European-wide unemployment insurance schemes will not solve the problem

On June 10, 2015, the Italian finance minister wrote an Op Ed article for the UK Guardian – Couldn’t Brussels bail out the jobless? – which continued the call from those who sought ‘reform’ of the Economic and Monetary Union in Europe for a European-wide unemployment insurance scheme. This idea continues to resonate within European circles and is held out as a major improvement to the failed Eurozone system. My response is that if this is as far as the political imagination can go in Europe among progressives then there is little hope that the EMU will become a vehicle for sustained prosperity. The creation of a European-wide unemployment insurance scheme is better than the current situation where the responsibility for providing income support to the unemployed outside of the private insurance arrangements is left to their Member States who surrendered their currency sovereignty upon joining the Eurozone. But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. Until the European debate shifts towards that issue and the policy players and the people who elect them realise that the fiscal design of the Eurozone is flawed at the most elemental level and that the fiscal rules superimposed upon that flawed design only serve to exacerbate the initial failure to construct a sustainable monetary union. Introducing a European-wide unemployment insurance scheme does not take us very far down that road of enlightenment.

The proposal by Italian finance minister, Pier Carlo Padoan was motivated by the his observation that:

… the euro area’s economic performance remains disappointing. The lasting impact of the financial crisis exposes a lack of demand, structural impediments to growth and job creation, and flaws in the architecture of economic and monetary union.

We can agree that there is a lack of demand (overall spending, especially distributed in areas still enduring depression conditions).

The cure is to expand spending and there are only two sectors that can do that: the government sector and the non-government sector.

The latter clearly is unwilling to embark on substantial private capital formation, household consumption expenditure is moderate and net export growth is not substantial enough to stimulate economic growth and any acceptable level, given the remaining mass unemployment.

Public expenditure is essentially also not capable of providing a growth engine because of the ridiculous fiscal restrictions that are imposed upon Member States by the treaties and the regulations within them.

The much-touted Juncker infrastructure plan was not only pitiful in its quantum but a year down the track we know that only a pitiful amount of that pitiful quantum has actually been expended. And even then, the funds were not net additions to the net financial assets of the Member States (that is, a ‘federal’ spending injection funded by the ECB) but were really just redistributed Member State spending. Pitiful is the only word one could use for that ruse.

We can also agree that the disappointing economic performance is a direct result of “flaws” in the design of the Eurozone.

Part of the neo-liberal Groupthink is to push all ills into the so-called “structural impediments” basket. This provides the mandarins with the cover necessary to deny that the problem is the lack of fiscal capacity at the Member State level and to propose so-called ‘reform agendas’, which include all manner of neo-liberal attacks on income support systems, worker entitlements, pensions, and public ownership of assets.

There are no structural impediments to public sector job creation in the Eurozone. Brussels and the ECB could cooperate and announce immediately that they would assist each Member State via coordination and funding in the introduction of a public sector Job Guarantee, which would take the form of an unconditional job offer and a reasonable minimum wage to anyone that wanted to work.

How long do you think the Eurozone unemployment rate would stay at around 11 per cent? How long do you think the Greek unemployment rate would remain around 25 per cent?

They could solve the mass unemployment malaise within days. If it took longer to accomplish the technical requirements to make these jobs operational, it would just mean that the unemployed would now be employed receiving a wage while waiting for a specific work assignment.

These workers would resume spending because they now had some income security again and the multiplier effects would flow on to stimulate private sector employment. Win-win!

Not a structural impediment in sight!

But the Italian finance minister has to run the ‘structural impediment’ line as part of the Groupthink.

Dr Padoan thinks that the crisis has generated a “social emergency”, which has raised “issues of such urgency and complexity that it calls for a more ambitious strategy than any we have previously tried”.

If you go back over the last several years you will find periodically some political or bureaucratic spokesperson within the Eurozone claiming that there is a calamity or emergency that urgently needs to be resolved.

It is now 2016, at least eight years into the crisis, and yet these urgencies seem to come and go without a great deal of progressive action coming out of Brussels or Frankfurt.

When I was young, the tale of the boy who cried wolf was told as a moral teaching. How many times do these political leaders need to ‘cry wolf’ before they lose any credibility at all?

The Italian finance minister claimed that:

The EU’s current policy mix is moving in the right direction.

Among a litany of so-called reforms that the European Commission has introduced to deal with the crisis, he listed the quantitative easing program of the ECB and Juncker’s pitiful investment plan as examples. He was not joking either.

He then claimed that “Eurozone labour markets especially must be made more resilient” and that this could be accomplished “by introducing a common European unemployment insurance scheme”.

He doesn’t exactly tell us what being “more resilient” actually means but we can take it to mean that unemployed workers would be in better position to receive income support which “would smooth demand and cushion the negative fallout of any future crises”.

But such a system would do little to reduce the consequences of the inherent design flaws of the Eurozone. Even in the Italian finance minister’s vision any increase in the degree of “fiscal integration would need to be designed to minimise moral hazard and avoid the need for permanent financial transfers between countries”.

And there you have it – his vision is not to create a redistributive system within the Eurozone such that while performing nations with low unemployment would transfer spending too poorly performing nations with high unemployment through some federal fiscal capacity funded at the federal level.

And just in case you imagined that this proposal was in some way a novel response to the ‘urgency’ of the crisis, you should think again.

In June 1989, the European Council accepted Delors Plan and resolved to begin the first stage on 1 July 1990. This was the precursor to the Maastricht meetings.

Soon after this meeting in Madrid, an Ecofin Committee working party (a sub-committee of the Finance Ministers’ group) considered how the Delors Report could be rendered acceptable to the Member States, bearing in mind that the Delors Committee had deliberately excluded the ‘politicians’ from the process to that point.

The vehement opposition from the British brought home the need to render something that would be politically acceptable.

French politician Élisabeth Guigou was charged with leading this ‘high level’ EMU group. A preliminary agenda setting meeting between European Council members and Ms Guigou was held in Paris on 15 September 1989.

The Minutes show that the Commission should:

… be ready to explain and advocate the need for binding rules in the budgetary field (in October’s meetings for the Group).

On September 27, 1989, the group produced an – issues paper – on the “role of the Community Budget”, in which they sought to separate so-called structural and macroeconomic issues, and determined that the intergovernmental conference that would be held in 1990 should consider whether a federal fiscal capacity in the proposed economic and monetary union was warranted.

