5. Rent Seeking and Rent Extraction

Rents are here defined as returns in excess of opportunity cost engineered in a market economy by the regulatory intervention of government (Tollison, 1982, 1997, Tollison and Tullock, 1988). The availability of such rents gives rise to rent seeking on the part of interest groups, whose members rationally expend resources in a competition to secure the present value of the rents that are potentially available. Whether rent seeking outlays constitute welfare neutral transfers or whether they constitute welfare-reducing wastes of resources depends on the institutional structure, although the general presumption is that some waste occurs even within a well-designed political system. The extent of rent seeking outlays in response to any given aggregate of available rents depends on attitudes towards risk, the nature of returns to scale in rent seeking and the nature of the rent seeking game (Tullock 1980).

As with so many important contributions to public choice, the original insight came from Gordon Tullock, this time in his seminal 1967 paper in The Western Economic Journal challenging the then conventional wisdom that the only loss of welfare from monopoly was the deadweight loss characterized as the Harberger Triangle (Harberger 1954). Tullock focused attention on the Tullock Rectangle of producer’s surplus created as a consequence of monopoly and posed the simply but crucially important question: would not producers when competing for that monopoly rationally expend aggregate resources, in the limit, equal to the present value of that rent? His positive reaction to that question shook the throne of the new welfare economics, and ultimately destroyed the latter’s widely endorsed presumption against free markets.

In 1971, Tullock returned to the theme of his 1967 paper, which as yet had made little headway in mainstream economics, shifting attention to the cost of transfers. Drawing from his experience in China, where beggars mutilated themselves as a means of making themselves pitiful to potential donors, Tullock argued that many would be recipients of government transfers in the Western democracies engaged in similar forms of activity. Rejecting the notion that all political redistribution of wealth is voluntary, Tullock focused attention on the resource cost of competitive lobbying of politicians and bureaucrats both by those who sought transfers and by those who sought to prevent them. He noted that the resources invested in such activities were socially wasteful, irrespective as to whether the transfers were made or not.

By recognizing that government regulatory activities are endogenous, the self-seeking response to resource outlays by influential pressure groups, Tullock explicitly challenged the public interest theory of government. In 1974, Anne Krueger coined the term rent seeking to characterize these activities, a term that would take a central place in the public choice litany.

The rent seeking insight plays a central role in Virginia Political Economy, suggesting as it does that that there are significant welfare costs to government activity. By the same coin, the concept presents a fundamental challenge to Chicago School notions that democracies are efficient and that the cost of redistribution does not exceed the normal cost of government.

Indeed, in recognizing that successful rent seeking results in a transitional gains trap that obstructs efficient economic reforms (Tullock 1975), the research program explains why clearly inefficient regulations remain on the statute books and offers a clear warning to those who are rationally well-informed to work hard to obstruct the passing of new regulations, however attractive the latter may appear to be.

A recent empirical study by Laband and McClintock (2001) suggests that, for the United States, supposedly a relatively efficient constitutional republic, the annual cost of rent seeking and rent protection amounts at least to $400 billion. Evidently, this is not the normal cost of government, even if rent seeking continues to be downplayed or ignored entirely by Chicago economists. (See also Laband and Sophocleus 1988).

The rent seeking literature assumes that politicians are passive brokers of policies that create rents, responding to rent-seeking bids essentially as auctioneers bent on maximizing the size of their brokerage fees. A recent literature (McChesney 1987, 1997, 2001), however, presents a yet more dismal picture, by recognizing that politicians may abandon their brokerage roles in order to obtain yet more lucrative returns by threatening adverse legislation unless they are paid off in terms of protection moneys. Rent extraction, as this Mafia-like protection racket is labeled, is highly costly in terms of resource mis-allocation. Yet, like ‘the dog that did not bark’ it does not manifest itself at all in the public accounting system. Even should it be revealed, the politicians who benefit from it, unlike members of La Cosa Nostra, are immune from legal penalties.

6. The Legislature

Under conditions of democracy, elected politicians serve for specified or flexible terms in legislatures as representatives of the electorate. Legislatures typically are either unicameral or bicameral in nature. They may or they may not be constrained by written or by conventional constitutional rules.

