Paul Krugman Destroys Every Republican Argument for Austerity

On Bill Maher’s Real Time Paul Krugman went head to head with Arthur Laffer, and destroyed every conservative argument for austerity.

Here is the video:

Krugman said,

We are in a depression. We are actually in a classic depression. A depression is when nobody wants to spend. Everybody wants to pay down their debt at the same time. Everybody is trying to pull back, either because they got too far into debt, or because if they’re a corporation, they can’t sell because consumers are pulling back. The thing about an economy is that it fits together. My spending is your income. Your spending is my income, so if we all pull back at the same time, we’re in a depression. The way to get out of it is for somebody to spend so that people can pay down their debt, so that we don’t have a depression. So that we have a chance to work out of whatever excesses we had in the past, and that somebody has to be the government.

We ended the Great Depression with a great program of government spending for an unfortunate reason. It was known as World War II…but when the war broke out in Europe, and we began our buildup that Great Depression that had been going on for ten years. People thought it would go on forever. Learned people stroked their chins and said there are no quick answers. In two years, employment rose 20%. That’s the equivalent of 26 million jobs today, the depression was over. We had full employment, and it never came back, or it didn’t come back until 2008, because people managed to pay down those debts, and we had a durable recovery.

Arthur Laffer delivered the conservative plan to fix the economy. Laffer agreed with Krugman that we are in a depression, and said, “I don’t think we have to do it by government spending. My view is I’ve never heard of a poor person spending himself into prosperity. The government doesn’t create resources. The government redistributes them, and it redistributes them from workers and producers to people they get the resources based on some characteristic of the work effort. So what you really need to do is I think you need to incentivize producers, and what you need to go along, and my way of going would be Simpson-Bowles. Something to lower the tax rates, broaden the base, get rid of the loopholes. I mean really get a production base that officially starts, and that’s the way you really get out of this depression. The way we did in the Eighties to be honest with you.”
Krugman countered the right wing theory with reality, “We have long run budget problems, and I don’t like Simpson-Bowles, but okay it was a good faith effort, but those don’t solve our short run problems. If you tell me we have a plan to balance the U.S. budget in 2030, great. That is not going to make a corporation that can’t sell its products now, produce more now. Do you think all the households in America are sitting around thinking, hmmm, I’m worried about the state of Medicare in 2030.”

Arthur Laffer inaccurately claimed that the Republicans under Reagan got the country out of the recession in the 1980s by reducing government spending, but actually the Reagan administration did the exact opposite. From 1982-1985, Ronald Reagan increased spending by 8.7%, which is the most of any president in recent history. In fact the three biggest periods of recent federal spending increase all came under Republican administrations, Reagan (8.7%), George W. Bush 2002-2005 (7.3%), and George W. Bush 2006-2009 (8.1%).

Paul Krugman shattered the right wing argument by pointing out that cutting spending is not going to encourage consumers and corporations to spend money. The whole basis of the conservative argument is that the debt causes uncertainty, and the economy will grow once the uncertainty is removed, but federal debt has nothing to do with creating consumer demand. The average American isn’t holding off on purchases because they are concerned about the federal deficit. They aren’t buying because they are using their cash to subsist and pay off debt.

Krugman had history and facts. Laffer had theories, and the facts tell us that if we want to jump start this economy, the government has to spend more.

There are not many programs on television that could host such an interesting discussion between two economists. In the confrontational world of cable news, two economists respectfully discussing contrasting economic theory would never make it on to the air. Bill Maher gave viewers a real treat, but when you separate the facts from the theories, it is clear that a full blown austerity program would be a disaster for the U.S. economy.

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62 Replies to “Paul Krugman Destroys Every Republican Argument for Austerity”

  1. So, according to Krugman, Obama’s spending $5 Trillion in 3 years simply wasnt enough.

    Maybe Obama should spend $100 Bazillion. Yeah, that should do it.

  2. The other point to make in response to Laffer is that the “supply side” theory never worked on its own terms. The idea was that rich people would save the money from their tax breaks, thus increasing bank deposits for use as investment capital. The only problem was that the savings rate went down, not up, after his 1981 tax cut, which is all the more evidence that Reagan’s was a classic Keynesian growth spurt, not a “supply-side” one.