They also wanted consideration of the possibility that federal fiscal policy could be used for discretionary changes in spending to help complement Member State policies, in pursuit of commonly agreed macroeconomic objectives.

A series of informal EMU workshops were run by the European Commission in late 1989 to advance the understanding of the options that were available in this regard.

Economists Daniel Gros and Jean Pisani-Ferry (1989) argued at one of these informal EMU workshops that the central issue to be decided related to fiscal policy.

They recognised that the standard view among economists considered that “a monetary union is politically acceptable only if it provides at least some ‘insurance’ scheme in the form of automatic income transfers among participating regions” (Page 14).

That is, they recognised that effective federations provided a federal fiscal capacity to provide relief when states within the federation were in recession.

They concluded that this “raises the issue of the appropriate level and role of the Community budget” and that such transfers could be achieved via a “Community wide unemployment insurance scheme or via some sort of fiscal equalisation mechanism” (Page 14).

[Reference: Gros, D. and Pisani-Ferry, J. (1989) ‘Costs and Benefits of EMU’, EMU Work Program, 11 October].

History tells us that there was no consensus on that point though.

The evolving consensus appeared to agree on very little and what was agreed would prove to be highly damaging to the capacity of the Eurozone to deliver prosperity.

It was widely held that the Bundesbank stipulation the new central bank could never fund government deficits. There was nuanced disagreement over what fiscal rules should be used to bolt down Member State fiscal policy.

There was no mention of the role of fiscal deficits in countering aggregate demand slumps and protecting employment. It was all about rules and constraints so as not to ‘compromise’ spending discipline.

So at that point, the idea of a European-wide unemployment insurance scheme was proposed and rejected as part of the broader rejection of any coherent fiscal capacity at the ‘federal’ level of the new monetary union.

Not much has really changed in the 26 years since then despite the crisis demonstrating that the propositions that were entertained and accepted in 1990 have led to a human disaster across the participating Member States.

The idea has been resurrected in the last several years as European policymakers have demonstrated an incapacity to deal with the crisis.

It is clear that the so-called ‘asymmetric shocks’ (spending contractions not evenly spread across the monetary union) have been particularly damaging to a monetary union comprised of relatively disparate economies.

When a particular state or region succumbs to a major downturn in economic activity, investment declines as sales plummet, unemployment rises, and new capital is hard to attract as it seeks profitable opportunities elsewhere.

The asymmetry of economic performance across a monetary union also highlights one of the major shortcomings of monetary policy: it cannot be spatially targeted.

The main policy tool at the central bank’s command is to set the interest rate, which is a one-size-fits-all tool. The experience of the EMU prior to the crisis illustrates this problem.

Given the fiscal policy settings, the ECB interest rates were too low for economies such as Spain and Ireland, which were undergoing unsustainable, and ultimately, destructive property booms. But some of the other economies, such as Germany and the Netherlands, were experiencing modest growth, which would have been undermined by higher interest rates.

In these instances, only a fiscal policy stimulus can provide the overall spending boost necessary to counteract the fall in private demand. The question then turns to what mix of fiscal policy tools is appropriate.

There are two sources of stimulus that fiscal policy can provide: (a) discretionary changes to the spending and/or taxation settings; and (b) the operation of the in-built automatic stabilisers, which refers to the inherent sensitivity of taxation revenue and spending to changes in economic activity.

Thus when economic activity falls and employment declines, the government automatically receives less taxation revenue and increases spending by way of welfare benefits.

No discretionary changes to the policy settings are needed for this second effect to work. The upshot is that the automatic stabilisers will push the fiscal deficit up and provide a modicum of spending support to the local economy.

In recessions, both sources of stimulus will typically be needed to ensure unemployment doesn’t escalate. Reliance on the automatic stabilisers alone only moderates the contraction, but will usually not provide sufficient stimulus to prevent the recession from occurring.

Automatic spending buffers respond to demand variations without the need for complicated and time-consuming political debate.

The design of the EMU deliberately reduced the potency of these automatic stabilisers.

How?

First, the EU fiscal capacity is miniscule by choice.

Second, the transfer mechanisms (for example, the regional and structural funds) are inflexible and cannot be triggered quickly to respond to cyclical assymetries.

In 2013, the German Young European Federalists proposed that a European level unemployment benefit system be established to “partly replace the national insurance systems”.

The scheme would bolster the so-called “automatic stabilisers” at the European level, which would provide some support to Member States suffering “asymmetric shocks”.

The scheme would be “funded through non-wage labour costs” (for example, a small levy on all payrolls) and provide support for workers for 12 months at half pay.

While the devil would be in the detail, the proponents claim there “would not be much of a change” in payments for the unemployed.

This raises the question as to how the scheme actually would generate a higher level of total income in crisis regions, especially when it is acknowledged that “the national insurance systems are already higher than the ones the European Unemployment Insurance would provide”.

Further, the proposal was essentially political rather than economic given that the support would evaporate after 12 months, thus ensuring that there would not be a “permanent financial redistribution among the member states”.

This is the sort of requirement or constraint that the Italian finance minister also proposes on any such scheme.

However as the current crisis has demonstrated, severe downturns, especially those related to private balance sheet imbalances, take many years to resolve and require long-term fiscal support while the private sector reduces its debt levels.

Successful federations, such as Australia, allow for ongoing redistributions of tax revenue, for example from states with strong growth to those with weaker performance.

But the limits on the transfers proposed by the German scheme and later variations reveal the conservative, neo-liberal nature of the proposal. The aim is to ensure that over the “whole economic cycle, the fiscal net balance would … be almost evened out”.

Why should that be a desirable goal? What the desirable federal fiscal balance should be depends on the circumstances. At times, a balance might be desirable. At other times, a deficit or a surplus might be desirable and these circumstances may or may not coincide with a complete economic cycle.

A group of economists associated with the Jacques Delors Institute also proposed boosting the automatic “cyclical response” capacity in Europe in June 2012.

Their reasoning was symptomatic of the Groupthink among European economists that led to the problem in the first place.

Many of the authors of this report were involved in various studies that gave rise to the design of the EMU.

Now, as the system they lauded had failed, their approach was to patch it up with various ad hoc measures, all of which are ringfenced by the austerity mentality.

