Monthly Archives: April 2010

On bias and referees in Serie A

This is great:

This paper studies how social pressure affects the behavior of soccer referees. We make use of an attractive source of exogenous variation in the number of spectators at matches. Due to recent hooligan violence, the Italian government has implemented a regulation that some soccer teams must temporarily play home matches in empty stadiums. We find that referees punish away players much more harshly and home players much more lightly when the games are played in front of spectators compared to when they are not. We find no evidence for the alternative hypothesis that home and away players are affected differently in these games along a number of different outcomes of players, such as the number of tackles. Our results therefore suggest that referees exhibit home bias caused by social pressure from the spectators.

That’s from Behavior under Social Pressure: Empty Italian Stadiums and Referee Bias by Per Pettersson-Lidbom and Mikael Priks at the University of Stockholm. Given that Italian soccer has suffered severely in recent years over allegations (and more than allegations!) of widespread collusion and Mafia involvement, I am sure that there is more to be told…but how to get the data?

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A quick thought about an application of the Folk Theorem

Has anyone noticed that the Folk Theorem is a great conceptual paradigm with a lot of explanatory power for the incentive structures that exist in the Republican party right now? Here’s the excerpt from Wikipedia:

It is possible to apply this class of theorems to a diverse number of fields. An application in anthropology, for example, would be that in a community where all behavior is well known, and where members of the community know that they will continue to have to deal with each other, then any pattern of behavior (traditions, taboos, etc) may be sustained by social norms so long as the individuals of the community are better off remaining in the community than they would be leaving the community (the minimax condition).

This is why ‘epistemic closure‘ has made the Republican movement intellectually moribund. Republican social norms enforce an intellectual strait-jacket because its intellectual incoherence mandates a kind of suspension of rationality.The Republican movement is in the transitional state where the Folk theorem no longer applies at a growing intellectual margin. Consider very specifically David Frum’s untimely exit from the American Enterprise Institute after the publication of his essay ‘Waterloo‘ in March. And Gary Becker, the Economics Nobel Laureate in 1992, notes in an essay last may the ‘intellectual deterioration’ of the conservative movement, noting prominently:

My theme is the intellectual decline of conservatism, and it is notable that the policies of the new conservatism are powered largely by emotion and religion and have for the most part weak intellectual groundings. That the policies are weak in conception, have largely failed in execution, and are political flops is therefore unsurprising. The major blows to conservatism, culminating in the election and programs of Obama, have been fourfold: the failure of military force to achieve U.S. foreign policy objectives; the inanity of trying to substitute will for intellect, as in the denial of global warming, the use of religious criteria in the selection of public officials, the neglect of management and expertise in government; a continued preoccupation with abortion; and fiscal incontinence in the form of massive budget deficits, the Medicare drug plan, excessive foreign borrowing, and asset-price inflation.

I would also add the conservative opposition to gay marriage is another fracture point in the Republican meta-narrative. This is because legally speaking, marriage is just a package of contracts for specific things. In this light the debate over gay marriage is literally a debate over contract rights and if we can restrict them on the basis that only two people of different sexes can make these contracts. This puts Democrats in the same tent as the Libertarians on an issue of property rights, inasmuch as we can think of the restriction of the right to contract as a restriction on the kinds of property, both real and virtual, that you can structure through a marriage.

In any case, I think that this country loses something when the Democrats cannot be challenged by real, intellectually rigorous arguments from the Republican umbrella and there is no viable third party, at least not yet.

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Answering Greg Young on Rex Sinquefield

Greg Young, a MU student with some inconsequential links to Grass-Roots Organizing, comments on my piece on Rex Sinquefield in the Missouri Record:

My problem with this section is that Eapen presents the idea that Sinquefield and the Show-Me Institute protect the rich and powerful at the expense of the politically weak and powerless as a completely ridiculous idea.  It decidedly is not, and I don’t think I’m outside any mainstream orthodoxy when I say that.

