Reviving the Economy, Creating the ‘New Normal’

Yves here. Even though this post may seem unduly formal, it examines how Covid-19 is stressing a system that was already looking wobbly. Mark Blyth pointed out that the crisis of 2008 ought to have led to a reset of the economic model away from favoring capital as much as it did over labor, but instead what resulted was a doubling down on the old, failed approach. To combat political and social instability, countries need again to think of their economy as serving citizens or at least broad national interests, rather than the perverse ideal of markets. But will that happen?

By Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at the Inter Press Service

The Covid-19 pandemic has significantly impacted most economies in the world. Its full impacts will not be felt, let alone measured, until it runs its course. Many countries are still struggling to contain contagion, while the costs on both lives and livelihoods will undoubtedly have long-term repercussions.

Back to the Future?

The pandemic has exposed economic vulnerabilities building up for decades, especially since the counter-revolution, against Keynesian and development economics in the 1980s, gathered pace with transnational corporation-led privatization, liberalization, and globalization.

As the world become more interdependent via trade, finance and communications, inequality and economic insecurity have waxed and waned unevenly, exacerbated by deregulation, reregulation, financialization, and less public social provisioning, undermining public health and social protection.

Policymakers shied away from addressing the fundamental causes of several financial crises from the 1990s (e.g., in Mexico, East Asia, and Russia) and during the first decade of this century, e.g., the dotcom, food, and global financial crises. Now, once again, all too many are focused on getting back to ‘business as usual’.

What Multilateral Coordination?

The global economic situation remains unpredictable, with uncertainties about the varied nature of pandemic recessions. Government responses have not only been diverse, but often poorly conceived due to the novel nature of the crisis. Impacts have varied with the contagion and policy responses, unhelped by often confusing, if not misleading metrics.

Such uncertainty is also reflected in the wide-ranging growth forecasts by major international organizations. The International Monetary Fund (IMF) has recognized the ‘Great Lockdown’ as due to ‘self-imposed’ contractions, leading to the “worst recession since the Great Depression”.

The IMF has supported government fiscal and monetary initiatives, declaring that it “stands ready to mobilize its US$1 trillion lending capacity to help its membership”. The World Bank has also promised an additional US$14 billion to help governments and businesses address the pandemic.

Plurilateralism Also Almost Irrelevant

A March G-7 countries’ joint statement promised “a strongly coordinated international approach”, with no specific actions mentioned or forthcoming thereafter. Instead, countries have pursued their own divergent strategies, even banning exports of medical equipment.

Meanwhile, the Trump administration continues to prioritise ‘America First’ while undermining most multilateral institutions and even plurilateral arrangements, including those created by the US, such as the G20.

Already, G20 members have been dragged into US-China tensions, as the White House blames China for the pandemic and other American problems. Meanwhile, Saudi Arabia, the G20 chair for 2020, is itself embroiled in its own political and economic quagmire, undermined by falling oil revenues, worsened by its oil price war with Russia.

Poor Diagnosis, Bad Medicine

Economic growth slowdowns, especially in manufacturing, services and trade, started prior to the Covid-19 outbreak. Yet, the pandemic’s economic effects were expected to be short-term as factories and offices were closed, and strict ‘stay in shelter’ lockdowns were enforced to stop contagion.

The drop in economic output, as the epidemic began and spread to industrial hubs, has had international repercussions with supply chains disrupted.

Such supply disruptions have engendered and interacted with prolonged, wide-ranging demand shocks as Covid-19 crisis-induced policy responses and other uncertainties reduced consumption and investment spending, slowing economic growth and undermining employment.

Almost 2.7 billion workers, around 81% of the world’s workforce, work and earn less due to the Covid-19 recession, with those in lower middle-income developing countries losing most. And almost 1.6 billion in the informal economy are in the hardest hit sectors or significantly impacted by lockdown measures.

The longer the lockdowns persist, the greater the economic disruption and adverse impacts as the effects spread via trade and finance linkages to an ever growing number of countries, firms and households.