They refused to “even consider the option to abandon the euro” and were, instead, guided by the principle: “As much political and economic union as necessary, but as little as possible”.

[Reference: Enderlein, H., Bofinger, P., Boone, L., de Grauwe, P., Piris, J.-C., Pisani-Ferry, J., Rodrigues, M.J., Sapir, A. and Vitorino, A. (2012) ‘Completing the Euro. A Road Map towards Fiscal Union in Europe’, Notre Europe, Jacques Delors Institute, June].

They continued to maintain that the “principle of subsidiarity” – that responsibility should be vested at the appropriate level of government – justifies this minimalist approach to fiscal union.

They advocated what they call a “sui generis form of fiscal federalism”, which is driven by an implicit assumption that the national economies to be involved in this union are not remotely interested in surrendering their fiscal autonomy to the centre.

Of course, the Stability and Growth Pacts and the austerity packages forced onto many of the Eurozone economies during this crisis have already severely compromised the so-called fiscal autonomy of these nations.

It seems that democracy and autonomy can be violated when the Troika is imposing the terms, but in other cases they are upheld as a sacrosanct principle that cannot be compromised.

This sort of hypocrisy has woven its way through the entire debate about economic and monetary integration in Europe and will continue to deliver sub-par outcomes.

These economists proposed a simple rule for the limits of democracy – “sovereignty ends when solvency ends” – which is astounding if you think about it.

The application of this rule inevitably leads to a violation of democracy because the risk of insolvency is intrinsic to the flawed design of the monetary system.

Member States are forced to issue debt in a currency they have no control over and the ECB is formally precluded from giving any guarantees (although of course it has violated that prohibition via programs such as the Security Markets Program.

Default risk and insolvency are always lurking, waiting for the next major economic downturn to arrive. Thus as soon as a nation falls into crisis, its citizens lose the capacity to influence their own destiny and are, instead, at the behest of unelected officials in the European Commission, the ECB and the IMF.

That doesn’t appear to be a road map for a sustainable and prosperous Europe.

The economists’ preferred approach to “cyclical divergences” was to “enhance the real exchange rate channel”, which is code for making internal devaluation more responsive through increased labour mobility and wage cuts in declining regions.

The authors thus invoke the standard neo-liberal approach – workers from recessed regions should move to growing regions and those who stay should work harder for less pay.

To supplement their “structural” emphasis, which they admitted would be “unlikely to solve the inherent difficulties”, they proposed “a cyclical adjustment insurance fund”.

How would it work?

The fund would be managed by Eurozone finance ministers who would build its kitty from contributions from nations experiencing above the Eurozone growth rates and pay out to nations in crisis, to “reduce pressure on public finances”.

The scheme would thus force nations to reduce their domestic spending in times of buoyant economic growth and provide some relief in bad times.

Significantly, the authors stressed the “the system cannot become a hidden instrument for permanent transfers” and nations might only be permitted to “take out what they once paid in”.

Once again the presumption is that the ‘federal’ redistribution would be neutral across the economic cycle and across space, a proposition for which there is no rationale other than fiscal conservatism.

A similar type of transfer system was advocated by Pisani-Ferry et al. (2012), such that in times of recession, nations would enjoy increased “federal” income and be forced to pay it back in better times.

[Reference: Pisani-Ferry, J., Vihriälä, E. and Wolff, G. (2012) ‘Options for a Euro-Area Fiscal Capacity’, Bruegel Policy Contribution, Issue 2013/01, January].

Their “relatively simple rule” would again exploit the “current fiscal framework” and require income support payments to flow whenever there are absolute and large output gaps.

The authority administering the scheme would borrow funds during a recession. It is unclear how the debt would be serviced or relinquished.

The proponents claim that a “natural way to pay the debt incurred in recessions would be to extract payments from countries with output above potential in good times”.

But an examination of the historical record suggests that nations find themselves in that position neither often nor for long. The scheme also depends on how one measures the output gap.

But the estimates of the output gap provided by multilateral organisations such as the OECD and the IMF are biased downwards because their adopted estimates of full employment unemployment are too high (that is, unemployment could be reduced substantially below the levels assumed by the neo-liberals to constitute full capacity).

In this environment, the income support scheme proposed would provide inadequate spending support to nations in recession and would be of limited duration.

The economies would be deemed to be back at full employment, while in reality they were still enduring persistently high unemployment and private spending gaps.

Further, Germany will clearly never allow a Eurobonds system to be introduced nor relax the direct funding constraints on the ECB.

Conclusion

There have been many different permutations of the same sort of proposal to introduce a European-wide unemployment insurance scheme presented in recent years.

They all require the contributions of the Member States.

They are all constrained by the existing fiscal mechanisms at the Eurozone level which cannot support sustained prosperity.

They all avoid facing up to the reality. There is no coherent integrate Europe that is sustainable with a shared currency.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

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    33 Responses to European-wide unemployment insurance schemes will not solve the problem

    1. mark says:

      Private insurance scheme almost sounds like paving the way to private welfare.

    2. Jason H says:

      I too read the article and saw this stand out with flashing lights” It goes without saying that such fiscal integration would need to be designed to minimise moral hazard and avoid the need for permanent financial transfers between countries.”

      I’m not an economist and even I can see how this isn’t going to work. It’s incredibly bizarre this boy who cried wolf nonsense as you say Bill. How long can it continue to go on?

    3. Chrislongs says:

      Bill,
      Bank problems in Italy even with super Mario at the ECB could be the wheels coming off? – Italy is too big to fail compared with Greece perhaps for the Euro? Lucky Cameron may be timing Brexit brinkmanship at the right time as Merkel distracted!
      Regards

    4. aka says:

      “But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. ” Bill Mitchell

      Probably so but what about the future when automation has replaced even more of the workforce?

      So the root problem is more fundamental than a lack of sufficient deficit spending and has to do with how wealth is and has been distributed and the short answer is unjustly.

    5. larry says:

      Surely, Bill, it is logically possible to have an integrated Europe with a shared currency, just not this one with its flawed currency system and its inherent social and cultural conflicts. None of which has ever been addressed. Given the way humanity fails to really solve problems as opposed to fudging them, it is a wonder it hasn’t become extinct. The only adequate explanation would seem to be its degree of fertility despite its problem-solving incompetence. But then, maybe I am being too hard on us.