This is misguided, and here is why. I am making the argument that it is not Sinquefield’s intention to protect the rich and powerful. I am not sure he even cares terribly much rich and powerful people remaining rich and powerful. But the what the evidence does indicate is that Sinquefield has been a powerful advocate for underprivileged children and education reform for years through his charitable work.

This interview with St. Louis Magazine contains a lot of the kind of biographical details that would allow for an informed evaluation of Sinquefield’s character, including his childhood in a Catholic Orphanage and the story of his life in academia and business. It is worth reading if you care about making an informed judgment about Sinquefield’s character and ability to be intellectually honest. Here’s an excerpt that I think is enlightening in terms of his policy advocacy in Missouri:

Obviously, the institute attracts like-minded scholars—Show-Me’s authors are vetted, often meeting with Sinquefield so he can decide if their heads are screwed on straight. But are the purchased study results biased in advance? They certainly weren’t in a recent study of the Missouri Plan, the state’s method of judge selection. Conservatives are eager to change Missouri’s system, but the study found it to have no economic disadvantages, compared to other nonelectoral systems. Sinquefield reportedly wasn’t thrilled by this conclusion; indeed, Show-Me promptly released a statement pointing out that there could be less tangible downfalls to the Missouri Plan. But Joseph Haslag, Kenneth Lay Chair in Economics at the University of Missouri–Columbia and an executive vice-president of Show-Me, says Sinquefield simply asked whether the methodology was sound. Assured that it was, he published the results.

So my response to Greg is that I think that a reasonable evaluation of Sinquefield and his advocacy leads to the conclusion that he honestly believes his policies are good for people and is willing to be honest about evidence based evaluations of those policies.

Greg continues:

For example, one of the Show-Me Institutes key ideas is their advocacy for a Fair Tax, which would eliminate the income tax in favor of a sales tax.  Now Fair Tax advocates will say that if implemented correctly, a sales tax can avoid being regressive and become equally fair to all citizens.  But it is hardly a controversial position to argue that a Fair Tax could end up harming lower income families while benefiting the rich and powerful.

The distinction I made answers this claim. Sinquefield believes this policy will be beneficial for the entirety of Missouri, not just the rich. Those who disagree that Fair Tax will stimulate job-creating economic growth can make their case, but their conclusion that the Fair Tax leaves Missouri low income Missourians worse off does not mean that Sinquefield thinks or intends that that will be the case. In fact, the evidence indicate that Sinquefield has already considered this possibility and has included in his proposal an explicit endorsement of an exemption for low income households from the Fair Tax. Here he is in the 2010 Show-Me Quarterly:

It’s true that a sales tax can be regressive, which is why it’s important to exempt low-income families from paying such increased taxes. If Missouri were to eliminate the income tax in favor of a slightly higher and more comprehensive sales tax, we could eliminate the penalty that the state’s tax policy imposes on business investment, and instead spur economic growth while simultaneously providing a more stable source of revenue for essential government functions.

It is a basic norm of civil discourse that you at least familiarize yourself with your opponent’s position on a subject before you implicate his character. It is this I find most offensive about the rhetoric of Grass Roots Organizing of Missouri: they’re lazy and willing to demonize someone before they are willing to research or understand his positions.

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The Clock Without a Face

A new treasure hunt book! The author is Gus Twintig and the book is being sold through McSweeney’s. From the description:

We’ve buried 12 emerald-studded numbers—each handmade and one of a kind—in 12 holes across the United States. These treasures will belong to whoever digs them up first. The question: Where to dig? The only path to the answer: Solve the riddles of The Clock Without a Face!

Here is Twintig answering questions on the book. The only book on his list of inspirations for this treasure hunt that I am familiar with is Ellen Raskin’s The Westing Game, which was a favorite of mine during my early adolescence. Here is Twintig’s blog and you can follow him on Twitter as well.

Anyone up for a road trip this summer?

H/T: Shawn Borich

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Chaos theory and economics

I’m working on a long post on extending the implications of work done by Edward Lorenz (1963) on chaotic outcomes from deterministic systems to economics. For those of you unfamiliar with the subject (and who have an idea of fun that doesn’t include reading academic mathematical papers) Lorenz examines a simple system of 3 deterministic equations that describe convection in the atmosphere. His key insight in this examination is that changes in the parameters generate vastly different systemic behaviors, some of which are chaotic and unpredictable.