  3. Supply side economics is a failed policy, period. Our economy is based on consumption. Nobody spends money on goods and services? The economy is non-existent.

  4. Laffer’s ignorance is rather astonishing. Not surprising since the Laffer Curve itself is a joke.
    Everything out of his mouth that night was dead wrong. Fun to watch Krugman teach this guy a lesson. Pretty sure he wasn’t listening.

  5. The important part that Krugman consistently misses is what is called malinvestment. I hope to hear him, some time in the future, address this. (He never will because his arguments completely ignore it and its long-term damage.)

  6. Every single word said about the filibuster was 100% true, but there’s more than that as an issue here. I think the true problem has risen from the fact that after politicians retire from the public “service,” they then rake in large sums of money by lobbying, selling books, even consulting. To that end, nobody in America would remember a quiet politician who voted for any idea he thought was good. We’re only going to keep the names of people who hit the house or senate floor with vehement outrage, shock-value tactics, blatant lies, and having all their friends back them up. This country entered a horrific logjam ever since you needed more than a simple majority just by saying “I’m a Republican, and because I don’t like your plan, I’m going to tell all of my other Republican friends not to like your plan, and because we have a guaranteed forty-six votes, that means you can’t possibly get sixty!” And then, of course, they go ranting off to their personal Super PAC, shouting as loud as they can for the rest of us to be shocked and remember how dumb they sounded, because they know that if we remember them, that means big money for them when they’re finally voted out.

  7. Do please edify us. Just putting this out there without backing it up with an argument backed by facts is akin to trolling.

  8. He has a point, but this has some huge differences from the Depression and WW2. In WW2, we made money at the beginning because Europeans were buying our stuff. When we actually entered combat, our economy was much improved. We amassed tons of debt while we were actually fighting, but that was mostly war bonds owned by our citizens doing their patriotic duty. Today, if we borrow money to stimulate the economy like we did in WW2, it would be from China, not from US citizens. Also, after the war, we were the only large economy that wasn’t in shambles, making the US the largest power in the world by default . We took that and ran with it. Today, the world’s manufacturing capital is China.

  9. Laffer is a complete joke. He’s even more mired in ‘supply-side’ economics which do not work, nor have they ever. The real job creators are the people who consume. Without it, we have what we have now. An govt spending in key areas of infrastructure and renewable energy would create thousands of more jobs than the oil companies. And republicans are harping on the ‘where are the jobs’ Mr. President again. They are insulting the intelligence of all Americans with that one, yet sadly people keep voting them into office. If the repugs win the WH and Senate, first of all get out of the country if you can, deficits and debt will no longer matter, all the things Obama wanted as job stimulus will be enacted (sans unions, of course), another war will be started, the SS and Medicare funds go bye-bye on Wall Street, public lands will be sold off, water rights will be given to corporations for unbridled gas/oil fracking, etc. Sorry to go on tangent at the end there.

  10. In 1934-35 FDR raised taxes on the wealthy to 91% to create jobs and it worked and we paid for the war which arose 6 years later. Before the Great Depression taxes on the wealthy were in the mid to high 20’s%. Low taxes on the wealthy does nothing other than allow them and corporations to stockpile massive amounts of money which has occured again in recent history. That means too much of the taxes to pay for our BLOATED Military fall upon the working man and working poor who drive the economy with their now reduced portion of the overall wealth pie.

  11. 5 Trillion sounds lime a lot until you realize the economic output of the Unites Staties is 45 trillion over a three year period. Don’t forget 1.5 trillion was for unfunded Bush
    wars The only part of the debt the Republicans approve of.

  12. But then again, Bush never had wars, they are all Obama’s. Both to pay for and to take responsibility for starting and its his fault we will end them.

    Convoluted GOP think stat

  13. I wasn’t looking for a discussion, I was just stating my opinion. This is not even close to trolling. I would argue that replying to a comment to accuse them of trolling is more characteristic of trolling.

    This isn’t the place for an Austrian Economics 101 course, so do your own research and you’ll understand what I am referring to, if you are interested.

  14. Where do you get your facts? I urge you to spend a week away from FOX and Limbaugh and ask questions of learned people who truly know their economics.