      One might suggest a bigger brain, as certain scifi stories do. But this won’t work, because our evolutionary trajectory, in reducing the size of our saggital crest, has ensured that the musculature holding up our head, that is, our skull and the brain accompanied by its cerebro-spinal fluid bath, is too weak. And no way to strengthen this set of muscles. In short, a bigger brain would lead to our being unable to hold our head up. And neck breakage a lot easier.

      As for the Italian banks, Chrislongs, a good bank-bad bank scenario would do their system a world of good, as it would any system in the state most are in, i.e., insolvent. Willem Buiter suggested it a few years ago for the British banking system before he decamped to the enemy. I understand he still advocates it.

    6. James Schipper says:

      Dear Bill

      When countries have a fixed exchange rates or a single currency, it is crucially important that they have the same inflation rate in order to avoid a real devaluation or upvaluation. That has not been the case in the Eurozone. In Spain and Greece, for instance, the inflation rate since the introduction of the euro has been considerably higher than in Germany or the NL. As a result, the Greeks and Spaniards lost competitiveness. That problem will not be solved by fiscal transfers. It can’t be solved either by structural reforms. It requires an exit from the euro.

      Regards. James

    7. Ignacio says:

      @larry: “Given the way humanity fails to really solve problems as opposed to fudging them, it is a wonder it hasn’t become extinct. “

      Because we never have reached the point where the carrying capacity of the environment at a planetary scale is below the point where it would allow us to recover. Extinction of human civilizations HAVE happened, but the extinction of our species at a global level would require catastrophic environment collapse (we can be almost certain by now that large chunks of human population will die horrible deaths in the next decades, but not the whole of it, for now). That point is coming close to become real, with the incessant destruction of fresh water supply and fertile soil, the Siberian permafrost disappearing (and the consequence release of methane into the atmosphere), depletion of resources and failure to adjust or back off carbon-based energy consumption etc.

      I’m not sure MMT can help though, because it’s an “industrialist” form of economics, meaning that it will push us to consume further carbon down the road. Despite what economists says there HASN’T been a disconnect between the rate of consumption of physical resources and economic growth yet, not even in developed nations.

      Although w/o recognizing our ability to provide and manage financial assets at aggregate level by the government we can neither solve problems (as we push society towards further competition and growth based on artificial scarcity, which will end up creating real scarcity from real abundance like we enjoy now).

    8. larry says:

      Ignacio, thanks for your comment. The only disagreement I have is with the notion of a scarce fresh water supply. You are right I am sure that we may well engage in water wars, but this will be because no one is considering utilizing the virtually unlimited fresh water and potential electricity supply that can be obtained from deep sea volcanic vents. Two reasons that they are not checking the potential of these vents are their locations and the initial cost. The nearest one to the UK is off the coast of Iceland. There are a number off the coast of the western US and at least one just off the coast of Saudi Arabia. No desalination processes needed in this case.

      The initial cost of building a platform on the deep ocean floor is likely to be astronomical, but once that is done, if done well, you would obtain unlimited fresh water streaming out of the vent and a byproduct of its motion up to the surface is electricity, production of which will last as long as the vent and the equipment does. MMT shows that governments, the only institution that could practically afford to extract these products from these vents, can develop this resource without worrying that they will go bankrupt.

      There is the problem of interference with the deep sea wildlife around these vents, such as anaerobic bacteria, but I would have thought this not an insuperable problem, and the benefit of unlimited fresh water and electricity, both of almost inestimable value, should not be underestimated. The environment agency is aware of this “technology” but is not interested in exploring it. There are some caveats; I will mention one. Some of these “smokers”, as they are called, emit CO2 along with the fresh water, but it should be possible to filter that out. The extraction technology is already to hand. All that is needed is the will to begin. That seems to be in short supply.

    9. Bob says:

      “In Spain and Greece, for instance, the inflation rate since the introduction of the euro has been considerably higher than in Germany or the NL. As a result, the Greeks and Spaniards lost competitiveness. That problem will not be solved by fiscal transfers. It can’t be solved either by structural reforms. It requires an exit from the euro.”

      OK James continue with that logic – the North of England should split from the South and launch its own currency. A Eurozone wide currency issuing govt COULD theoretically solve the problem (although it won’t and the Eurozone should break up.)

    10. Podargus says:

      larry,there is no such thing as “unlimited” on planet Earth. The sort of cornucopian technobabble you have produced in your comment is just one of the many indications of unrealistic thinking. On a large enough scale that uncoupling from reality will be the death of a us all.

    11. Jeff says:

      @Larry
      It’s easier and cheaper to simply protect our freshwater supply.
      Equally i’d rather we didn’t destroy an ecosystem for the sake of electricity, i’d much rather we went nuclear + renewables and chucked the carbon industry under a bus.

    12. Ignacio says:

      larry, I’m uncertain about what you say, even if it’s true of were possible, I had more in mind Asia ie. China, no sure if we are past the point of no return over there already, even if such projects were possible. What is certain is that the distance to fresh water supply humans have to walk for in many places in the Earth, right now, is already increasing, this has an impact that mainstream economists are unable to see and calculate because they don’t understand how the real world operates.

      Many cultures will find easily to throw the majority under the bus before adjustment in the name of the majority, and many other will change so a new normal is established (the West is undergoing the process of rationalizing this right now). Some cultures are already in place like the disgusting caste system in India, and the Chinese in the past haven’t had any problem massacring large portions of their population. At this point I find that brutality and bloodbath will come back in those places in a way we haven’t seen before (if anything because populations are much larger now).

    13. J Christensen says:

      Our unemployment insurance plan in Canada is essentially a federal payroll tax. The benefits except in the case of seasonally unemployed workers, tends to run out long before a new job can be found.

      The New democrats are fixated on the Guaranteed minimum income rather than a guaranteed job. Among the strongest supporters I have met for this idea are 30 -40 year old Marxist philosophy students who either live with or are supported by their parents still.

      It’s hopeless trying to persuade them that a guaranteed job which might also include getting an education is better than the minimum income. It’s very disappointing when even the philosophers can’t think outside the box they live within.

    14. Neil Wilson says:

      “The New democrats are fixated on the Guaranteed minimum income rather than a guaranteed job.”

      We’ll see how long that lasts when they actually have to post the cheques to millionaires, and raise the basic rate tax to 45%.