The general lesson for meteorologists that Lorenz isolates is that you can’t predict some of these weather systems past some specific time frame (I think a week or so). More generally, Lorenz’s work is foundational in chaos theory, fractal dynamics, and nonlinear systems.

Where I propose to extend this work is in following Benoit Mandelbrot (1963) who finds evidence of chaotic behavior in cotton prices. Mandelbrot was also Eugene Fama’s instructor at the University of Chicago and this work plays a key role in the development of the  efficient market hypothesis. I also am inspired by Stephen Wolfram (2002, A New Kind of Science) who suggests that there are extensive applications for the tools used by nonlinear dynamical studies of cellular automata in modeling economies and interactions. I won’t delve into it here, but Douglas Hofstadter’s seminal text on Godellian incompleteness (1977, Godel, Escher, Bach) is also worth reading for the deep and rich insights into cognition and systems theory.

My interest in this subject was triggered from the notion that institutions are fundamental parameters in describing and understanding economic interactions. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (LLSV) are foundational in the study of legal origins and economic development but I am hard pressed to think of work outside of that literature that engages institutional interactions, development, and outcomes.

I suggest that properly understand the dynamics of interactions and change are key in understanding the nuances that make political ideologies untenable at the margin (and this is a statement that I want to make in context specifically of the 3 major strains of thought competing for space today: liberalism, conservativism, and libertarianism). There are many places where these ideologies allow for computationally equivalent outcomes but this is poorly understood.

Stay tuned. Oh and here’s the famous Lorenz Butterfly, which is the phase space portrait of the dynamical system that Lorenz (1963) analyzes:

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Words that should be in the National Spelling Bee

Burahara: discrimination by blood group (unique to Japan). Link here.

H/T: Marginal Revolution


My op-ed in the Missouri Record on Rex Sinquefield

…was published today and you can clickthrough here. Here is an excerpt:

A couple of months ago Grass-Roots Organizing (GRO) held an anti-big banks rally sponsored by a progressive local activist organization. I am generally in favor of breaking up big banks or adopting some kind of regulatory approach that limits the systemic risks that large, complex institutions created.

But a second message from GRO had a decidedly different tone. Along with the opposition to big financial institutions whose ignorance and malfeasance brought our economy to a very ugly place, there was also a diatribe against Rex Sinquefield, a multi-millionaire retired investment banker. Rex (and his wife Jeanne) have liberally funded politicians on both sides of the aisle to promote a policy agenda that includes increased school choice, more transparent and data-driven governance and reform of Missouri’s tax system. There are legitimate debates to be had on these policies but if you disagree with Rex Sinquefield on his political agenda or his methods, it is unfair to conflate these disagreements with opposition to big banks and financial deregulation.

There are two arguments for that thesis. The first, and obvious one, is that opposition to big banks is not premised on the same assumptions of opposition to the “Fair Tax Proposal” or school choice. The second and more important argument is that Sinquefield represents a school of thought that is diametrically opposite to the ideology that captured the financial services sector and brought the global economy to the brink of collapse. Moreover, the harshness of the criticism thrown his way is stunning; it is demonstrably true that Sinquefield’s political agenda around the state does not represent efforts to protect the rich and powerful at the expense of the politically weak and powerless.

I am assured by friends that the rest of the piece is worth reading, especially for those with an interest in Missouri politics. There is also a discussion of Sinquefield’s former company, Dimensional Funds Advisors, which is very interesting to me as an economics student.

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Great moments in quota history, rubber edition

From History of the United States Rubber Company by Glenn Babcock, p 359:

Although the International Rubber Regulation Committee (IRRC) increased the exportable limit for the last quarter of 1941 to 120% of the production quotas, complaint was made that the production was still being arbitrarily limited. It was contended that the ‘smallholders’ of rubber plantations in Malaya had not been permitted to equal the production rate they had had in the early days of 1934, immediately before the IRRC became oeprative; on the other hand, production quotas assigned to estates (holdings of 100 acres or more) were more than 45% above their 1934 rate of production. It was believed that a similar situation prevailed in the Netherland East Indies and Ceylon.

