently former Treasury Secretary Paul O’Neill thinks it’s a “low ball” number, according to Jonathan Weisman’s story in Tuesday’s Washington Post:

“That’s not the real number,” former Bush Treasury secretary Paul H. O’Neill said of the $482 billion deficit forecast. “It’s upward of $500 billion and counting. It’s a mind-boggling number.”

…and here’s a link to a CNN video story featuring Concord’s Bob Bixby (aka my boss).

The Administration still claims their policies would produce a small budget surplus in fiscal years 2012 and 2013, but that’s calculated on a baseline that assumes an ever-growing Alternative Minimum Tax and conservative growth in discretionary spending (including war spending).  With the usual adjustments for realistic policy, I think it’s more likely that there would remain a deficit in 2013 of over $400 billion.

Note that with the current year deficit a bit lower than $400 billion now, that tightens the Obama campaign’s 2013 deficit target a bit, given that Austan Goolsbee had claimed an Obama Administration would achieve a lower (nominal) deficit in 2013 than the current year deficit.  On the other hand, the Obama campaign has also adopted the realistic “policy extended” baseline as their baseline, and has only pledged to pay for their new initiatives relative to this baseline.  (No matter that this won’t help them when it comes to actually legislating under the PAYGO rules, which calibrate to the current law baseline.)  So under either benchmark, the Obama campaign seems to be fairly consistently setting a target 2013 deficit of right around $400 billion–maybe plus or minus $50 billion.

More later. 

EconomistMom Says You Gotta Go See This Movie!

July 26th, 2008 . by economistmom

IOUSA posterTwo thumbs up!  (I have two thumbs!) 

I have mentioned the movie I.O.U.S.A. before here on this blog, starting with my “about” page in discussing the new and improved (almost totally hip?) Concord Coalition, and then again in mid-June when the movie was shown at a DC-area film festival.  Well, mark your calendars… The movie opens in theatres in 10 major metropolitan areas–the “I.O.U.S.A. the movie” website lists New York, Los Angeles, Atlanta, Chicago, Dallas, Miami, Philadelphia, Kansas City, San Francisco, and Washington, D.C.–on Friday, August 22nd.  The evening before the theatrical release, on Thurs., August 21st, a much broader nationwide distribution of about 400 theatres will be treated to a special screening/sneak preview, to be immediately followed by a simulcast panel discussion featuring Warren Buffett, Pete Peterson, and David Walker.  (***UPDATE:  go to this “Fathom Events” webpage to find the theatre nearest you.)  If and when it will come back after the 21st for a run at your theatre, I’m not sure.  So save the evening of the 21st to see it when you can–and early.

Because I’m so privileged to work with many of the ”stars” in the movie (the movie features the Concord Coalition’s Fiscal Wake-Up Tour, great shots of our executive director (my boss) Bob Bixby in our humble Concord offices in Arlington, VA, and is very much oriented around Concord’s mission), I’ve had a chance to see the various versions of the movie as it has developed and improved and have even had the opportunity to meet and give feedback to the movie’s director, Patrick Creadon (how cool is that?).  I’ve now seen the movie four times, having just viewed the theatrical release version just yesterday, and I love it more each time I see it.  (I’m always the first one to clap at the end.)  I really think it’s so brilliant how Patrick has turned what would seem to be a dull, ”inside the Beltway” policy issue that one would normally only read about in too-technical government documents or see through C-SPAN coverage of too-tedious congressional hearings, into a sit-on-the-edge-of-your-seat (and learn), thoroughly entertaining motion picture.  Amazing.

But you might think I’m a little biased.  After all, I find the issue of fiscal responsibility so engaging that I thought I could build a blog (this blog) around it!

So don’t take this budget geek’s word for it… Check out this review by Jessica Mosby, of the Women’s International Perspective blog, who must have seen the movie at one of the film festivals or other special screenings.   Jessica is not an EconomistMom–she is, in her own words, ”a writer and critic living in San Francisco, California. In the rare moments when she’s not traveling across the United States for work, Jessica enjoys listening to public radio, buying organic food at local farmers markets, trolling junk stores, and collecting owl-themed tchotchke.”