Governments have adopted various monetary and fiscal measures to try to revive and sustain economic activity. Such measures include cash transfers to households, extending unemployment insurance or social security benefits, temporary deferment of tax payments, and increasing guarantees and loans to businesses.

Early ‘stimulus packages’ assumed that the ‘pandemic shock’ would be short-lived and easily reversible. They have largely ignored addressing the unsustainability, inequality, instability and other vulnerabilities of their economic, social and ecological systems.

Monetary Ruse, Liquidity Trap

Basel 3 recommended capital conservation and countercyclical capital buffers for all banks. Many central banks have cut interest rates and increased liquidity through a combination of measures, by lowering reserve and Basel 3 requirements, besides easing loan terms for new temporary loan facilities for banks and businesses.

Continued credit support, through unconventional monetary policies, has not addressed liquidity problems due to truncated business turnover. Increased liquidity provision has instead been captured by better ‘credit risks’, even fueling inflation while doing little for the most vulnerable and needy, deepening pre-Covid-19 inequalities.

Unconventional monetary policies before Covid-19 were already creating stock market bubbles, instead of financing investments in the real economy, thus contributing to growing inequality.

Central banks have not been able to repair their balance sheets or draw back excess liquidity, for fear of financial sector collapse, thus ironically increasing its fragility by pumping in more liquidity, increasing speculation and fueling inflation.

Fiscal Traps Unsustainable

Without better planned coordination, initial relief measures for households and businesses were often wrongly portrayed as fiscal stimulus packages while output has remained constrained by lockdown enforcement.

Despite cuts in government expenditure, especially for public health and social protection, there was little political will to increase progressive taxation. Still mounting government debt, already at historically high levels prior to the pandemic, has not helped.

Instead, earlier tax cuts have increased public debt, while the failure to improve fiscal capacities after the 2008 global financial crisis has meant eschewing productivity enhancing public investments, boosting revenue via progressive taxation, and strengthening universal health coverage and social protection.

Designing Recovery

The design of measures matters, crucially affecting likely effects. As countries prepare for recovery, they should ask what ‘recovery’ can and should mean. To address the many problems we have to contend with, it should not mean a return to ‘business as usual’.

First, as workplaces and social spaces – where people meet, socialize, shop, etc. – have to be redesigned and repurposed to meet precautionary public health requirements, such as physical distancing. Second, the unsustainable, financialized and grossly unequal pre-Covid-19 economy needs to be fundamentally transformed.

Covid-19 policy responses have rarely addressed deeper prior malaises, such as stagnant or falling productivity growth and declining labour remuneration, not to speak of ‘sustainable industrial policy’ measures to address global warming, resource exhaustion and other sustainability problems.

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  1. anon46

    Mark Blyth pointed out that the crisis of 2008 ought to have led to a reset of the economic model away from favoring capital as much as it did over labor, … Yves

    Make that favoring capital over CITIZENS and I agree; e.g. automation is eliminating the need for human labor.

    1. DHG

      With Satan running the show, it will never ever happen and yes this is all Satans system here on Earth but not for much longer.

      1. Massinissa

        So ah, how many years are we going to be waiting for this rapture? How will we know when the Kingdom of God will have come?

  2. Susan the other

    Something Taleb said is sticking with me. That neoliberals and libertarians misuse the word “Liberty’ to mean something more akin to monetary libertine-ism. I do think capitalism has never been properly disciplined, but it does have a certain morality – until profits are threatened. Then all bets are off. Fear takes over. So any new normal should start there. If we want to keep capitalism it will have to follow the “silver rule” which is “Don’t do anything to others that you don’t wanna have done to you.” It’s negative liberty, but without a certain discipline liberty just runs amok. In order to make profits secure it would be good to guarantee some level of earnings. How we do that I dunno, unless we socialize capitalism. Or rather socialize neoliberalism. That would almost take a civil war. Our “unsustainable economic, social and ecological system” really needs to be more civilized. To do that we cannot impose stability from above in the form of “markets” and “interdependence” – those two catch words have nothing to do with civility and stability. When profiteering goes global and nations are made dependent and subservient to international corporations all we have is insecurity at every level. The concept of “locality” is as important to civilization as it is to quantum mechanics. Everything in the world is integrated at a local level. If that didn’t exist everything would be chaos. What we need to achieve is a grass roots synergy. If that can go global, so be it.