Organized on the basis of political parties, or coalitions of parties, or committees and sub-committees, politicians essentially are political brokers, pairing demanders and suppliers of legislation, i.e., those willing to pay most for a particular law or transfer with those who are willing to pay the least to prevent such a law of transfer. Typically, such politician-brokers concentrate on legal arrangements that benefit well-organized and concentrated groups at the expense of diffuse interests, each of which latter is taxed a little to fund the transfer or legislation (Tollison 1988).

Although politicians have ideologies of their own, competition among them, together with the contestability of their positions, constrains their ability to pursue such ideologies unless they conform to those of the constituents who secured their election. Of course, that does not imply that some politicians will not risk an election loss by pursuing a goal to which they are especially attracted. Nor does it imply that politicians will misjudge the will of the electorate on ideologically charged issues. Fundamentally, however, politicians are brokers and not purveyors of policy.

Politicians expend resources in specific wealth transfer markets in return for brokerage fees that typically take the form of some mixture of campaign contributions, post-political career remuneration and promised votes. The size and continuity of such brokerage fees depend significantly upon the perceived durability of the wealth transfers. Durability, in a political system characterized by cycles, depends upon institutional constraints designed to protect the status quo. Such constraints vary significantly across the world’s democratic legislatures. However, both politicians and interest groups share a common interest in promoting institutional arrangements that enhance the durability of laws (Tollison 1988).

In Westminster models of parliamentary democracy, where parliament is supreme and there is no effective separation of powers, durability of laws in a polity characterized by cycles is not easy to achieve. In such systems, the executive branch of government, the prime minister and the cabinet, are drawn from the elected legislature and are dependent for their continuation in office on the majority support of the legislature. The cabinet possesses agenda power in preparing legislation, but this is modified by the ongoing threat that alienated members of the majority party may withdraw parliamentary support and force the government to resign. Coalition governments, typical in many democracies in Continental Europe, are yet more vulnerable to cycles. Predictably, campaign contributions will be relatively low and interest group activity relatively less forceful, ceteris paribus, under all such systems of government than under more severely constrained models.

The United States legislature is just such a constrained model, both by constitutional design and by evolved institutional structure. Its bicameral format increases the difficulty both of passing and of repealing laws. The separation of powers allows for bills passed by both chambers to be vetoed by the President, forcing it back onto two-third supra-majority votes to override the veto. The independent federal judiciary patrols the borders of its legislation, in principle, at least to ensure that the Constitution has not been infringed. These constitutional constraints arguably enhance the durability of its determinations (Landes and Posner 1975, Anderson, Shughart and Tollison 1988, Tollison 1988, Mueller 1996).

In an alternative and important explanation of the stability and durability of legislative equilibrium, Shepsle (1978) and others have focused attention on the role of committees and the nature of committee assignments in both chambers of the United States Congress, but more especially in the House, as coalition-builders. In this analysis, committees substitute for more vulnerable logrolling (Tullock 1959) in overcoming the high transaction costs of contracting in political markets. They do so by providing a division of labor within the legislature, in which representatives specialize in the political issues relevant to their own districts.

The committee structure of Congress is grounded in ‘property rights’ granted to each committee of jurisdiction, allowing it almost exclusive rights in ‘gate keeping’ (i.e., in deciding whether or not to allow potential bills onto the floor of the chamber). It is also grounded in the ‘deference’ accorded to each committee by non-committee members, grounded both in reciprocity, in threat, and in the power of ‘ex post settling up’ accorded to committees with jurisdiction by the convention that conference committees between the two chambers are manned primarily by members of those original committees (Shepsle and Weingast 1981). In such circumstances, committees can protect the status quo, or their own bills from non-empty win-sets (Black and Newing 1951) thereby providing protection against cycling in an environment of instability.

Despite the growing literature based on the new institutional economics that focuses attention on the gains-from-trade aspect of ‘politics-as-it-is’, there is another, darker side of the legislative process that must not be ignored. Politics is not primarily concerned with gains-from-trade, but with obtaining power over the public authority (Moe 1987, 1990). When two poor voters and one rich voter comprise the electorate, the rich voter is in trouble. He is not in trouble because of political cycles and the instability of the political process. He is in trouble because the poor majority may decide to steal his wealth, using the political; process as a less costly mechanism than theft. To the extent, that the legislative process is concerned more with redistribution than with wealth creation, so the fear of the rich voter must be increased.