      What you will find is a fudge along the middle that makes the whole concept less of a ‘guaranteed minimum income’ and actually just another form of tax credits – aka a subsidy to the private sector to maintain pointless jobs that should be automated away.

      And then, if it lasts long enough, you’ll get the optimising to tax credits as people realise that working more doesn’t really justify the time and effort because the wages have collapsed towards the minimum wage. And then you’ll get the backlash against the ‘shirkers’ who don’t deserve it and the ‘millionaires’ who don’t need it.

      We’ve been through all that cycle here in the UK with tax credits and child benefit. No doubt, like banking collapses, we’ll have to go through it a few more times before enough people start to question ‘received wisdom’.

    15. Steven Boxall says:

      Some while ago (it might be about 15 years/20 years or so ago) I seem to remember reading some papers which said that the EU had accepted that if it didn’t want to accept high levels of unemployment it had to create jobs in the public sector. The papers said that the EU had accepted that the private sector just was not going to create and maintain the level of jobs required if we were not to have mass unemployment.

      Unfortunatly I threw these papers away and now can’t even find any reference to this policy and set of EU Programmes which came out of it.

      I am sure I am not making this up, so can anyone remember what this creating of Public sector jobs was called (the ‘something’ agenda) so I can at least try to find it in a search engine; and when was this aganda abandoned?

    16. J Christensen says:

      Niel Wilson, Thanks for sharing your experience in the UK. It appears our NDP party is trying to take us down a path that others have already traveled, and found they are the worse for having chosen it. They also claimed they would target a balanced fiscal position using Chicago school economics at the same time.

      The job guarantee as an idea put to the low income voters mind, seems to conjure images of the work for welfare (workfare), and union dividing “right to work” rhetoric and legislation etc that conservatives have already imposed in various places.
      I can’t blame people for being suspicious of a symbolically related concept given those memories; however, the complete refusal of those who claim to stand up for the workers and the poor, to even take a look at MMT basics, even it’s first lesson that government issuing fiat can never become insolvent in it’s own unit of account, is truly baffling.
      Getting the message across that political choice of fiscal policy is more important than catering to business lobbyists to achieving an economy that works for the common good? might as well be quantum mechanics.

      For the New Democrats it’s a case of their economic policy goals not fitting with their stated mission, which makes me suspicious of the leadership.

      I think the job guarantee, MMT based fiscal policy, and a more sustainable green economy could be packaged together in a new left social contract proposal that has both the common good, and increased socio economic equality at the core of it’s mission, with some success. It should be easier to sell MMT , a job guarantee and a green economy if these ideas appear to fall naturally out of just two fundamental concepts. A lot of the bad old memories and symbolism that trigger reactionary responses can be avoided this way.

    17. Some Guy says:

      J Christensen: The job guarantee as an idea put to the low income voters mind, seems to conjure images of the work for welfare (workfare), and union dividing “right to work” rhetoric and legislation etc that conservatives have already imposed in various places.

      This is just not true. “Low income voters” prefer the JG & can see the UBI / BIG as the gross insult to one’s intelligence that it is. The problem is with the better off, shrinking middle class and with the “philosophy students”, “who claim to stand up for the workers and the poor” – but mindlessly & condescendingly assume that they are soooo muccchhhh smarter than them.

      They aren’t.

    18. Bob says:

      “Low income voters” support whatever they support. Let’s stop with the dumb generalisations please.

    19. Some Guy says:

      Bob: There are polls & a great deal of history that supports what I said. To support a UBI, one’s understanding of economics must be significantly less even than mainstream / neoclassical / neoliberal economists. But reality tends to give the “lower income voter” a rather better understanding than that.

    20. J Christensen says:

      Some Guy,
      My comment was based on my own experience speaking to about two dozen random individuals in random non formal settings while the last Canada federal election campaign was running and afterward. To that extent what I said is true. That is how my opinion was formed.

      As an MMT advocate, I was shocked and concerned by the knee jerk reactions against the idea of replacing the guaranteed minimum income proposed by one party with a JG instead. I wanted to know why. I thought a JG would be immediately embraced as the favorite by everyone, but it clearly wasn’t.

      My point seems to have been misinterpreted, I stand by what I said: the phrase “job guarantee” tended to produce a knee jerk reaction from most of the low income workers with less education and a few quite well educated left leaning people of varying background for reasons relating to what I stated and a few others.

      This may be local phenomenon in areas were people had never really heard of a JG before, but I do think it was a sizable enough sample to have been an observation worthy of mention nonetheless. It is what it is.

    21. Some Guy says:

      Sure, of course I believe you. My comment was too harsh, and I apologize. It is a noteworthy observation. The problem is in explaining things, and with the obscurantism of the UBI/BIG/minimum income people, which does get under my skin. The point is that they are either proposing “welfare” – nothing new, not a major cure, nothing to write home about or the UBI – the most ridiculously inflationary, or just plain ridiculous idea ever seriously proposed. The virtues of each are usually combined and their faults ignored & it is implied that one can choose both at the same time. Logic & the human world don’t work that way.

      If one uses the word “replacing” then workfare = being forced to work for welfare benefits may be suggested, which the JG is NOT. So why not just say minimum income if you want (= welfare, which always ends up as = welfare workers prying into your life one way or another, = treating adults like children or the infirm). But PLUS an unconditional offer of a decent, permanent, living wage ordinary government job – something comparable to a postal worker or a beginning teacher in a normal country say. As our MMT thinkers say, the JG proposal is an “add-on”.

      The point is that unlike welfare/workfare/minimum income, the JG is not, is never a “benefit”. It is a job. Under any realistic conditions & by any reasonable measure it will be self-supporting, has always proven to be self-supporting & more, substantially more. So the society reaping the JG’s benefits (not vice versa) will be able to afford more (of everything but oppression) for everyone.

      I’m also basing my views & rhetoric on the USA (& on polls here). IMHO the USA is much more likely to be a leader in getting a JG than most think. For reality being more made more brutal, less sugar-coated here does open the eyes of those made to confront it.

    22. J Christensen says:

      Some Guy,

      I should point out also that prior to last fall’s federal campaign, were the IG was forwarded as policy position by one party, I got different responses from most people when the JG topic was raised. So it seems that when the JG and IG ideas are held side by side during an election campaign the IG idea tends to be favored here.
      Secondly, I should point out that the party proposing the IG came in third place in the election; in part because of strategic voting against Stephen Harper and in part because even poorly educated workers and the left wing university crowd could understand intuitively that a party that takes it’s economic guidance from Chicago school probably isn’t very serious about the IG or equality in the first place.