    1. L

      Yes, Libertarianism, as Ed Walker has pointed out elsewhere is really a theory of property, not freedom, and it’s focus is exclusively on the management of said property. It can only be called a theory of “liberty” if you eliminate all human concerns and focus only on letting the current top dogs be “free” to eat the others.

      1. Fritzi

        It always baffling to me, how that concept can retaining it’s power.

        The current situation ist actually disproving one of it’s central, moralizing claims quite spectacularly.

        The idea that the goverment and the people running it and working for it desire this total power over the economy.

        The recent article about the conversation between Julian Assange and Yanis Varoufakis and the analysis of the commentariat showed so clearly how all the big corporations are totally dependent on goverment and central banks for mere survival, giving technically total power to the goverment.

        But there is just zero interest in actually exercizing it.

        Not that that is actually new, eestern goverments just don’t want to govern, because to really govern would mean responsibility and that is the last thing they want.

        Which is completely contrary to libertarian predictions and shoots to shredd the one and only argument they ever had that allowed them to moralize and pretend that they had a philosophy of freedom.

        Of course many goverments indeed are greedy for power, but exclusively over the poor, with the rich the bureaucrats the libertarians love to demonize, those seem so eager to be the slaves of private wealth that they come across as complete masochists.

        Damn, where are those socialist, success hating bureaucrats that would ally with us moocher prols against the Captains of industry and finance that Ayn Rand and even other, less obviously unhinged libertarian “thinker” have promised to us.

        I want them, but they just never materialize.

        1. Bill Wald

          Christians have been waiting 2,000 years for Jesus to return and right wing “gold bugs” have being preaching the crash of the US dollar since at least 1972 and there is no evidence of either in the wind. I”m betting that neither happens in my lifetime. That’ a good bet because I turned 80 last month.

        2. Bill Wald

          Personal opinion: The bottom line of all economic and social proposals is the universality of human greed. It is built into our DNA. We are all greedy for different things: money, power, special favors from God, to be a god . . . .

  3. rd

    The impacts of the stimulus payments can be seen in these graphs of consumer spenindg on a county basis at this website:

    A quick thing I looked at was the county level consumer spending in NYS. New York County (NYC) was down 45.6%. However, the smaller upstate cities in counties like Erie, Monroe, Chemung, and Onondaga had higher consumer spending than last year (counties are typically 500k-1 million people).

    I think the major cities are going to be in a world of hurt over the next two years. However, the smaller cities may be poised to do ok. If the federal government shuts off the spigot, then we may see those smaller areas start to really struggle though.

  4. Hepativore

    There is also the fact that the effects of the pandemic and the economic and political fallout resulting from it will be used as an excuse to push for even more austerity.

    It is too early to tell what the long-term effects from this are going to be down the road, but the effects of the pandemic might even prove to be a windfall for the PMC and capital classes. As the virus seems to have disproportionately affected those lower on the income scale they can use the measures put into place from the outbreak such as social distancing, working remotely etc. to further discourage and curtail the ability of labor to organize for better conditions. Plus, it might be the case that it will accelerate the trend of automation without sharing the benefits to the lower classes. Finally, it might also lead to even further class stratification in the form of many corporate managers simply observing and talking to people from video-conferencing screens installed in their workplace without bothering to even visit in person so as to enforce the class barriers between themselves and labor.

  5. Sound of the Suburbs

    “What have we got that they haven’t got?” those at the top look for a means of control
    Land – Feudalism
    Money – Capitalism

    The land scam (feudalism)
    We will let you use this piece of land and leave you with enough to provide a basic subsistence existence and we will take the rest of your produce.