However, native ingenuity appears to have been more than a match for governmental restrictions. Claims have been made that the IRRC “favored the planters and was definitely unfavorable to Asiatic peasants, with the result that the trend toward natural rubber’s becoming more and more a peasant crop was stopped.” By exports of natural rubber that represented production of Indonesian natives increased from 40% of that total in 1933 to 48% in 1938 and to 50% in 1940. Conversely, exports from Indonesia that represented production by “Europeans” declined from 60% in 1933 to only 50% in 1940. Rubber was perhaps the only agricultural commodity that did not reflect increased production by the Western owners of estates, at the expense of Indonesian natives, during those years. With the overrunning of southeastern Asian and the East Indies by the Japanese army in the early months of 1942, the International Rubber Regulation Committee passed out of existence, but lasted officially until 1944.

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Great moments in political economy, China salt edition

From Salt and State: An Annotated Translation of the Songshi Salt Monopoly Treatise, by Cecila Lee-fang Chien, p. 3-4:

The Guanzi, one of the first great works on political economy in China, provided an ideological basis for monopoly that persisted for two thousand years, from the Han dynasty to the end of the Qing. This treatise, probably collated by adherents of GuanZhong (?-645 BC) a major figure inthe establishment of Qi as the first hegemon among the Chinese states, asserted that because everyone needed salt, increasing its price even incrementally would reap huge returns.

If you were to announce a head tax on all adults and children, everyone would certainly complain and oppose it. But if you implement a salt tax policy, one hundred times the profits will accrue to you, the ruler, while the people will be unable to escape it. This is what is meant by managing finances.

According to the Guanzi’s logic, thecost of salt to consumers would effectively include a tax, yet spare them a separate payment. By controlling both the production and distribution of salt, the state could prevent disparities between rich and poor, as well as increase state revenues.

While statesmen before the Qin unification (221-206 BC) recognized the fiscal value of sale, the nature of China’s monopoly came to be premeditated on a united empire. In contrast to other powers across Asia and Europe at other periods, where governments had to content themselves with charging transit tolls (France) or merely regulating the sale or some other stage of the industry (Venice), China’s centralized bureaucracy could tightly monitor the sources of salt as well as the stages of production and distribution.

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Senator Claire McCaskill at #YDMO2010

Here is Missouri Senator Claire McCaskill (D) speaking to me on April 17th at the 2010 Young Democrats of Missouri state convention in Springfield, Missouri. I’m especially proud that I have a senator who publicly commits to not earmarking (1:45).

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Great moments in rent-seeking, the geopolitics of oil edition

From The Politics of Oil by Robert Engler, p. 265-6:

Despite these setbacks, the vacuity and fumbling of American foreign policy and its application to oil still promote the propping up of regimes whose days are numbered and who are prepare to trade their people’s physical heritage for dollars and military support. All this takes pace with the active participation of oil corporations that seek to integrate the raw material producing countries of the world into the processes of their private government. Late in 1958 the United Nations General Assembly received Soviet-backed resolutions, first proposing that the UN provide aid for nations wishing to develop their own petroleum resources and then one more simply suggesting a study of internatioanl cooperation in such development. The Americans simply responded to the bait of this blunt threat to the international companies and clear provocation to the producing countries of Latin America and the Middle East. “In no time at all the oil lobbyists were swarming around the United Nations,’” the St. Louis Post-Dispatch reported. “There were so many conference between the oil men and members of the United States delegation that one American diplomat said he told the oil people to ‘let us alone so we can protect your interests.’” One oilman, a member of the delegation, “was warned to lie low.” Speaking for the United States, Senator Mike Mansfield rose to defend private enterprise and national sovereignty:

If the General Assembly starts with the oil industry today, where shall we stop? Will there be a separate resolution on the steel industry, the flour milling industry, poultry raising, cement manufacturing, automobiles, synthetic fibers or the hula hoop business?