My favorite parts of Jessica’s review:

…Creadon’s new film, which is based on the book of the same name, rebuffs the notion that “economics” and “fun” have to be mutually exclusive. For 85 minutes, I.O.U.S.A. zips through 200 years of American history to explain how the richest country in the world is currently $9.5 trillion in debt.

…If you have no idea or don’t even care that this debt exists, I.O.U.S.A. makes you want to learn. The film’s complex premise and daunting numbers are made more accessible by the use of colorful graphs and illustrations. Creadon effectively contrasts what average people think (or think they know) against experts’ analysis, which keeps the film from being too weighed down by statistics and theories.

…A significant portion of I.O.U.S.A. follows former U.S. Comptroller General David Walker and The Concord Coalition Executive Director Robert Bixby as they tour the country speaking in town hall meetings as part of their Fiscal Wake-Up Tour. Since 2005, Walker and Bixby have made it their mission to educate the public on the reality that the future of the country depends on making difficult financial decisions. Hearing two middle-aged bureaucrats talk about economics and the country’s dire future is oddly compelling and even funny (maybe it’s all the Tab soda that the good-humored Bixby is always drinking).

…Between 1980 and 1990 the national debt more than tripled. After being elected in 1992, President Bill Clinton broke his campaign promise to lower taxes, deciding instead to balance the budget and eliminate the debt by 2012. But we haven’t continued to pay down our debt; the rising budget deficit, and what that means for the country’s future, is why Walker and Bixby started their Fiscal Wake-Up Tour.

Even people who are aware of the budget deficit (and, according to the film’s hilarious interviews with random people on the street, that’s only a handful) don’t fully understand the complexity and ramifications of the deficit.

… I.O.U.S.A. is an incredibly timely documentary that is able to address a serious issue in an accessible and fun way, which is never an easy feat. Spending money and time on an educational documentary film may not appeal to everyone, but understanding the country’s economy is especially important as a recession looms and the price tag for the Iraq war escalates to $3 trillion. However, some people may be overwhelmed by the amount of information that the film presents, especially those not familiar with economics. 

…To its credit, I.O.U.S.A. does not take political sides; regardless of which party is in office – politicians on both sides of the aisle are responsible for the current situation…

…While it may be easier to simply ignore the complexities of the country’s finances, Americans actually have a chance to reevaluate their fiscal policies with the upcoming presidential elections – watching I.O.U.S.A. is a good place to start.

I will keep you readers informed about the movie’s release as I have more information to share.  For now, go to the movie’s website to check out the movie trailer and photos, and save Thursday evening, August 21st for a possible special screening coming to your neighborhood theatre (the evening before the big theatrical release to those 10 major metro areas).

And… YouTube links:

IOUSA movie trailer

interview with Patrick Creadon, with clips

Aha! Bill Gross Does Yoga–That Explains It!

July 26th, 2008 . by economistmom

Just noticed a crucial detail that had slipped by me in that “yoga bears” article from Thursday’s Wall Street Journal… Please check out my update to that yoga post!  (Wow…everything somehow ties together here on EconomistMom…)

My Daughter Got A Raise Yesterday

July 25th, 2008 . by economistmom

Not my “allowance trust fund” daughter, but my Baskin-Robbins daughter–as Virginia “observes” the federal minimum wage, which went up yesterday from $5.85/hour to $6.55/hour.  With the 15-20 hours/week she works, that’s at most $14 extra/week, which is still nothing in terms of the “true value” our family places on her B-R employment from getting that family discount on the ice cream…and even the occasional flubbed-up ice cream cake we get for free!  Which goes to show you that sometimes the biggest work incentive effects–perverse or otherwise–are unrelated to the wage rate.  ;)

(By the way, that’s not my daughter in the costume, but she’d definitely wear one of those if they boosted her wage rate another 70 cents or just hired more fun people to wear such costumes with her.)