    The money scam (capitalism)
    You do the work, and we will pay you a wage that will provide a basic subsistence existence and we will take the rest as profit.

    As the money scam (capitalism) replaced the land scam (feudalism) the UK’s aristocracy barely noticed. They lived in luxury and leisure and other people did all the work.
    The Classical Economists could never imagine those at the bottom moving out of a bare subsistence existence as that was the way it had always been.

    The workers started to band together to improve their lot.
    That’s a weak point try and get rid of it.

    In the good old days of small state, unregulated capitalism.
    The Classical economists realised it was those at the top that didn’t do any work and were maintained in luxury and leisure by everyone else.
    The Classical economist, Adam Smith:
    “The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money.”
    Get rid of that with neoclassical economics.

    Our knowledge of privately created money has been going backwards since 1856.
    Credit creation theory -> fractional reserve theory -> financial intermediation theory
    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner
    The last thing we want is for people to know banks create money out of nothing, get rid of it.

    What did they learn in WW2?
    In the paper from 1943 you can see …..
    They knew Government debt and deficits weren’t a problem as they had seen the massive Government debt and deficits of WW2.
    They knew full employment was feasible as they had seen it in WW2.
    After WW2, Governments aimed to create full employment as policymakers knew it could be done and actually maximised wealth creation in the economy.
    They had used austerity in the 1930s and it had been a disaster, from now on they would use fiscal stimulus when recessions hit.
    They put in place welfare states so economic hardship would not cause those 1930s problems again.
    That’s a weak point, get rid of it.

    …… etc ……

    What did they work out in the late 19th and early 20th centuries?
    Banks can create the money to invest in business and industry; they don’t actually need wealthy investors for capital.
    That’s a weak point, get rid of it.

    What was the secret of the Asian Tiger economies before they discovered financial liberalisation?
    Banks created the money to invest in business and industry.
    They used credit/window guidance to steer bank credit away from financial speculation and towards business and industry.
    This gave a tremendously stable and successful economic model.
    That’s a weak point, get rid of it.

    Oh no, Richard Werner was there when Japan went wrong and worked out their secret.

    1. Fergus Hashimoto

      “As the money scam (capitalism) replaced the land scam (feudalism) the UK’s aristocracy barely noticed. They lived in luxury and leisure and other people did all the work.”
      You make it sound as if the landowners simply turned into industrial capitalists without any muss or fuss. But that’s not what happened. In England there was a class struggle between the rising commercial and then industrial bourgeoisie on the one hand and the ruling landowning aristocracy on the other. After the Glorious Revolution of 1688, with the restoration of the monarchy after the Commonwealth, a parliamentary system was established that served as the battleground for the class struggle between the two. As a result of this peaceful struggle, no aristocratic heads were chopped off as in the French Revolution, but that should not conceal the fact that the landowners were gradually displaced. High import duties on wheat (called “corn” in England) kept food prices and the costs of living high for the British public, and hampered the growth of manufacturing, by reducing the disposable income of the British public. The Corn Laws of 1846 enabled importation of wheat at low tariffs, so the landowners could no longer overcharge the industrial proletariat for bread. This was a decisive step through which the industrial bourgeoisie took power at the expense of the landowning class

    2. Fergus Hashimoto

      At the risk of being denounced as an agent of the parasitical financial oligarchy, I would like to point out that it is by no means an established fact that banks make money out of thin air:
      “In recent years, some have claimed that banks create money ‘ex nihilo’. This column explains that banks do not create money out of thin air. From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise. In addition to bank solvency representing a constraint on private money creation, banks require access to liquid reserves in order to be able to engage in money creation.”
      Source: Banks do not create money out of thin air, by Pontus Rendahl and Lukas B. Freund, VOX-EU, 14 December 2019

  6. Sound of the Suburbs

    In the beginning ……

    Mankind first started to produce a surplus with early agriculture.