Because there are no long-term property rights in the public authority, the governing political party must exercise caution when legislating its institutions. Political opponents, should they access the power of those institutions, may deploy that power to reward their own constituents. For this reason, the agencies of government are often tightly constrained by legislation, or even are designed to fail in their express purposes (Moe 1990).

7. The Presidency

In countries exemplified by the United States, where the separation of powers is enshrined in the Constitution, the President is elected by an independent vote and holds his position for a fixed term quite independently from the wishes of the majority of the legislature. The United States Constitution arms the president with a veto power over bills emanating from the legislature. To override the presidential veto each chamber of the Congress must re-pass the affected bill with at least a two-third supra-majority vote. The veto threat effectively allows the President to serve as a third chamber of the legislature, logrolling with the other chambers in the shaping of legislation (Carter and Schap 1987). The President also enjoys significant regulatory powers delegated to him by Congress. These powers can be utilized to reward or to punish legislators who choose to pursue goals contrary to the preferences of his key constituents in the Electoral College (Moe 1987).

Potential differences in the interest group constituencies of the Congress and the president emanate in part from their different bases of representation. Special interests are much more effective when targeting their rent seeking on the specialized districts of the House than they are state-wide in the Senate. They are least effective in targeting the nation-wide constituency of the president. The special interests are most effective when working in opaque environments.Presidential politics are much more transparent than congressional politics.

One view that has some currency in the public choice literature (see Crain and Tollison 1979) is that the President and Congress override the separation of powers and the intent of the Founding Fathers and impose a collusion of powers designed to enhance the durability of legislation and thus to raise the brokerage fees provided by the special interests. While this perspective has some credibility when the presidency and the Congress are both controlled by a single political party, it is difficult to justify when the party of the president does not control the Congress.

When the Congress and the President are at odds with each other, it is by no means clear which branch will dominate. Madison (The Federalist, No. 53) envisaged the legislature as the dominant branch and worried about the power that this would accord to factions. Powerful presidents, (most notably Ronald Reagan) however, have influenced policy even when their parties have been in a legislative minority. Certainly, presidents are able to destabilize political equilibrium when the policies at issue are high priority and transparent.

8. The Judiciary

The United States federal judiciary was established by the Founding Fathers as a co-equal independent branch of government designed to function as an effective counter-weight to the legislative and the executive branches. To limits its powers, the federal judiciary is dependent on the President and the Congress for its appointments, dependent on the executive branch for enforcing its judgments, and on the Congress for appropriating its budget. Within these constraints, however, the judiciary patrols the behavior of the executive and the legislative branches to ensure that the Constitution is not violated.

To secure independence, federal judges are granted lifetime tenure, albeit subject to the sanction of impeachment. Their salaries cannot be reduced in nominal terms during their tenure. Their judgments, especially those of the Supreme Court, are accorded enormous respect even when they run counter to majority popular opinion. Even so, the federal judiciary has not escaped public choice scrutiny.

Because judges and justices are appointed through a political process, it is extremely unlikely that the ‘best and the brightest’ will be successful. Typically, they will have made contributions too controversial for the tender souls of the politicians. Potential appointees are scrutinized closely in terms of ideological bias and past political service.

Where the President’s party controls the Senate, and thus the Judiciary Committee, candidates of the alternative political persuasion will not be nominated. Only stealth candidates who provide a false image of their views (notably in recent years Justice Souter) will wriggle through the selection process. Where the party of the president does not control the Senate, serious candidates will have to display mediocre intellects and enhanced deference to the legislature (in recent years Justice Kennedy is a good example) or to be willing to play the color card (Justice Thomas).

The interest-group theory of politics (McCormick and Tollison 1981) models legislatures as firms supplying wealth transfers to competing interest groups by means of contracts termed ‘laws’. In one interpretation (Anderson 2001), the judiciary confirms such contracts by adjudicating in favor of the short-term interests of pressure groups who successfully bid for political influence. As the balance of pressure groups changes so the courts will shift their judgments, irrespective of the original intent of the legislation.