UPDATE:  That’s my daughter, Allie, in comment #3 and the photo below (…wow! she’s making good money this week…the $400 is her guess for two weeks work)… She’s the one in the middle here:

McCain’s (Big) Net Spending Cut

July 24th, 2008 . by economistmom

OK, so continuing where I left off on the “Obama’s Net Tax Cut” post last night, here are some observations on the level of federal spending that Senator McCain and Senator Obama are (at least implicitly) proposing–as implied by what we know about their tax plans (via Tax Policy Center estimates) and their deficit targets (via the words of the candidates’ advisors).

From the CBO baseline, take outlays as a share of GDP in fiscal year 2013:  19.5% ($3.53 trillion; GDP is projected at $18.077 trillion).

From the same CBO baseline document, see the table on “the budgetary effects of selected policy alternatives not included in CBO’s baseline” (on pages 9-10 of the pdf file); this is the update of the usual “table 1-5″ in CBO’s January report.  From that table, add some more war spending ($25 billion in 2013) and a more realistic assumption about the growth of discretionary spending ($135 billion in 2013) to get a more realistic projection of outlays in 2013 of ($3.53 trillion + $160 billion = $3.69 trillion, which is):  20.4% of GDP.

McCain’s revenues in 2013, according to the Tax Policy Center estimates:  17.4% of GDP.  McCain’s claim for the 2013 budget deficit under a McCain Administration:  0.0%.  So, the implicit level of outlays in 2013, under a McCain Administration:  17.4% of GDP–or a cut from the realistic path worth 3.0% of GDP ($542 billion, or a 14.7% cut from the realistic level of outlays under current policy extended). 

Note that not only is 17.4% way below both the current and the 40-year historical average of federal outlays of about 20 1/2% of GDP, but in fact, it’s so low that over the past 40 years shown in CBO historical tables we have never had a single instance of such low federal spending.  (The lowest in 40 years was 18.4% in fiscal year 2000 and 18.5% in FY2001–i.e., at the end of the Clinton Administration.)  So I had to look to the historical tables in the FY2009 budget to find that the last time outlays were below 17.4% was in 1965 (at 17.2%).  Back then revenues were a lot lower as well, by the way–at only 17.0% of GDP–but still the gap (deficit) that year was only 0.2% of GDP.

Is a 3% of GDP cut in government spending below a “realistic baseline” realistic?  Of course, I think not, but that presumes that with an aging population and rising health care costs, as a society we wouldn’t be so cold hearted as to “cut the old people off” (…you’d think, especially if the President is one of those people).  But, paraphrasing Doug Holtz-Eakin who yesterday mentioned the two reactions he gets to the McCain balanced-budget-in-2013 claim:  (i) skepticism, and (ii) fear, he warned: “look out.”  (You can go back to the audio to get his exact words… **UPDATE:  looking back at my notes, what Doug said was that the “horrified folks better get ready.”)

In contrast, the Obama campaign’s decision to have a much less ambitious deficit reduction plan affords them a more realistic path for federal spending, at least as implied by the estimates of their tax proposals: 

Obama’s revenues in 2013, according to the TPC estimates:  18.2% of GDP.  Obama’s claim for the 2013 budget deficit under an Obama Administration:  if we interpret Austan Goolsbee’s remarks yesterday as suggesting a $400 billion deficit, that’s 2.2% of GDP.  If we take the Financial Times’ interpretation of a 2.5% of GDP deficit, that’s a $450 billion deficit.  So, the implicit level of outlays in 2013, under an Obama Administration:  somewhere in the 20.4-20.7% of GDP range (that’s 18.2% plus 2.2 to 2.5%).   Note that (coincidentally?) this is just about or slightly higher than where the realistic outlays projection takes us.

So, while Senator Obama is probably proposing a small net tax increase relative to a “policy extended” baseline, Senator McCain is clearly proposing a huge net spending decrease relative to any baseline.  It’s a very stark difference in the candidates’ visions of the future role of government–and a very stark choice we voters have before us.

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