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Henry Hazlitt’s Economics In One Lesson: The Shortest and Surest Way to Understand Basic Economics--originally written in 1946--is still important reading today. Here’s the point of the book:

The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence.

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or public policy;

it consists in tracing the consequences of that policy not merely for one group but for all groups.

He explains:

The bad economist sees only what immediately strikes the eye; the good economist also looks beyond.

The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.

The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.

Hazlitt used the broken window illustration to make his point.

A classic example is raising the minimum wage. This helps workers who will now make more money. But it also means that there will be fewer workers. So the unintended consequence is that more people are hurt than would be helped.

Or consider health care reform. The intention is that more people will have insurance. But the reality will likely be the opposite: two years from now less people will have insurance than they do now.

Confused?

Listen to a couple of economists at the EconLog explain:

Bryan Caplan:

If preliminary summaries of Obamacare are true, it looks like individual health insurance will soon be a better deal than employer-provided health insurance.  In the individual market, you can now wait until you’re really sick to buy insurance: “Heads I win, tails I break even.”  Firms won’t have that gimme – and it seems more valuable than premiums’ tax deductibility.  Admittedly, Obamacare imposes a small penalty on individuals who don’t buy insurance, and a moderate penalty on firms that don’t provide it.  But it still seems like it will be in the financial self-interest of many firms and their workers to get rid of insurance, and split the (cash savings minus penalties).

Arnold Kling:

As of now, a rational individual would not choose to obtain health insurance, and a rational new business would not offer health insurance. In both cases, that is because the legislation has made it illegal for health insurers to discriminate against people on the basis of health status. So the cost of obtaining health insurance while you are healthy will stay high–in fact, market forces should send it higher–while the cost of remaining uninsured has dropped dramatically.

Is it time to bet that there will be more Americans uninsured two years from now than there are today? Or will the law produce results that are consistent with intentions, regardless of incentives?

My point here is less about the rights or wrongs of health care, but rather the encouragement to use contemporary news as an opportunity to practice critical thinking and good economics as we try to think through the things in the right way.

HT: Matthew Continetti

Update: As commenters are pointing out, the best books on the market for an introduction to economics are in Thomas Sowell’s triology:


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38 thoughts on “Economics, Health Care, and Unintended Consequences”

  1. Peter Morris says:

    The slanted nature of the economists selected here is unfortunately not a good example of “critical thinking”

  2. Justin Taylor says:

    Maybe—but simply saying so don’t make it so!

  3. Chris says:

    For a throughgoing exposition of these economic principles–even for non-economists–coupled with a deluge of compelling real world examples in which seeminlgy good intentions part ways with intended outcomes (since policy makers often fail to take into account what sort of incentives they are creating for people with their policies), see Thomas Sowell’s “Basic Economics” and “Applied Economics.” Really good stuff.

    1. Ron says:

      Yes, great recommendation… and I would also suggest people read Sowell’s weekly columns at Townhall.com

      http://townhall.com/columnists/ThomasSowell

      Yesterday in his column, “A Point of No Return” he hits the nail on the head when it comes to the seriousness of Health Care Bill.

    2. Cassandra badie says:

      consider this

      For I was hungered, and ye gave me meat: I was thirsty, and ye gave me drink: I was a stranger, and ye took me in: Naked, and ye clothed me: I was sick, and ye visited me: I was in prison, and ye came unto me. Then shall the righteous answer Him, saying, Lord, when saw we thee hungered, and fed thee? Or thirsty, and gave thee drink? When saw we thee a stranger, and took thee in? or naked, and clothed thee? Or when saw we thee sick, or in prison, and came unto thee? And the King shall answer and say unto them, Verily I say unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me.”
      Then shall he say also unto them on the left hand, Depart from me, ye cursed, into everlasting fire, prepared for the devil and his angels: For I was a hungered, and ye gave me no meat: I was thirsty, and ye gave me no drink: I was a stranger, and ye took me not in: naked, and ye clothed me not: sick, and in prison, and ye visited me not. Then shall they also answer Him, saying, Lord, when saw we thee an hungered, or athirst, or a stranger, or naked, or sick, or in prison, and did not minister unto thee? Then shall He answer them, saying, verily I say unto you, Inasmuch as ye did it not to one of the least of these, ye did it not to me. And these shall go away into everlasting punishment: but the righteous into life eternal. (Matt 25:31-46)

      1. Cassandra,
        And how would that be related to Congress passing an unconstitutional piece of legislation that forces people to buy insurance?