    It wasn’t long before the elites learnt how to read the skies, the sun and the stars, to predict the coming seasons to the amazed masses and collect tribute.

    They soon made the most of the opportunity and removed themselves from any hard work to concentrate on “spiritual matters”, i.e. any hocus-pocus they could come up with to elevate them from the masses, e.g. rituals, fertility rights, offering to the gods …. etc and to turn the initially small tributes, into extracting all the surplus created by the hard work of the rest.

    The elites became the representatives of the gods and they were responsible for the bounty of the earth and the harvests. As long as all the surplus was handed over, all would be well.

    It’s been the same ever since, the extraction methods have just got more sophisticated over time.

    1. Sound of the Suburbs

      “All for ourselves, and nothing for other people seems, in every age of the world, to have been the vile maxim of the masters of mankind.” Adam Smith

      Yes, that Adam Smith, the classical economist.

    2. Sound of the Suburbs

      I was watching a documentary on ancient Egypt when I saw some evidence that they actually knew they had just made the whole thing up.

      There were two links to the gods, the priests and the Pharaoh.
      Over time the priests began to become more powerful and a threat to the Pharoah.
      Akhenaton just changed the religion, so the old priests no longer had any power and he became the only link to the new, single god.

      A clever move by Akhenaton, but everyone else had got rather attached to the old beliefs and gods, and weren’t entirely convinced when he just changed everything at the drop of a hat.
      As soon as he had gone, they went back to their old ways.

    3. Anon- sorry I can't say

      Yes, I agree with you on this. Studying history of art and looking and the pyramids taught me something I really do treasure. It showed me that there is nothing at all that humans can created that will not, over time, go back to being dust. There is no tomb, statue, architecture, monument or anything else people can build that is going to last forever. It all gets recycled back into the earth or destroyed somehow eventually.

      There are no perfect selfies I can take, books I can publish or anything else that will insure I will stand out in history in any important, lasting way.

      It doesn’t matter how rich I can make myself because there are no monuments I can build (or use slave labor to build) that are going to have any truly lasting effect. I’m a blip in time and there is nothing I can do to change this. Thank you pyramids for this lesson.

      Now, when I look at any impressive human made structure I always wonder about the people who did the actual labor. Were they treated poorly or well? Who was so privileged to get to dictate the building of this structure I am viewing? Who gets the credit? Who should really get the credit? I don’t see these things the same way anymore.

      Having said that I came to the conclusion after art history that the only thing a person can ever do that can have a lasting impact is kindness to others. The gift of a helping hand in some way to another person or some other kindness shown to people, animals, the earth. I try to do that best I can while living on this planet in this form (life is short) I try to make helping a priority. Not that I do this perfectly by any means, it’s just what I learned from the pyramids and art history and I try to remind myself of it.

  7. Maritimer

    A search does not turn up “crime” or “looting” or even “illegal”. Don’t go there, Professor, it could be a career terminator.

  8. Alice X

    The Earth has withstood all of the capitalist expansionary economy it can withstand. The only prospect for human and indeed ecological continuance is a decrease in human demands on the the Earth. We saw that initially with Covid-19 but there seems to be no long standing lessons learned.

  9. k teh

    The global supply chain financed by fintech is a circular ponzi, which is collapsing due to loss of actuarial leverage. That’s why increasing debt produces no result. The Fed has dramatically increased electronic money, while putting the screw to physical cash in general circulation, and monetary velocity has been falling dramatically since the last crash.

    The rest is symptoms employed as misdirection. Might check your local “community” bank and see what the cash policy is, the lifeblood of small business. As a small business owner, corporate leverage is electronic money to cash in general circulation.

    They say small business is the foundation of the economy, while destroying them. Those businesses competing to supply corporations are not real small businesses, and the winners are not really competing. Electronic money is a top-down political function, not a bottom-up economic function.

    A greenhouse solves a lot of problems.