  15. Actually, Obama is not spending the trillions alluded to. Mr. Bush committed us to the debt that amounts to most of that figure.
    And Mr. Laffer, I know many instances of poor people borrowing themselves into wealth. They are called ‘college students.’ I was poor, deeply in debt, and borrowed still more, while having no income, to graduate from college and obtain a job. It took me 20 years to pay off my debt, but now I am retired and doing well. Our nation needs to borrow to put people to work until their purchasing returns business to an expansionary direction. Austerity will further deepen and/or lengthen the Great Recession.

  16. The Dream Act is a Faustian bargain, providing education in exchange for military service as opposed to civilian service. It is a cynical way to create an educational program for people who are often economically disadvantaged. Economic conscription forces many poor people into the military. Instead, we need to decouple one’s class position from service in the military.

    The mass media needs an honest discussion about how you create wealth. You don’t create it simply by government purchases. Because you also need to reindustrialize and involve the government in that. You need a trade policy. You need to enhance the competence of firms. Cutting taxes is a retrograde policy. But, the government can spend more by financing private corporations or helping foreign-based firms. You need to figure out how to aid U.S. firms higher up in the economic “food chain.” You also need to figure out how to rebuild industries that have been destroyed or have been totally lost. Part of the solution is based on creating competent planning skills in the government which are lacking. The other part depends on a total revamping of business and engineering schools. A lot of the contemporary debates and economic discussions are superficial and at most are at a high school level of sophistication.

  17. You’re absolutely right. The only fit place for an Austrian economics course is in a comparative religion class, or as a stand-in for flat earth theory.

  18. Who will sacrifice to help the economy?

    How about adding 5000 toy factories and let the damn eco freaks take a hike.
    How about extracting as much oil as we can and THEN build your stupid global warming non science ,junk science.

    How about 2/3rds of the country working to collect tax, and have your so-called healthcare.
    why not 16$ in the bank and THEN offer your socialist handouts.

  19. Actually the US has the largest manufacturing output in the world. China is a close second. You need to realize that a lot of the manufacturing done by China is lower tech we gavee up.

  20. Wow — amazing. You put up a racist, sexist, homophobe as your hero. An ignorant slob who is great at conning morons. How many Nobels has he won?

  21. No Europeans were buying our arms; the United States Government did, on credit. The British were out of money; that’s why Lend-Lease was necessary – and after the war the borrowing was forgiven. We weren’t selling arms to the continental European countries at all – even those which were not yet conquered could not get them.

  22. How can the destruction of wealth lead to prosperity whether for a family or a nation? We are in a depression because the banksters have stolen hundreds of billions of dollars through TARP, Obamas’ bailouts and hundreds of billions of dollars that were given to banks overseas through the Federal Reserve. Don’t forget Bush/Obama’s wars, the Drug Wars as well. This is why I support Gary Johnson. the Libertarian Party candidate for president

  23. Correction for accuracy:

    Bush bailout
    Obama stimulus
    Obama auto industry loan paid back

    Wars? Both started by Bush.Both left off of the budget by Bush.

    Both ended by Obama. Both put on budget by Obama.

    Drawdown continues in Afghanistan – advise and assist, not patrolling in many areas.

    Most Libertarians don’t support women’s rights, minorities rights, gay rights and many more.

  24. 1) You’re right, No women’s rights, minorities rights, gay rights, – EVERYBODY HAS THE SAME RIGHTS!!!!!!! Why does that seem unreasonable?

    2) If you call Ron Paul a racist, sexist, homophobe when the debate is about economics, then you are a failure!

  25. I guess todays pundits never read US History past Reagan’s term in office. Herbert Hoover used austerity and gave the United States the deepest deppression in the history of the country.

  26. Paul Krugman rules again. I fear the consequences if we keep going along the way the Republicans want. The national budget has NOTHING in common with a “Family budget,” which is always thrown up as being the model for dealing with finances. False equivalency all the way.

  27. We must remember that Conservatives have been scientifically shown to use low effort thinking. One can not expect them to understand economics Ideas that are more involved than a talk radio sound bite.