      The people I find get MMT and the JG, almost immediately tend to be the scientific and engineering crowds, especially electrical engineer’s who know that every circuit no matter how large or complex must have a source of current (money) and potential difference(taxation) (battery or generator etc) in the field applied to the power supply terminals for any work to be done by the components and hence for the system to have any output. For most circuits to work without burning out components some sort of voltage regulator, a well designed negative feedback mechanism, is also required. Some components dissipate energy and others temporarily store it in one way or another to give it back to he circuit after some delay; even if it is just a Rube Goldberg machine that has no real purpose other than amusement.

      Low income workers know they are always only one pink slip away from losing everything. They see the pay checks coming from the employers, and don’t understand the complex economic interplay between real resources, including their own productive labor, as being enabled only by government controlled issuing of the sovereign money, which belongs to them every bit as much as anyone else. This cause’s them to lose sight of their own central importance to the real economy, deferring that position to the capitalist class. This attitude dampens their self esteem and their political support for socio-economic equalizing policy proposals such as the JG which would work in their own interest as well as everyone else.

      Nearly the entire history of capitalist political activism is filled with strong willed efforts to maintain a subservient underclass mentality among most of the population, even to the extent that this hurts the entire economy. That government issued money can can be used to perpetuate this bastardry makes one ashamed of a “society” that allows it to go on.

      I can appreciate that the JG would be the peoples first choice in the US. Canadians had a slightly longer run before neo liberal memes destroyed the progressive idealism, which even achieved universal health care; this was derided by the neo liberals as “the nanny state” and is now seriously imperiled even here. Our capitalist class has been less powerful and has had to play a more subtle game, but with power increasingly being handed off to the international capitalist class, via their transnational corporations by various means, the balance is changing, and as your Warren Buffet would put it “his class is winning” the class war.
      An income guarantee sounded like a possibility here to those who haven’t had the time or the inclination to study some macroeconomics, only because of the social democratic progress of a past that is still fresh in the minds of many living people.

      Good luck with the battle for the Job guarantee in the US!

    23. aka says:

      “as being enabled only by government controlled issuing of the sovereign money, which belongs to them every bit as much as anyone else.”

      Not really. Based on possession, it’s the commercial banks that own fiat* since only they in the private sector may have fiat (aka reserve) accounts at the central bank.

      *except for physical cash, a very poor alternative to inherently risk-free accounts at the central bank for everyone who wants one.

    24. J Christensen says:

      aka,
      I see your point however It doesn’t invalidate what I said. The only issuer of the national unit of account in any form is the government and government represents the people who bestow that authority upon it. It’s irrelevant to that argument that the government employs non sovereign agencies to operate the day to day banking services on it’s behalf.

      Government answers to citizens and banks answer to government. That is the order; to the extent you lose sight of that, you have lost your democracy, and the ability to ensure money works for the common good.

    25. aka says:

      ” … to operate the day to day banking services on it’s [government’s] behalf.” J Christensen

      What service on behalf of government requires that only* commercial banks may have inherently risk-free accounts at the central bank? What service requires that individual citizens, businesses, organizations, local governments, etc. may not deal with their nation’s fiat except as physical cash?

      *in the private sector, that is.

    26. aka says:

      “… and banks answer to government.” J Christensen

      Since individuals, businesses, organizations, local governments, etc. may not have accounts of their own at the central bank then the payment system in fiat must work through the commercial banks – there is no alternative. Hence, if a commercial bank has insufficient funds in its account at the central bank, it’s as if all its customers have insufficient funds in their accounts too.

      So currently, especially during financial crisis and especially with large banks, ie. with many depositors and/or large accounts, ie. TBTF, it’s the government that does the bidding of the commercial banks – lest the economy break down.

      Individual, business, organizational, local government, etc. accounts at the central bank would constitute an alternative payment system to the commercial banks and would thus free the economy from being hostage to the commercial banks. Who can legitimately object to this?

    27. aka says:

      “That is the order; to the extent you lose sight of that, you have lost your democracy, and the ability to ensure money works for the common good.” J Christensen

      The implicit social contract you are referring to is this? That commercial banks and the so-called credit worthy, which always includes property and other asset owners. ie the rich, shall be allowed to legally steal the purchasing power of everyone else but especially of the poor in exchange for better, less expensive goods and services for everyone and jobs for the victims?

      Even on its own terms that social contract is failing to deliver since jobs are being eliminated by automation or shipped to low wage countries. So what now? A pitiful Job Guarantee that implicitly blames the victims? That indicates that the proponents don’t understand or don’t care about the fundamental injustice of our money system or believe that there is no better alternative? Surely the latter since the JG proponents are neither unintelligent or uncaring in my opinion but surely there must be a better solution than providing jobs as a substitute for justice and the ability to do meaningful work?

      So how about we start with an ethical money system for a change? Including what restitution can easily be given the victims by abolishing government-provided deposit insurance and distributing the new fiat required* equally to all citizens via their accounts at the central bank?

      This is not a total solution since unjust inequality in the ownership of assets such as land and big corporations exists too. However, it’s a big start that combines fundamental reform with the abolition of much private debt without disadvantaging non-debtors or destroying the banks and should buy us additional time and credibility to deal with the remaining unjust wealth inequality.

      *For the transfer of at least some currently insured deposits, at the deposit holders’ discretion, to inherently risk-free accounts at the central bank as deposit insurance is progressively eliminated. The commercial banks should have to acquire these new reserves legitimately via borrowing from or asset sales to the public and not via borrowing from or asset sales to the central bank – hence the new fiat distribution before and during the abolition of government-provided deposit insurance. Ironically, it would be in the interest of the banks themselves to lobby that the new fiat distribution be large to lower their borrowing costs from the public and to raise the price of the assets they might sell to the public.

    28. J Christensen says:

      aka,

      I do understand that banking is not being regulated in a way that’s fair to the majority. But that’s just part of the problem. The government gets to set those regulations and yet doesn’t do so in away that is generally helpful. As Bill Mitchell and other MMT academics also repeatedly tell us is that fiscal policy could create fairer conditions were government making best use of the correct macroeconomic model (MMT) in the interest of the broad public good.