        1. Cassandra badie says:

          Job 29:16 “I was a father to the needy, And I investigated the case which I did not know.
          ——————————————————————————–
          Psalm 41:1 For the choir director. A Psalm of David. How blessed is he who considers the helpless; The LORD will deliver him in a day of trouble.
          ——————————————————————————–
          Proverbs 31:8 Open your mouth for the mute, For the rights of all the unfortunate.
          ——————————————————————————–
          Proverbs 31:9 Open your mouth, judge righteously, And defend the rights of the afflicted and needy. (NASB

      2. David Zook says:

        Cassandra –

        Thanks for the Scripture. Jesus seems to be addressing individuals from all nations in this text rather than a secular government body and I think there is a huge difference. This text points to what individuals are doing with their time and treasure, not government. To consider the role of government in society Romans 13:1-7 might be more helpful: to condone good and to punish evil.

        1. Cassandra badie says:

          more excuses that’s all you are doing , one could say the same about thou shall not kill, yet in battle david killed all the time. you are making excuses and not following the word of god. do you honestly believe that it’s ok to give to the poor and pray for the poor but when it comes to helping millions of poor women, men and babies it’s ok if you dont support laws that will help them??
          sounds like something a scribe would say
          and you think God is so dumb that he doesn’t see what you are doing and doesn’t know what in your heart??
          that sounds alot like what the man did who sentenced Jesus to death, he tried to blame it on the people
          and the people mostly like said like you not my fault the government killed him.
          you wont be able to wash this blood off your hands
          well if you allow millions to suffer and vote for leadership that is trying to allow millions to suffer you are guilty
          and you wont escape
          as you have done to least,, you have done unto me

          1. David Zook says:

            Thanks for your thoughtfulness Cassandra. You are obviously well versed in Scripture and interpret Scripture from a justice standpoint.

            Let me ask you where does this stop? Will the government mandate that every individual has the right to own a home regardless of their ability to pay? Or a car? or college? how about food? clothing? What does Scripture say about that? Cassandra, please don’t take these questions as me being snarky. I am simply raising the question.

            Did you realize that a family of four who makes up to $88,000 can have their health insurance subsidized by the U.S. government under this law? Is that fair?

            Do you know that one of the results of the law will most likely drive many health insurance companies in business in the next few years because mandates unrealistic rules to claims payout and claims reserves. For every $100 that comes into the company, they are mandated to pay up to $115 – $120 out. Is that just?

            From a philosophical standpoint we might be in more agreement than you think. I believe that we need to protect the weakest of the weak, but I based on the government’s track record I remain unconvinced that the government can do that very thing.

            The specifics of Obama’s health care law are aimed to control business and lives under the guise of insuring the poor.

            It’s deceiving and trickery at its worst.

            1. David Zook says:

              oops…did it again. My fingers aren’t cooperating.

              Above it should read “Do you know that one of the results of the law will most likely drive many health insurance companies out of business in the next few years”

  4. I am in the middle of Sowell’s “Applied Economics” and would recommend it to anyone looking to expand their understanding of how economic principles are manifested in real world scenarios.

    I posted some excerpts just last week that you might find worth reading: http://www.jeremywalker.us/2010/03/politics-of-economics.html

  5. Eric Tonjes says:

    I third the Sowell recommendation.
    And @Peter above, to decide that economists are “slanted” because they hold one particular economic perspective (in Caplan and Kling’s case an Austrian/libertarian one) is to say exactly nothing. Everyone is slanted. Are they wrong?

    1. Anything by Sowell is worth reading. Twice!

  6. JT, How could you ignore Marxist opinions?!

    I’ll provide an alternative analysis.

    The capitalist pigs you quoted above want to use their academic positions to keep the working man poor and in need of the capitalists.