  28. The problem is that there is no “free lunch”. Currently the g US Government is getting over 60% of its revenue from the Federal Reserve. This is causing inflation in food and oil prices. The US economy will not recover if people (consumers) are “spending” money that the don’t have. When many of the “consumers” are dependent on the Government for their “income” then the Government becomes the primany drivers for the economy – but is has to borrow money it
    does not have which means the Fed has to print more – which makes the money worth less – which means you can’t buy as
    much – so the government has to give you more – which means
    the government has to borrow more – which means the Fed has to print more, and on and on and on. The proplem has now become so bad that the government can’t stop because if it did
    did the government would collapse overnight. If Obama and his flunkies had a clue, then they might stimulate capitalism so that it creates more jobs and therefore more income for the government but their hate of capitalism prevents that from happening. Therefore, you are left with two options 1) Get rid of Obama and is crew or 2) Total economic collapase – Greek style.

  29. What Krugman won’t tell is that WW II was an era of extreme austerity — you literally could not buy bread and butter without a ration book, and many common goods were not available at all (there were actually riots when nylon stockings were re-introduced).

    What’s really telling is what happened AFTER the war — Keynesians all predicted TGD would restart with the massive fall in gov’t that went with demobilization. Instead, we had a short, sharp recession and then a decade of growth as FDR’s growth-choking spending programs were finally scaled back.

    Something else Krugman won’t tell you is that the several prior banking crises over the 20 years before TGD didn’t result in the sort of ongoing high unexployment that characterized TGD. The major difference between TGD and the prior crises was that the gov’t stepped in and passed all sorts of labor laws and wage controls, which had the effect of making employers not want to hire people.

  30. The major difference is that there was massive rationing in WW II — it was hardly an era of better living standards, quite the opposite.

    As Russ Roberts put it in his Keynes-Hayek video:

    Wow. One data point and you’re jumping for joy
    the Last time I checked, wars only destroy
    There was no multiplier, consumption just shrank
    As we used scarce resources for every new tank

    Pretty perverse to call that prosperity
    Rationed meat, Rationed butter… a life of austerity
    When that war spending ended your friends cried disaster
    yet the economy thrived and grew faster

    You too only see what you want to see
    The spending on war clearly goosed GDP
    Unemployment was over, almost down to zero
    That’s why I’m the master, that’s why I’m the hero


    Creating employment’s a straightforward craft
    When the nation’s at war, and there’s a draft
    If every worker was staffed in the army and fleet
    We’d have full employment — and nothing to eat!

  31. Don’t like the truth, now do you, Bill?

    Ron Paul is a dominionist and bad news. Wake up and smell the coffee. There are numerous links that prove the fact (maybe someone else feels like posting them, or maybe another thread showing how bad news Ron Paul really is should be started).

    As far as your bullshit about everyone having the same rights, well, my friends cannot marry because the law in this state forbids it. The God damned “Good Christians” made it so that they can dictate to grown adults who they can and cannot marry. My people didn’t have the right to worship in our own way. That required a federal law in 1979… and even today the “Good Christians” keep screaming “having special rights” because we don’t worship like they do (and no, we do not use drugs in worship, except caffeine and tobacco). I am a poor person, and it seems in this county there are two versions of the “Castle law”… one for the rich where they can defend themselves in their own home without facing prison time, and the one applied to us – if we don’t make every effort to avoid conflict, even to the point of abandoning our home, we can go to prison for manslaughter (or murder) if we use lethal force against a home invader. The only way out is if we can PROVE that the invader was going to kill us and we had no way to escape… and even then the pigs told us that we’d face a trial and the outcome would be uncertain.

    I could go on and on with examples about there not being the same rights for everyone. Your statements are pure bullshit, and nothing more.

  32. That won’t work for today’s students… it’s very possible we will never be able to pay off our debt, unless Sallie Mae and the other lenders are brought to heel and forced to stop playing nasty tricks (which I’ve personally experienced). I don’t know what student loans were like back when you went to school (I was in college in the late 70s and I never got financial aid). I don’t know what sort of interest rate you paid. I can say this… that the lenders are doing all sorts of really nasty tricks to increase a student’s debt (it’s not a myth that sometimes students will suddenly find that their debt has doubled or tripled overnight) and it seems most people don’t care.

    Oh, and unless something breaks loose, I don’t expect to become rich through my educational debt. I face too many barriers… ageism, discrimination against the disabled, and the hostile environment of today. At least there is a chance (a reasonable one) that I would be able to find employment in spite of those limitations. I hope so (my only hope for survival).