      That government is not stepping up, is the problem. They now have all the tools needed to achieve this goal and yet they are not using them for some reason. Bill and other MMT’rs prove beyond any reasonable doubt that the neoclassical theory being used to guide current decisions is a major problem. This raises the question: why the steadfast adherence to a theory that doesn’t work well when there is a clear alternative?

      I don’t believe the job guarantee is “pitiful” or that it “blames victims”. The neoliberal ideology with it’s abandonment of full employment along with the tropes used to justify high unemployment and underemployment, or the conservative use of workfare to create a class of welfare recipients forced to work in competition with the minimum wage earning working poor, do fit those descriptions all too well.

      A job guarantee, with it’s broad definition of a job, empowering the worker in a way that develops human potential while providing the satisfactory quantity and quality of jobs that, private enterprise under laissez faire capitalism cannot, is the most realistic way to maintain the benefits of a stable monetary economy in a period in history were technology and a fundamentally flawed economic system work against the interest and aspirations of most of the population.

    29. aka says:

      “I do understand that banking is not being regulated in a way that’s fair to the majority. ” J Christensen

      What would be fair is equal protection under the law and that would include the allowance of accounts at the central bank for all citizens, the abolition of government-provided deposit insurance in a manner that provides restitution to the population and the removal of other privileges for the commercial banks.

      “As Bill Mitchell and other MMT academics also repeatedly tell us is that fiscal policy could create fairer conditions were government making best use of the correct macroeconomic model (MMT) in the interest of the broad public good.” J Christensen

      Yes, more deficit spending (fiat creation) is definitely called for to reverse injustice. Then why not direct all future spending* by the monetary sovereign to individual, business, etc. accounts at the central bank by default instead of to commercial banks? What is fair about unavoidably directing spending by the monetary sovereign to commercial banks because individual, business, etc. accounts at the central bank are not allowed?

      *including equal fiat distributions to all citizens for the abolition of government-provided deposit insurance.

    30. J Christensen says:

      “Yes, more deficit spending (fiat creation) is definitely called for to reverse injustice. Then why not direct all future spending* by the monetary sovereign to individual, business, etc. accounts at the central bank by default instead of to commercial banks? What is fair about unavoidably directing spending by the monetary sovereign to commercial banks because individual, business, etc. accounts at the central bank are not allowed?

      *including equal fiat distributions to all citizens for the abolition of government-provided deposit insurance.”

      I just don’t see what problem that solves.

      Banks are intended to provide services essential to the real economy; they could be either public or private and provide the same services. If they are public, whats to say corruption in the politically controlled public system doesn’t cause as many distributional problems as a private bank that is government regulated? This has happened in the past so it can’t be discounted. Would public banks use the real human labor resource to provide banking services as efficiently as commercial banks?

      There is a finance (money) side of the economic equation and then there is the real (labor, material resources, etc) side. If these two aspects are decoupled it means a breakdown of our ability to sustain the virtuous cycle were people use their own unique skills and creativity to work to produce a good or service which is valued and can be shared on the open market in exchange for the fruit of someone else’s labor.

      If you simply give everyone an account at a central bank and then put money into each account, would the real economy be as productive in terms of innovating quality goods or services for everyone, thus raising the standard of living? I doubt it would. It would be a miracle if it did. The money itself has no value outside of the economy it serves.

      In a market economy, jobs create goods and services to sell, and sales create jobs. There is no getting around that. There’s no taking the people or debt out of it. Worker/consumers are the driver of the whole thing.
      Between neo liberal austerity and jobs off shoring, aided by poorly regulated banking, screwing up labor markets, this simple logic has broken down. The organic and evolving mechanism that once increased living standards for the worker/consumer is not just stalled, it’s going in reverse.

      There is nothing wrong with banks operating commercially when well regulated, and with effective government oversight and, controls to ensure the interest they receive is actually earned (interest is how the business of banking gets paid for what they do). There are many examples of banks, many banks, having done just that, but as law Prof Bill Black says, they tend to be squeezed out by the less scrupulous competition that poor regulation fosters (Gresham’s law).

      Normative banking practices , public or private, in line with the fiscal policy of a functional democratically controlled government that uses MMT as it’s macroeconomic tool to provide for the public good, are positive for the economy.

      Now the problem is how do we make it work the way it’s supposed to? Whether banks are public or private is secondary to wise and honest government operating in the interest of the common good. Any bank has to be accountable to it’s client : government, and government has to be accountable to it’s client : the public. Government needs to act as a cognizant professional, like a physician or engineer would act on behalf of a less knowledgeable client whose interest must be served responsibly and ethically. That’s the only way we don’t end up losing progressive ground.

    31. Kevin Harding says:

      the problem is that even at historically low rates of unemployment low pay with
      or without a legislated minimum wage has never addressed the problem of
      poverty.
      Yes in the post war years in the OECD the direction of travel for the poor was positive but in work
      poverty was real .In terms of real goods and services consumed just as real
      as today’s unemployed ,part time employed ,zero hour employed etc.
      In the last 20 years Japan have enjoyed,low unemployment and low inflation, they top Okans’
      misery index ,solved their ‘Phillips curve problems’,have no immigration to undermine
      pay and conditions and yet they have also topped the international league for stagnating wages.
      Yes the state needs to employ more people and train more people ,directed for the public purpose.
      Providing healthcare services,education services ,non co2 electrical production,mass transportation,
      scientific research and here in the UK expanding housing resources.Millions of secure well paid
      jobs this will certainly give a boost to firms income but it will not eliminate the working poor.
      Fiscal stimulus delivered in this way or another can create full employment but full employment
      has never ,can never eliminate the working poor.
      There is much to malign New labour’s UK governments for but improving the income of the poor
      is not one of them.

    32. aka says:

      “I just don’t see what problem that solves.” J Christensen

      Well, obviously the new fiat distribution to abolish deposit insurance will allow a great deal of private debt to be paid down and non-debtors will have new fiat to spend or for peer-to-peer lending to commercial banks or to other accounts at the central bank. That should immediately stimulate the economy and in a manner that few dare criticize.