An alternative interpretation (Landes and Posner 1975), focuses on the long-run effects of judicial independence, arguing indeed that such independence may be an integral component of the interest-group theory of government. They argue that the function of judges is to provide stability to the bargains agreed between the legislature and organized pressure groups, thus increasing the value of the rents that are dispersed. Precisely because the judiciary is independent from the current legislature, the judiciary is able to resolve disputes concerning the interpretation or constitutionality of a law by reference to the intentions of the originally enacting legislative body. Landes and Posner (1975) provide weak empirical support for this proposition. The proposition remains suspect, however, because such long-run stabilization of contracts inevitably reduces the prospects for the forging of new contracts (Benson 2001). Legislators who control the budget appropriations to the judiciary are unlikely to allow strong judicial independence where it threatens their current brokerage fees in the rent-seeking market.

9. Bureaucracy

The bureaucracy of government, responsible for the implementation of policies that are legislated and signed into law, is located in the executive branch of government. However, bureaus are dependent on the legislature for budget appropriations, are subject to its oversight authority, and are vulnerable to new legislation where their activities place them at odds with the current legislative majority.

The traditional political science perspective envisaged senior bureaucrats as being impartial, and public-spirited in the sense of pursuing either the original intent of the legislation that created their bureaus or the current wishes of their legislative overseers. This perspective has been closely scrutinized by public choice scholars who have focused on the rational choice approach in which senior bureaucrats are viewed as maximizing their personal utilities subject to relevant institutional constraints.

Within the public choice perspective, the senior bureaucrats who exercise authority over the budget are viewed as self-seeking maximizers of utility that is defined as some balance between expected wealth, ideology, patronage, discretionary power and ease of management (Tullock 1965, Downs 1967, Niskanen 1971). Budget maximization (Niskanen 1971) or discretionary budget maximization (Niskanen 1975, 2001) is deployed as a plausible proxy for these various objectives. Senior bureaucrats commit a total output in return for a total budget appropriation. They seek the maximum budget compatible with satisfying this output commitment.

In negotiating such budgets with the legislature, senior bureaucrats are viewed as possessing information advantages because of the monopoly nature of their provisions. Their legislative overseers have little access to independent information regarding the bureau’s production function. Because of the indivisible nature of the budgetary negotiations, the senior bureaucrats are able to operate as discriminating monopolists, extracting the total surplus from the legislature (Niskanen 1971).

The nature of the budgetary outcome under these bargaining conditions depends on two factors. First is the nature of the budgetary environment, specifically whether the bureau is demand-constrained or budget constrained (Niskanen 1971). In circumstances of relaxed oversight, or demand constraint, the budget-maximizing bureau simply maximizes the sixe of its bureau unconstrained by output constraints. In circumstances of tightened oversight, or budget constraint, the bureau maximizes the size of its budget at a lower level than would be possible under conditions of demand constraint.

In both circumstances, the output of the bureau is significantly higher than the median voter would prescribe. In the former case, the bureau is additionally technically inefficient, supplying its output at costs significantly higher than those minimally available to it. In the latter case, the bureau is technically efficient according to this model (Niskanen 1971).

Once discretionary budget maximization replaces budget maximization, the outcome of budget negotiations changes. Senior bureaucrats no longer negotiate deals that extend output beyond that optimally demanded by the legislature. Instead they focus their attention on maximizing the budget surplus that can be deployed in pursuit of other goals (Niskanen 1975). A key implication of this outcome is that bureaus are always technically inefficient, securing budgets significantly in excess of the minimal cost of providing output even if the level of their output is not in excess of the optimal requirements of the oversight committee.

Members of the bureaucracy predictably enter the political market place on the demand as well as on the supply side as special interests that are unconstrained by free-rider considerations (Shughart and Tollison 1987). They tend to be differentially well-informed concerning the predictable response of legislators to specific initiatives. They are rationally well informed concerning the policies that their bureaus will administer. Predictably, senior bureaucrats favor non-transparent policy initiatives, not only to conceal special interest allocations from electoral scrutiny, but also to maximize their own discretionary power in the provision of commodities subject to their control.

Following Niskanen’s seminal work, the public choice analysis of bureaus has reverted somewhat from his 1971 theory of bureau dominance to the view that oversight committees exercise significant control and that bureaus respond to a significant degree to the dictates of their political masters (Weingast and Moran 1983). The congressional dominance theory assumes that congressmen on the relevant committees possess sufficient incentives and sufficient sanctions to establish effective governance over the agencies that they monitor.