  33. Ah, but what was the spending ON?

    Not ordinary people, that is certain. It took the depression to wake people to the danger of corporations and the rich – a lesson largely forgotten today (except that the Occupy movement seems to be reminding people).

  34. “Paul Krugman shattered the right wing argument by pointing out that cutting spending is not going to encourage consumers and corporations to spend money.”

    Several studies (incl. the famous Harvard one) have shown that gov’t spending in a district tends to displace private spending — that is, they reduced private economic activity.

    In any case, this is a flawed premise. The economy cannot be fixed by having consumers spend more, because the problem is precisely that we cannot afford to spend more — we are not as wealthy as we thought we were in 2007, and by extension we were not as productive as we thought we were. When you look at the economy in terms of multiple equilibria rather than the simplistic misaggregation of adding C to G as though they were the same thing (C includes trillions of consumer decisions done with self-interest in mind), it becomes pretty clear our problem is that we were over-consuming before (i.e, our consumption outpaced the true, post-bubble value of our production).

    “The whole basis of the conservative argument is that the debt causes uncertainty, and the economy will grow once the uncertainty is removed, but federal debt has nothing to do with creating consumer demand.”

    Actually the primary basis of the conservative argument is the rock-solid principle that gov’t is a less efficient allocator of resources than private markets. If this wasn’t true, the Communist bloc would have grown their economies faster than the European social-democracies, which in turn would have grown faster than the United States, and by today we’d all be merrily flying the hammer and sickle because free market economics would have been abandoned. Instead, just the opposite happened.

    Krugman’s is roughly the plan that got Greece into trouble — when the euro zone came together, they got low interest rates and so they borrowed to grow gov’t spending by ~10% a year. Today they are still spending more than in 2007, and it seems increasingly likely that the left is going to win the elections there and opt for default and exit rather than cut spending to sustainable levels. It doesn’t look like the Germans are going to let them print euros, so they’re going to have to print drachmas, and then everyone can how wonderfully Krugmanomics performs in the long run.

  35. Bullshit. Greek style? I suggest you look at their economic situation without the “capitalist” blinders.

    They have a gap between the rich and the poor which is as bad, if not worse than we have. The rich aren’t taxed in Greece.

    I read a journal article a few months back looking at the economic situation in other countries. Where there was problems, there was also a bad problem with the rich owning most of the wealth and not pulling their fare share. (I don’t remember where it is, but I think I have it saved to my hard drive somewhere.)

    You’ve experienced the American brainwashing. What we’re talking about isn’t socialism… it’s a well-regulated capitalism and from long discussions among social scientists, that’s probably the best economic system that gives the most rights to everyone (and doesn’t reserve them for the fortunate few).

  36. In the Twentieth Century, the ocean around Florida rose eight inches. Between 2000 and 2030, it will rise more than that. If you insist this is junk science, how about backing your argument by volunteering to live shackled to a low-lying jetty between now and then?

  37. “Hoover tried to combat the ensuing Great Depression with volunteer efforts, public works projects such as the Hoover Dam, tariffs such as the Smoot-Hawley Tariff, an increase in the top tax bracket from 25% to 63%, and increases in corporate taxes.” — wiki

    I recommend Amity Shlaes’ excellent book The Forgotten Man on this oft-misunderstood era.

    Coolidge was the last U.S. President who believed in small government, famously equating excess taxation to organized theft.

  38. There was not $5 trillion is stimulus spent. Excluding automatic stabilizers like food stamps and unemployment comp and sops to the Right like tax cuts, the amount spent to directly get things built was less than $300 billion, about $100 Billion a year.

    Food stamps, unemployment compensation, veterans benefits, and tax cuts are not stimulus. According to the Right they are. But the Right is Wrong.

    The amount of wealth destroyed by the mal, mis, and nonfeasance of W was about $12 trillion, about $40,000 per capita. Another $3 trillion or so has been lost as real estate values have fallen further, about $10,000 per capita. The amount spent directly to build highways and buildings is about $300 billion, $1000 per capita.

    $50,000 per capita in wealth has been lost.
    $1,000 per capita has been spent to make things better.

    The stimulus was much, much too small.

  39. The worst malinvestment is having millions of people under and unemployed.

    Keynes argued that paying people to dig holes and other people to fill them would be beneficial during a depression. Samuelson explains how Keynes was correct in the 1st edition of his textbook in 1948.