    The rich should be taxed more. It is only fair. “From each according to his ability. To each according to his need.” In fact, our tax system should be more progressive. The rich keep getting richer on the backs of the working poor. It’s time the poor get their fair share. We should immediately, and drastically, raise the tax rate on inheritances. The capitalist pigs who died certainly don’t need the money any longer. Neither do their progeny.

    Health care will improve under central planning. Obviously government is better at organizing large scale ventures. Look at the Post Office, under budget projects, surpluses in Social Security and Medicare, excellent customer service at all levels of government, efficient use of resources to wage wars, control of the borders and victory in the War on Drugs! What more evidence do you need?!

    Ultimately, to deny health care to the underprivileged is to deliberately keep them weak so they will be unable to revolt and bring down the capitalist pigs a notch or two.

  7. Tyler H says:

    The topic of minimum wage is even more complex than you make it out here. In fact, most economists can not figure out whether or not raising the minimum wage causes job loss (or hampers job creation). This is the same reason why people argued about stimulus spending – there simply isn’t enough data to back up either side so that the situation is so complex that it can’t be boiled down to a simple analysis.

    1. Are you being serious?

      There is plenty of data. The problem is that politicians don’t ask economists to speak unless they support the pol’s pet projects such as minimum wage.

      I’ve audited restaurant management companies and have witnessed job losses resulting directly from increases to minimum wage.

      It makes perfect sense. If something costs more (in this case workers) you will purchase (hire) less of that something unless that something is price inelastic. A good or service is price inelastic when increases or decreases in price have little or no impact on the demand for that item. Such items include insulin, rice, flour, drinking water, gasoline in the short term, and business travel. Goods and services that are not inelastic include gambling, soft drinks, beef, and eating out.

      The profit margin in many fast foot restaurants is very small. Any increase in minimum wage, at least for lower wage markets (the South for instance), will result in restaurants laying off stay and going out of business.

      That doesn’t make constituents feel good so politicians don’t like to talk about it. Doing so would cost them votes.

      As for the stimulus spending, no respectable economist would support such inane behavior. A general principle of home economics holds true at the national level. If you’re heavily in debt, going deeper in debt may feel good in the short term but you are wrecking your financial future. You can’t spend your way out of trouble and neither can the country. Some people will benefit to be sure, namely recipients of government contracts and handouts (often one and the same). There may appear to be an improvement but the debt will one day have to be paid. Unfunded liabilities at the federal level have every household in the United States on the hook for over $500,000.

      Yet we continue to spend. You don’t need a Nobel Prize in Economics to know this is a bad situation which is going to do nothing but get worse unless drastic measures are taken soon.

      1. Correction:

        The profit margin in many fast foot restaurants is very small. Any increase in minimum wage, at least for lower wage markets (the South for instance), will result in restaurants laying off stay and going out of business.

        Should read:

        i>The profit margin in many fast foot restaurants is very small. Any increase in minimum wage, at least for lower wage markets (the South for instance), will result in restaurants laying off staff and going out of business.

      2. David Zook says:

        Excellent analysis Stan. I have taken more economic classes than someone can shake a stick at and anytime a arbitrary price floor is set like a minimum wage it ends up hurting demand. It is an irrefutable economic principle. The question then becomes how much will it hurt demand?

        For instance, take the minimum wage. If you increase it a penny an hour, the effect for the demand of workers will be negligible. (Businesses will hire workers at the same pace as before and likely absorb the cost of the increase). If you increase it a dollar, you will see the demand for workers decrease (businesses will hire fewer workers) and if you increase it $25 dollars you will see the demand for workers plummet (they will stop hiring).

        In order to recoup their increased labor cost, the business either has to raise prices or reduce the number of people doing the work and ask for more productivity out of their remaining employees. (Doing more with less)

        If the minimum wage increases too much, say to $25 per hour, people will choose not to purchase the product. After all, who wants to buy a $12.00 McDonald’s hamburger?

        If this health care law remains law, we will feel the painful effects of the opposite of price floors … artificial price ceilings. This is already happening with Medicare and Medicaid. The government dictates to those businesses that supply the services a price cap. (We are only going to pay XX number of dollars for this service.) When the price is too low, the supplier can’t meet their expenses, so the supplier decides to no longer provide those services. This is called rationing and it’s already happening.