The federal bureaus and agencies established by statute usually, though not universally, are subject to oversight both by the Congress and by the President. Their budgets are appropriated by both chambers of the Congress but are subject to review and potential veto by the President. In such circumstances, it is relevant to analyze bureaucratic behavior from the perspective of a multiple principal-agent relationship.

The congressional dominance theory (Weingast and Moran 1983) assumes that congressmen on the relevant oversight and appropriations committees possess sufficient incentives and sufficient sanctions to establish governance over the agencies that they monitor. Although the committees are not endowed with sufficient resources to engage in continuous monitoring, special interests keep them well informed about agency performance. By choking of appropriations to recalcitrant agents, by harassing them through the oversight process, and by threatening interventionist legislation, congressional committees are viewed as influential monitors. The threat of ex post sanctions and the promise of ex post settling up create ex ante incentives for agents to reflect the preferences of the majority vote on the relevant congressional committees.

The hub of the efficient governance hypothesis is the assumption that congressional committees exercise a near monopoly jurisdiction over their respective agents, thus benefiting from clearly defined property rights that encourage circumspect monitoring. To the extent that congressmen self-select the committees on which they serve, the near monopoly power that they access provides leverage over precisely those issues relevant to their individual political support and, hence, to their expectations of re-election.

If this hypothesis is correct, there are two testable predictions that should survive empirical testing, namely (1) that specific oversight/appropriations committees should exercise more influence than Congress as a whole over the behavior of particular agents and (2) that if the political complexion of a particular committee should shift, then so should the political relevant behavior of the associated agent. Early tests have not refuted either of these hypotheses (Weingast and Moran 1983, Weingast 1984, Grier 1991).

Nevertheless, because of the competition among multiple principals for agency control, agents will not be efficiently monitored. Considerable agency discretion will survive.The multiplicity of principals arises from at least four sources, namely (1) jurisdictional overlaps among oversight committees in each chamber of the Congress, (2) duality of oversight responsibilities in a bicameral legislature, (3) jurisdictional conflicts between oversight and appropriations committees composed of different members and (4) the competing jurisdictions of the Congress and the President, especially when the Congress and the presidency are controlled by different political parties.

10. Constitutional Political Economy

According to Buchanan (1990) there is a ‘categorical distinction’ to be made between constitutional economics and ordinary economics, a distinction in the ultimate behavioral object of analytical attention (ibid, 2). In ordinary economics, analysis is concentrated on choices made within constraints that are imposed exogenously to the person or persons making that choice. Constitutional economics, in contrast, directs analytical attention to the choice among constraints, choices that are made ex ante by individuals in seeking to restrict their own and others’ subsequent choice sets in the ordinary political sphere.

The seminal contribution to constitutional political economy is The Calculus of Consent, co-authored in 1962 by Buchanan and Tullock. This topic outlined for the first time an individualistic theory of the constitution, assigning a central role to a single decision-making rules – that of general consensus or unanimity.

By focusing attention on the nature of expected external costs and expected decision-making costs under decision-rules short of unanimity, and by recognizing that constitutional rules are derived under conditions of generalized uncertainty, Buchanan and Tullock explained why rules of less than unanimity (not necessarily a simple majority rule) would be chosen unanimously by rational individuals at the constitutional stage: ‘At best, majority rule should be viewed as one among many practical expedients made necessary by the costs of securing widespread agreement on political issues when individual and group interests diverge’ (Buchanan and Tullock 1962).

The Calculus of Consent effectively leveled a playing field in political economy that had tilted dangerously against free markets during the late 1940′s and 1950′s. Advocates of the new welfare economics, led by Paul Samuelson and Kenneth Arrow, had developed a sophisticated attack on free markets, claiming that they were plagued by problems of monopoly, externalities, public goods, and information deficiencies. By so doing, they had placed even Milton Friedman, the most formidable defender of the capitalist system, on the defensive (Friedman 1962).

Buchanan and Tullock (1962) redressed this imbalance by demonstrating that political markets were riddled by these exact same weaknesses, but much more generally because of the indivisibility of collective decision-making. Recognition of this reality by individuals deliberating under conditions of uncertainty in constitutional decision-making was precisely why they designed constitutions that would limit the range and extent of government and thus rein in the potential abuse of individual rights. In this sense, constitutional political economy explains why public choices are constrained by the unanimous consent of rational and free individuals.