In a setting where we know not where we are going, the quest for oil looms as one clear goal.

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Rex Sinquefield on taxes

Patrick Tuohey at the Missouri Record has generously agreed to publish a piece I wrote on Rex Sinquefield and his political agenda in Missouri. The piece should come out tomorrow, but here is a selection of excerpts from the Show-Me Institute Quarterly clarifying Sinquefield’s advocacy on taxation. The excerpts are taken from the Fall 2008, Fall 2009, and the Winter 2010 issues of the Show-Me Quarterly.

On why a re-evaluation of Missouri tax policy is in order:

Missouri is chronically below average for economic development and growth. During the past 10 years, employment has grown 8.8 percent nationally, while Missouri has boosted jobs by a barely perceptible 0.23 percent. In their study for the American Legislative Exchange Council, titled “Rich States, Poor States,” Laffer and Moore offer one explanation for the state’s poor performance: Missouri’s personal income tax rates. The highest rate of 7 percent — which includes the state’s top marginal rate of 6 percent, plus a 1-percent earnings tax imposed in Kansas City and Saint Louis — places the Show-Me State at 32nd in the nation.

On the deficiencies of Missouri’s income tax:

We side with economists who say that an income tax is a huge drag on growth in two ways: First, an income tax lowers the net pay of workers, providing them with less of an incentive to work. The flip side of this argument is that Missouri workers are likely to demand higher pay in order to offset the higher after-tax income in other states. Second, the income tax is inherently unwise, because it’s relatively narrow in scope and cannot be avoided except by leaving the state. This is hardly the type of tax that makes sense in the face of cutthroat competition among states. Missouri needs business and job creation. We’re also impressed by another set of significant economic numbers. States with no income taxes have the lowest overall tax burdens, according to data compiled by the Tax Foundation. Indeed, the correlation is virtually one to one.

On the link between taxation, jobs, and economic growth:

We show that the state’s economic growth has been sluggish by national standards, but that the nine states without an income tax have added more than twice as many jobs as the national average. Not all of this extra growth can be attributed to differing tax systems, but some of it certainly stems from the fact that the lack of an income tax lowers business costs. States without an income tax also have lower overall rates of taxation; the eight states with the lowest taxation rates in the country are eight of the nine states with no income tax. Multiple studies have shown that lower levels of taxation also boost economic growth, so implementing a sales tax to replace the income tax could boost growth in more than one way.

A broad-based sales tax should exempt the poor and will provide Missouri with greater financial security:

It’s true that a sales tax can be regressive, which is why it’s important to exempt low-income families from paying such increased taxes. If Missouri were to eliminate the income tax in favor of a slightly higher and more comprehensive sales tax, we could eliminate the penalty that the state’s tax policy imposes on business investment, and instead spur economic growth while simultaneously providing a more stable source of revenue for essential government functions.

And replacing the income tax with a sales tax can be revenue-neutral:

n 2007, Missouri’s sales tax generated nearly $2 billion. To replace the income tax fully, the sales tax would have to produce another $4.9 billion, according to Joseph Haslag, executive vice president of the Show-Me Institute. (I would like to point out that because repeal of the income tax would stimulate growth, ultimately, a dollar-for-dollar increase in the sales tax won’t be necessary. But I’m willing to adopt a revenue-neutral approach for argument’s sake.) However, Missouri lawmakers over the years have voted to exempt more than 140 other items from the sales tax, according to research conducted for the Show-Me Institute. In addition, Missouri does not tax consumer services. If Missouri included in the sales tax all products and services purchased by individuals — which  would exclude business-to-business transactions and capital acquisitions by businesses — a general sales tax rate of about 5.7 percent would suffice, according to Haslag’s estimates.

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On Puzzles

Puzzles are instructive, Mr. Gardner found, for they teach us to appreciate hidden structures of the world that are not owned by any particular discipline and are potentially useful to all. He saw the world as resembling not a magazine, where the subject of each section bears little relation to that of the next, but a well-written novel, where ideas introduced in one chapter are apt to reappear—transformed, modulated and extended—in others. He taught his readers to see the world in the same way, inculcating in them an openness and alertness to the often surprising possibilities of the world, and the desire to seek them out.