        In the State of Washington, Walgreen’s has decided to no longer accept new Medicaid patients because Medicaid has set an artificially low price ceiling for prescription drug reimbursement. Walgreen’s is actually losing money on each Medicaid prescription they fill and there is nothing Walgreen’s can do about it. So they have chosen to no longer participate in that market.

        Now imagine if doctors and hospitals are treated the same way. If the government interferes with the free market by placing a cap on how much they reimburse doctors and hospitals and set the price too low, doctors and hospitals will close. Yet, the same number of people still get sick and need medical attention. The effect: It will take you a much longer time to get in and see a doctor. All because of the government is interfering with the free market and setting an arbitrary price too low. (After all, we need to punish those who we think are making too much and are jacking up their prices just to make a buck … wink, wink.)

        Let’s take it one step further. Say there are only a few surgeons left in your town because they can’t earn enough money to pay their expenses and their time due to the price ceiling established, but there are still the same number of people who need surgery. Someone is going to have to decide (that would be the government) who is going to get surgery and when. They are going to have to create guidelines according to necessity, risk, age … yes age … (that is, how many years of life do the actuaries believe that you will be alive), and what ever else they dream up to determine who receives surgery and when. When you hear about death panels, this is what people are most likely referring to.

        It may take three years to receive surgery for something that would have taken weeks if the free market was allowed to work. Do you want to wait that long? What happens if you die before then? This is why people of means who live in countries with socialized medicine come to the U.S. for treatment.

        The Democrats contend that about 127 people die each day because they don’t have health insurance. I will contend that the number of people that will die each day will dramatically increase once the full effects of this law is felt because care will and must be rationed. (yes, I am being prophetic!) [sigh]

        Is this the hope and change that we want?

        Whew! I said my piece. :)

        1. David Zook says:

          I meant peace … not piece. It’s late.

      3. Cassandra badie says:

        just wondering all you people who think min wage is too high what do you say to families trying to live. i know we cut all tax credits to people making over a certain amount and double there taxes that way we can still help the poor and bring down debt
        oh wait that might effect you now, there is a problem with that?
        sorry we have to lower the debt of the nation and lets do it on the backs of the upper class for a change
        why not??
        whose at the head of the line
        economist

        1. David Zook says:

          Cassandra –

          My analysis is simply economic theory. Any time anyone artificially mandates a price floor like minimum wage or a price ceiling by capping how much they will pay, there are consequences that end up affecting the market and potentially many peoples lives, possibly even yours.

          So if policymakers are in the mood to mandate this type of thing, they better count the costs and be prepared for a group of people to raise the question of how unjust their mandates are because those mandates effect real lives.

    2. Cassandra badie says:

      i have noticed gop who complain about stimulus package were first in line with hands out and then took credit for all the jobs created
      to faced

  8. “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond.”

    Very true indeed. And this is exactly the way (that and Austrian economic principles) Peter Schiff very accurately predicted the financial/economic crisis we’re in now that very few people saw coming. And his predictions of what lies ahead are even more dire, and this health care entitlement itself plays a big role in that because it’s simply more and more spending on top of spending.

    Someone I read the other day said it’s basically as if a family is up to its eyeballs in debt and the leader of the family wants to make a charitable donation to help the poor (a noble cause indeed to be sure) that costs $100,000 in money they don’t have. What do you think will happen? Default. Latvia’s government collapsed the other day. Next is Greece (bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=awgDP17rsJ70) which is considered by many to be the canary in the coal mine for the West in general. Then Spain, Portugal, the UK, and the US will falter.

    Schiff along with many other Austrian economists are right: every sector of our economy the government has touched, taken over, or involved itself in explodes in costs and becomes increasingly inefficient. Economics is about the science of incentive, micro and macro. That’s missed in most of the models out there. It’s not just mathematics. We need more leaders like Schiff and other Austrian economists who understand the fundamentals. By the way, he’s running for Senate in Connecticut.