  10. Sound of the Suburbs

    No one ever called the international elite “streetwise”.
    The international elite, whilst being very clever, are extremely gullible, and they got tricked into thinking dodgy, old, 1920s, neoclassical economics was a new, scientific economics for globalisation.
    All the economists had done was put some complex maths on top, so it’s got the same old problems it’s always had.
    Austerity always seems to be the answer when you use dodgy, old, 1920’s neoclassical economics.
    The international elite have been repeating mistakes from the 1920s and 1930s.

    Let’s be a bit more streetwise.
    Oi! Mariner, what was the US like when they used neoclassical economics in the 1920s?

    Mariner Eccles, FED chair 1934 – 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s.
    “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped”

    The problem; wealth concentrates until the system collapses.

    “The other fellows could stay in the game only by borrowing.” Mariner Eccles, FED chair 1934 – 48
    Your wages aren’t high enough, have a Payday loan.
    You need a house, have a sub-prime mortgage.
    You need a car, have a sub-prime auto loan.
    You need a good education, have a student loan.
    Still not getting by?
    Load up on credit cards.
    “When the credit ran out, the game stopped” Mariner Eccles, FED chair 1934 – 48

    Einstein’s definition of madness “Doing the same thing again and again and expecting to get a different result”

  11. Sound of the Suburbs

    Economics 101 – The basics

    In the good old days of small state, unregulated capitalism.
    The problem was those at the top that didn’t do any work.

    The Classical economist, Adam Smith:
    “The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money.”

    The capitalist system is geared up to keep those at the top in luxury and leisure.
    Only later on did we bolt on a benefit system to look after those at the bottom who were unemployed.

    The problem was those at the top that didn’t do any work, and they were a real nightmare as Ricardo knew only too well.
    Ricardo was an expert on the small state, unregulated capitalism he observed in the world around him. He was part of the new capitalist class and the old landowning class were a huge problem with their rents that had to be paid both directly and through wages.
    “The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist.
    What does our man on free trade mean?

    Disposable income = wages – (taxes + the cost of living)

    Employees get their money from wages and the employer pays through wages.
    Employees get less disposable income after the landlords rent has gone.
    Employers have to cover the landlord’s rents in wages reducing profit.
    Ricardo is just talking about housing costs, employees all rented in those days.
    Employers and employees both win with low housing costs and a low cost of living.

    There were three groups in the capitalist system in Ricardo’s world (and there still are).
    Workers / Employees
    Capitalists / Employers
    Rentiers / Landowners / Landlords / other skimmers, who are just skimming out of the system, not contributing to its success

    From Ricardo:
    The labourers had before 25
    The landlords 25
    And the capitalists 50
    ……….. 100

    He looked at how the pie got divided between the three groups.

    Economics 102 – Where on earth does today’s economics come from?

    Let’s look at the timeline

    Classical economics – observations and deductions from the world of small state, unregulated capitalism around them
    Neoclassical economics – Where did that come from?
    Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics
    Neoclassical economics – Why is that back again?

    We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.
    On bringing it back again, we had lost everything that had been learned in the 1930s and 1940s, by which time it had already demonstrated its flaws.
    The Mont Pelerin society developed the parallel universe of neoliberalism from neoclassical economics.

    1. Sound of the Suburbs

      William White (BIS, OECD) talks about how economics really changed over one hundred years ago as classical economics was replaced by neoclassical economics.
      He thinks we have been on the wrong path for one hundred years.

      They actually knew what small state, unregulated capitalism looked like in those days as they could observe it in the world around them.

    2. Sound of the Suburbs

      The Chinese are gradually working towards this.

      Davos 2019 – They have now realised high housing costs eat into consumer spending and they want to increase internal consumption.
      Disposable income = wages – (taxes + the cost of living)
      They let real estate rip and are just beginning to realise why that wasn’t a good idea.

      It took 1.4 billion Chinese people years to get this far, but they are moving in the right direction.

    3. Sound of the Suburbs

      Disposable income = wages – (taxes + the cost of living)

      What Michael Hudson has been trying to tell people for years put into an equation.

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