  40. Greece got into trouble for the same reason other countries have… by not taxing the rich enough and not regulating them and their corporations.

    The countries in Europe with the most problems are also the ones with the biggest gap between the rich and the rest… same as in America.

    I recently watched a great movie “All the King’s Men”, which led me to read a bit about Huey Long. Too bad he was assassinated, he might have gotten this country into a much better position and we might not be having the problems that we have now. I really liked some of his tax ideas for the rich.

    100% tax on everything above $50,000,000. Tight regulation on corporations. Free medical care.

    The problems he saw are the same ones we face today. And like in his day, the rich are to blame.

    It was striking to me that a 1%er, a doctor, was the one who killed him.

    What is really striking is that the countries that have approached his ideas in their practice are the ones in the best shape financially (and in other ways)… like some of the Scandinavian countries. They really crack down on the rich there, and yes, there are still rich people. The rest have much better lives… their standard of living is far higher than ours, by the way (we’re lower than 30th in the world for standard of living… and countries with things like universal health care, Living Wage, and things like that are doing MUCH better than this country).

  41. Interesting debate! I’m not going to take sides, as I
    believe neither are at the root of the issue. To me,
    the issue is a matter of the people (human beings), vs.
    bureaucracy. I believe creation is the result of a higher
    intelligence, & that bureaucracy is a creation of man.
    When bureaucracy gains the power to control creation,
    conflict becomes inevitable, between G*d, & humanity.
    I believe Washington (Government) is now so corrupt, that
    it no longer has any salvage value, & must crumble. The
    Corporate bureaucracies, that rely on Government protections
    will also crumble. Excessive consumerism must stop, & a
    new wave of community building will re-build what’s left of
    humanity. It will come from those who refuse to participate
    in worshiping bureaucracy. Many people understand that we
    were created to live on a planet that has everything we
    need to live abundantly, & that our wants, & needs are
    provided for by nature. We will teach, that love is the
    highest power available to man, & that fear is the lowest
    power, & is used by ego. All of creation is to be respected
    & valued. This will all bring in a new evolution of
    spiritual man, where communication, art, music, dance, &
    other expressions of spiritual value will become the way of

  42. No austerity in WW2? I guess it easy to believe so, unless you talk to my grandad, who said you needed a ration coupon to buy practically anything, not that there was whole lot to buy with all the metal being dedicated to the war effort. It took him over a year to cut through the red tape to buy a truck, to haul peanuts for the war effort. It was the only ‘new’ truck though 3 years old in five counties.

    Nah, there was NO austerity, they lived pretty high on the hog during WW2, except for having barely anything they were allowed to buy and all.

    Talk to someone who lived back then.

  43. We are in a depression and I’m glad Obama has begun bailing out Main Street through the Home Affordable Refinance Program or HAPR 2.0. This program is helping homeowners refinance who are underwater. Although there are some caveats to this program and it’s far from perfect, homeowners who qualify will be able to save anywhere from a few hundred dollars up to around $1K per month on their mortgage. In turn, they can spend this money in the market place or begin to pay down their debt. Hopefully this can be a nationwide program pertaining to all homeowners soon.

  44. This jerk is a Bilderberg, who would want to listen to him? With Reagan we were prosperous. Then came Clinton; in 1991 he said give everyone a house, so every got a mortgage and a house even tho they could not afford it, and that’s what started this whole mess. Now look where we are today because of Clinton. Bush walked into a big mess and asked Barney Fife, Hillary and the others if things were alright and they said yes,so you can blame them to. We should not have bailed out the banks, because the Rothschilds, Rockefellers and Morgans are behind these banks. That was a big mistake.

  45. Fail

    Reagan didnt make us prosperous, he started us on the road to where we are today.

    You know nothing but what you are told. Bush took over Fanny and freddy before the meltdown. Bush had a far bigger home entitlement housing program than Clinton. Read his 2nd inaugeration if you are allowed to, he talks all about it

    Sorry, you cant blame Franks and the rest. You can however go back to where you copy and paste your silliness and tell them they are lying to you

    Blame Bush for TARP, not Obama

  46. If the problem is there is no demand, how can as, Arthur Laffer says, giving money to the job creators to create jobs, to make products, that no one wants help anyone? More supply side BS.

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