    Just consider these:

    Peter Schiff was Right: http://www.youtube.com/watch?v=2I0QN-FYkpw

    Schiff on Health Care: http://www.youtube.com/watch?v=LfGjqmG47cU

    Schiff on the next economic crisis looming: http://www.youtube.com/watch?v=IubIJkx30ao

  9. Candy Webb says:

    Grammar alert….Fewer workers, not less workers. Fewer people, not less people.

  10. I’ve been reading Kling and Caplan for years, and they are truth seekers.

    Thanks for this post, Justin. The church will only rise when Truth seekers are also willing to see truth. The road to hell is paved with good intentions; it is cleared and graded with unintended consequences.

    1. Cassandra badie says:

      if the reason abortion is wrong because the bible says so
      well that’s not all the bible says
      but i guess you only support the parts you like
      the part were we are to care for our fellow man that you can’t understand
      the part were we are to examples of chariest for a dying world that you can not understand
      turning the other cheek
      what did Jesus say we should do to least among us ,, nothing
      if being gay is wrong because of the bible and you feel it is your job to enforce the bible teaching in other peoples lives
      why not your own
      i think Jesus said give to him who ask you. it didn’t say do a study to see if the person deserves you help it just says to help , it also says sex before marriage is a sin , none of us have done right ??
      so what i am saying is the reason people hate Christians is not because they don’t want god it’s just you people who claim to know him are total lying selfish jerks so concerned to holding on to the little you have , but God sees

      compassion for the distress of the poor, and the unfeeling disregard shown by the wicked

      Psalm 72:4 May he vindicate the afflicted of the people, Save the children of the needy And crush the oppressor.
      ——————————————————————————–
      Proverbs 16:12 It is an abomination for kings to commit wicked acts, For a throne is established on righteousness.
      ——————————————————————————–
      Proverbs 25:5 Take away the wicked before the king, And his throne will be established in righteousness.
      ——————————————————————————–
      Isaiah 11:4 But with righteousness He will judge the poor, And decide with fairness for the afflicted of the earth; And He will strike the earth with the rod of His mouth, And with the breath of His lips He will slay the wicked. (NASB ©1995)

  11. For information on Austrian Economics, mentioned by David above, visit the website of the Ludwig von Mises Institute.

  12. Milton Friedman was a genius … he explains in this old video the underlying fallacies of entitlement philosophies.

    http://www.davidwesterfield.net/2010/03/milton-friedman-on-entitlement-policies/

  13. J.Clark says:

    Look no further to understand the competing economic theories at war here. Check this out: http://soundslikelife.wordpress.com/2010/03/08/fear-the-boom-and-bust/

    This rap (that’s right), this rap off between Lord Keynes vs Hayek lay both theories down in rhyme with a flare of flamboyance.

    1. Loren Eaton says:

      I was just about to post that video. Hilarious and surprisingly informative!

  14. JPManning says:

    Economics supposes that people are rational beings. Sometimes economics works (or doesn’t work) because people are not rational beings. Also, economics supposes the market has all the information evenly spread among its parts so that proper decisions are made. Sometimes that information is slow-moving.

    In general, economics is a good guess on how the market will react. What it can’t account for is the unrational ways that liberals and conservatives will act towards health care based not on economics, but political motivations. That will skew the market a bit.

  15. Stephen says:

    Yes, Milton Friedman was a genius. Milton Friedman was also against employer provided health insurance. In fact he called it the “original sin” of American healthcare policy.

    Yes, there are unintended consequences to anything. Perhaps we should just let Adam Smith’s “invisible hand” hold sway and give up trying to legislate against inequities. Far be it for us to call the workings of the free market unjust. All hail Fortuna!