      As for spending by the monetary sovereign being directed, by default, to individual, business, etc. accounts at the central bank instead of to commercial banks, that’s just justice since fiat is the citizen’s money and if the commercial banks need it, they should have to buy or borrow it honestly. Besides, the payees may specify, for sufficient compensation, no doubt, that the payments be deposited to other accounts at the central bank if desired.

      “Banks are intended to provide services essential to the real economy; they could be either public or private and provide the same services. If they are public, whats to say corruption in the politically controlled public system doesn’t cause as many distributional problems as a private bank that is government regulated? This has happened in the past so it can’t be discounted. Would public banks use the real human labor resource to provide banking services as efficiently as commercial banks?”

      Commercial banks are not truly private and never have been in the US since that would have required a government-run fiat bank with accounts available to all citizens – since physical fiat is a very poor alternative to a bank account. Hence the popularity of commercial banks despite their notorious reputation for failing.

      Thus to have truly private banks includes the requirement that everyone may have accounts (individual, business, etc) at their respective central banks and that government-provided deposit insurance be abolished in a just manner.

      I agree that public banks are not the way to go but neither are government subsidized private banks.

      “There is a finance (money) side of the economic equation and then there is the real (labor, material resources, etc) side. If these two aspects are decoupled it means a breakdown of our ability to sustain the virtuous cycle were people use their own unique skills and creativity to work to produce a good or service which is valued and can be shared on the open market in exchange for the fruit of someone else’s labor.

      If you simply give everyone an account at a central bank and then put money into each account, would the real economy be as productive in terms of innovating quality goods or services for everyone, thus raising the standard of living? I doubt it would. It would be a miracle if it did. The money itself has no value outside of the economy it serves.

      In a market economy, jobs create goods and services to sell, and sales create jobs. There is no getting around that. ”

      Obviously, the commercial banks would still exist and could still create as many deposits as they dared but without risking the payment system since all remaining deposits in the commercial banks after the end of government-provided deposit insurance would be, by definition, at-risk, not necessarily liquid INVESTMENTS, not mingled with the funds for next week’s groceries.

      So your concern must be that borrowing costs would rise since honest banking is bound to be more expensive. But not necessarily since, in addition to perpetual deficit spending by the monetary sovereign, enough additional new fiat could be equally distributed to individual citizen accounts at the central bank to drive interest rates as low as is thought necessary, eg. to achieve a price inflation target of, say, 2% in fiat to discourage money hoarding and encourage investing or lending.

      “There’s no taking the people or debt out of it.”

      Unethically financed automation has dis-employed people with what is, in essence, their own legally stolen purchasing power. As for debt, common stock, shares in equity, is an endogenous money form that requires no debt, that shares wealth and power rather than concentrate them. But why should those with equity share it when government subsidies for private credit creation allow them to bypass both that need and the need to borrow from the public?

      “Worker/consumers are the driver of the whole thing.”

      Then it was short-sighted on its own terms to create a money system to cheat them, however subtly. Yes, we’ve had material progress but who’s to say we wouldn’t have had at least as much with ethical financing? Especially given all the social problems, including crime and war, the current system has produced? Besides, having a job is inherently inferior to being able to work for one’s self as the population used to do before unethical financing helped to steal their livelihood and reduce them to wage slaves instead of potential co-owners of the new factories, etc.

      “Between neo liberal austerity and jobs off shoring, aided by poorly regulated banking, screwing up labor markets, this simple logic has broken down. The organic and evolving mechanism that once increased living standards for the worker/consumer is not just stalled, it’s going in reverse.

      There is nothing wrong with banks operating commercially when well regulated, and with effective government oversight and, controls to ensure the interest they receive is actually earned (interest is how the business of banking gets paid for what they do). There are many examples of banks, many banks, having done just that, but as law Prof Bill Black says, they tend to be squeezed out by the less scrupulous competition that poor regulation fosters (Gresham’s law).”

      With government-subsidized private credit creation, what the banks are lending is the publics purchasing power but for private gain. That is clearly wrong since it is a subsidy of the rich, the most so-called credit worthy, at the expense of everyone else but especially at the expense of the poor, the least so-called credit worthy. Let the banks be 100% private* with 100% voluntary depositors and the ethical** problems disappear.

      “Normative banking practices , public or private, in line with the fiscal policy of a functional democratically controlled government that uses MMT as it’s macroeconomic tool to provide for the public good, are positive for the economy.”

      Not if they subsidize the ability of the richer to steal from the poorer, as is currently the case. This has led to grossly unjust wealth distribution which is itself a cause of economic waste (eg. crime and war) and inefficiency.

      “Now the problem is how do we make it work the way it’s supposed to? Whether banks are public or private is secondary to wise and honest government operating in the interest of the common good. Any bank has to be accountable to it’s client : government, and government has to be accountable to it’s client : the public. Government needs to act as a cognizant professional, like a physician or engineer would act on behalf of a less knowledgeable client whose interest must be served responsibly and ethically. That’s the only way we don’t end up losing progressive ground.”

      It should be a given that government should work for the common good and not subsidize the ability of the richer to steal from the poorer since that just increases the problems government must deal with in the wake.

      *This will require the abolition of as much private debt as can be done without disadvantaging non-debtors since they have also been cheated.
      ** Not to say that collecting interest is necessarily moral but that is a matter for individual conscience to decide, imo.

    33. J Christensen says:

      Kevin Harding,

      Doesn’t a job guarantee pay rate tend to set a de facto minimum wage? Using the fiat money to pay for the JG means government is in control of not only the employment level but also the range of wages workers will be willing to work for given the nature of the jobs available and how well an employer treats them. Which is how it should be.

      Employer and employee must work together for either to get ahead. This forces the business to obtain surplus (profits) by managing the business efficiently and maximizing employee productivity rather than exploiting people who have no choice to work under poor conditions and for the least pay.

      Businesses have a legal obligation to maximize profits in any way they can legally get away with, this is why they always take whatever means they can to reduce labor costs, but if they have to compete with the public sector in a free market for labor with enough other parties, they have to manage the business well rather than exploit the working poor for profits.

      Remember also that full employment maximizes the economic output. This justifies public sector employment of those not fully employed by the private sector on the basis of satisfying the common good.

      This would seem to offer self adjusting solutions to a variety of issues that arise in industry-labor relations, with a minimum of other interventions on the part of government. It gives freedom a whole new meaning and it’s fully justifiable on the basis of acting on the common good.

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