The hard core of the constitutional political economy research program combines the assumptions of rational choice, methodological individualism and homo oeconomicus in a manner that distinguishes it sharply from all mainstream economic research programs designed to evaluate the nature and the role of the state (Brennan and Hamlin 2001). Over the following forty years, the auxiliary assumptions of the model have adjusted to reflect changing circumstances. Those working within the field, however, have not found it necessary to adjust the hard-core assumptions.

As the political environment in the United States deteriorated from the rosy scenario of the second Eisenhower administration through the civil rights crisis, and the Vietnam fiasco of the Kennedy and Johnson administrations, culminating in the Watergate crisis of the Nixon administration, Buchanan in particular became less enamored of the positive gains-from-trade approach of The Calculus of Consent. In The Limits of Liberty (1975), he effectively deployed the philosophy of Thomas Hobbes – the threat of beckoning anarchy – to protect the hard core of his research program in a much less favorable external environment. From this insight came some of the best scholarship of the program, most notably in 1977 Democracy in Deficit by Buchanan and Wagner.

There then occurred through the decade of the 1980′s a shift of direction from science to moral philosophy as Brennan and Buchanan (1980, 1985) injected propositions from John Rawls (1971) into the protective belt of their theory. With the breakdown of the Soviet Empire in the early 1990′s, scholars recognized that Rawls’s ‘veil of ignorance’ played no role in the process of constitution making that followed in the wasteland left behind by socialism. In 1990, Buchanan returned to science in an important paper introducing his new journal, Constitutional Political Economy. Since then the constitutional political economy research program has proceeded successfully along the rational choice lines from whence it originated (Mueller 1996, Brennan and Hamlin 2001).

11. Bioeconomics of Non-Human Societies

Innovative public choice scholarship is extending the frontiers of the discipline well beyond the domain of rational economic man to encompass the behavior of other species, notably bees and fishes. Janet Landa, a law-and-economics scholar and a prominent bioeconomist, has written two important papers dealing with these species.

Her 1986 paper on the political economy of swarming in honeybees offers a fascinating study of collective action in biological systems. Landa explains the organization of bee swarming as a means whereby honeybees economize on information and decision-making costs when establishing a new nest site. She uses the Buchanan and Tullock (1962) theory choice of Pareto-optimal voting rules to explain why scout bees use the unanimity rule when deciding where to establish a new nest.

On the one hand, the external costs of using the ‘any bee’ rule would be very high for the whole bee swarm should the one bee find an unsuitable home. On the other hand, the decision-making costs of using the unanimity rule are low both because scout bees constitute only about 5 per cent of the whole swarm and because they are a homogeneous group, being experienced former foragers. Because of the high external costs relative to decisionmaking costs, the use of the rule of unanimity by scout bees is efficient.

Just as honeybees ‘vote with their wings’ (Landa 1986), when swarming out of their nest in search of a new home, so many species of fish ‘vote with their fins’ (Landa 1998), when forming schools in order to migrate to spawn, to search for new foraging areas, to hunt for prey and to organize for defense. In her 1998 paper, Landa applies public choice analysis to the biological literature on schooling fish, using a selfish fish, club-theoretic paradigm.

On this basis she hypothesizes that a selfish fish (a) joins the fish school because it derives hydrodynamic benefits (a club good), (b) has no incentive to completely free-ride because it will be left behind by the school if it attempts so to do, (c) has no incentive to shirk a leadership role because of role reversibility between leaders and followers, (d) derives defense benefits against predators from its membership of the school, and (e) has no incentive to discriminate against odd-looking outsiders since odd-looking fish in a school are attacked more frequently by predators than are look-alikes. On the other hand, outsiders display xenophobia towards insiders because outsiders do not wish to become prime targets for predators. As a consequence, fish schools tend to be homogeneous.

Finally, Landa applies the Buchanan and Tullock (1962) theory of choice of optimal voting rules to explain why the ‘any leader’ rule for making the collective choice to escape, the main anti-predator defense strategy, is optimal for members of a fish school. In so doing, Landa explains the leaderless, completely decentralized form of organization of fish schools, in contrast to bee swarms. Evidently, the reach of The Calculus of Consent extends well beyond Homo Sapiens into the bioeconomics (consilience of economics with biology) of non-human societies.

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