  16. Michael Boyd says:

    I strongly second the recommendation to look into Austrian Economics at the Ludwig von Mises Institute website as mentioned above. Many of you will have your eyes opened over time as you read publications like the monthly “Free Market” or from some of the books they’ve published or recommend (I liken my coming to an understanding of Austrian free-market economics to when I first understood reformed theology). I read a great deal of Austrian economic theory in the early to mid 1990s and still read “The Free Market” published by the Mises Institute regularly. I was tickled when Hazlit’s book “Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics” was quoted above. It was one of the first Austrian books I read in the 1990s. The Austrian economists pretty much predicted all the economic ills that have occurred along with explanations on why these things would occur years ago. You may ask then, “why don’t the current leaders listen to them?” Simple, they are money/power hungry, self-loving, corrupt politicians, and are far from the responsible servant-leaders they should be. The institution of sound economic policy would put and end to their game and the wicked special interest who rule and control them. Christians who write from an Austrian perspective are R.C. Sproul Jr in his book called “Biblical Economics: A Commonsense Guide to Our Daily Bread” (I’m pretty sure Sproul Sr holds to Austrian views from things I’ve heard him say related to economics) and Gary North. Ron Paul is a current politician who is an Austrian, as is his son Rand Paul and Peter Schiff, both running for the U.S. Senate. I look at the Austrians as the “good guy’s” vs. the “bad guy” Keynesians whose policy has ruled our country since the early 1900’s and have run it into the ground with never ending spending and debt, and unsound banking. I think the well done and educational rap video above points this out well, and the point made at the end of the video is telling. Sound economic policy is so important for the well-being of our country. More believers need to look into this topic and not be fooled by all the lies our there. It seems lately that “capitalism” has become a bad word and is getting undue blame. May I recommend Jay W. Richards “Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem” to combat the false accusations made against capitalism and the free market, which seem to be becoming popular among young people who’ve been lied to in universities. To understand why only giving handouts hurts the poor, see “When Helping Hurts: Alleviating Poverty Without Hurting the Poor. . .and Ourselves” by Fikkert and Corbett. As believers, we cannot fall into the argument that the government has a larger and larger socialistic role to play. We as believers need to step up to the plate, stop spending all our money pursuing the “good American life”, and help the poor at home and abroad in way’s that help pull them out of poverty and allow us to be like Jesus and lay up treasure in heaven at the same time. I believe informed mission organizations like Compassion International and World Vision can do things for people way better and in a much more responsible way than any government can. Even better, churches could do a better job all over the world in helping the poor responsibly- even in providing healthcare I believe. It would be a major testimony to the world if we were known for being counter-cultural in the way we live and give and therefore love others.

  17. Timothy says:

    When I read Milton and Rose Friedman’s book Free to Choose I was bowled over by its logic and its clarity of exposition. One thing it explicitly drew upon was Adam Smith’s Wealth of Nations. In it Smith argued that in many situations when things are left to the market, things are disposed of in the most advantageous way as if ‘by an invisible hand’. But according to the Friedmans there are exceptions that Smith mentions. Smith talks at length of market failure leading to a failure of the invisible hand to function properly. For reasons not clear to me, it seems that market failure stalks the American medical situation. Despite spending twice as much as say France, the outcomes are significantly worse. For some reason the more market oriented approach of America is failing. It is worse than merely failing; such is the cost of the American medical system, with or without Obamamcare, that the entire economic welfare of the nation and with it the capacity of the nation to fund healthcare is put at risk. You do not need to know complicated economic theory to know that something fundamental is wrong, very wrong. Perhaps complicated economic theory is needed to know how to put it right, or to critique the political snake oil solutions on offer, but just to know that something is very much not right with the status quo requires almost no intelligence at all.
    There is an old politician’s syllogism that ‘something must be done; this is something; therefore this must be done’. Certainly Obamacare can and should be critiqued to see if it belongs to this type of political foolishness but it would also be foolish not to accept that somehow America needs to reform its medical expenses so that its care is improved and that the cost of the care halved (yes halved) so that the whole nation does not go down the pan. One immediate criticism that can be made of Obamacare is precisely that it fails to address or even attempt to address the mushrooming costs of health care. Somehow the bureaucratic catastrophe of American healthcare that matches anything achieved by the ludicrousness of socialism has to be tackled.

  18. More from Schiff on Health Care, this guy really knows what he’s talking about on this: http://www.youtube.com/watch?v=QnuQV8Od1Ns

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Justin Taylor is executive vice president of book publishing and book publisher for Crossway and blogs at Between Two Worlds. You can follow him on Twitter.

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