That’s from the WSJ. The story is about the reclusive mathematician who wrote Scientific American’s puzzle column between 1956 and 1981 and the cultish math-geek gatherings that now happen in his honor every two years. The entire story is worth reading and includes notes on cognition, neuroscience, and even references the indomitable Stephen Wolfram.

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Susan Montee: Legislative fiscal projections fail

From State Auditor Susan Montee’s audit of Missouri’s tax credit system:

Tax credit redemptions in the state of Missouri have increased from about $372 million in fiscal year 2001 to over $584 million in fiscal year 2009, an increase of 57 percent in 8 years, while net General Revenue (GR) Fund – State collections over the same time period increased from about $6.44 billion to $7.45 billion, an increase of 15.7 percent. Tax credit redemptions as a percentage of net GR Fund collections increased from 5.8 percent in 2001 to 7.8 percent in 2009.

Fiscal notes associated with legislation establishing or modifying tax credit programs do not accurately project the financial impact on the state’s GR Fund collections. For 15 tax credit programs reviewed, the actual redemptions exceeded the projected long term fiscal impact by a net amount of over $1.1 billion for the 5 years ended June 30, 2009. In total, 96 fiscal note sections were associated with the 15 programs we reviewed, and 16 sections indicated the amount of impact was unknown. Since fiscal notes have not accurately projected the financial impact of tax credit programs, the General Assembly should consider increasing the use of alternative cost containment measures to better control the costs of tax credit programs.

Here is the Columbia Tribune with more.

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Levine on patents

Over at Huffpo, David Levine, an economist at Washington University in St. Louis, writes:

There are many solutions to the problem of global warming — ignoring it is popular with the extreme right, and moving back to the stone age is of equal interest to the extreme left. For the rest of us improving technology seems like a good place to start. Even if dumping carbon dioxide in the atmosphere turns out not to lead to global warming, the ill-health effects of pollution aren’t controversial.

So “green” patents seem to be a no-brainer. Want to encourage technology? Give people monopolies for inventing things. If you think that way, a headline here on the Huffington Post “China Surprising Leader In Green-Technology” may surprise you as much as it does the author. After all China isn’t famous for the strong enforcement of patent laws. It isn’t a surprise to Michele and me — we’ve been beaten over the head time and again by empirical economists discovering that patents do not encourage innovation.

Patents do not lead to more innovation? In chapter 8 of our book Against Intellectual Monopoly we went through all the economic studies we could find: 22 studies by authors ranging from Arora to Zoz. We can sum them up by quoting Lerner’s study of 150 years worth of evidence: “Consider, for instance, policy changes that strengthen patent protection…this evidence suggests that these policy changes did not spur innovation.”

He continues:

In the case of carbon emissions, the problem is worse. Rich countries produce a lot, and big countries such as China and India are quickly becoming richer. Carbon pollution, however, does not respect international boundaries. So you would think that the goal of countries — such as ours — that are already rich, would be to make it as easy as possible for poorer countries to reduce their carbon emissions. Are you surprised then that on June 10, 2009 the United States House of Representatives “voted overwhelmingly to establish new U.S. policy that will oppose any global climate change treaty that weakens the IP rights of American ‘green technology’”? That Jonathan Pershing – deputy special envoy for climate change at the US Department of State – says unequivocally that we will will charge poor countries like Bolivia all the market can bear for our green patents?

We can put this “beggar they neighbor” policy into perspective by describing a study published in the prestigious American Economic Review by Chaudhuri, Goldberg and Jia about the antibiotic quinolones. They estimate that every dollar we squeeze out of impoverished Indian consumers by forcing our patent system on them and driving up the price of drugs costs them seven dollars. Think of this in the context of global warming. Who pays the seven dollars then? The cost of global warming isn’t just paid by the Indians — it’s paid by all of us. If we have to pay inventors seven dollars for every dollar worth of global warming reduction…I’m sure Siberia will be a nice place to live some day.

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