Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 21 May 2016

Economists are losers so ignore them on Brexit

That essentially is the argument of the Telegraph’s Allister Heath, expressed as Donald Trump might. Heath says we have a been failures for over a century, “yet they now have the chutzpah to behave as if they should be treated like philosopher kings, an all-knowing “profession” that we are all supposed to bow down to uncritically.”

Actually right now I think we would settle for being heard. Ironically the only people in the media who seem to have noticed our Times letter are those supporting Leave. This matters. Recent polling evidence suggests voters have taken on board the Bank of England’s view that we will be worse off in the short term. But when it comes to the economy in 10 to 20 years time, as many voters think we will be better off by leaving as think otherwise. That the overwhelming majority of academic economists think there are significant long term costs to leaving might therefore be useful information for voters: information many currently do not have. So much for “philosopher kings”.

Of course economists have many faults and do make mistakes. But it remains the case that economists do know more about what determines trade and foreign investment and the impact of migration than most. We certainly know more than political journalists.

Should our expertise be ignored? Let’s look at some of the evidence Heath uses to suggest we nearly always get it wrong. The first is a poll conducted by the Economist in 1999 about whether the UK should join the Euro. Here the split was basically 2 in favour for every one against. But there is a crucial difference from Brexit. In the case of the Euro every economist would acknowledge (see the Economist article) that there were good arguments for and against. In the case of Brexit the only matter to discuss is how big the costs of leaving are. Our trade can only decrease following Brexit. Foreign direct investment can only decrease. Migration, which is also a plus for the economy as a whole, is likely to decrease following Brexit.

The main argument those supporting Brexit use to suggest the economy will do better is that we can get rid of all those pesky regulations that are holding business back. Which was exactly the argument the Conservatives and those in the financial sector made when they championed reducing regulations on finance before 2008. It worked for a few years, and then we had the financial crisis that led to the biggest post-war recession. Mr. Heath has the chutzpah to lay all the blame for that on economists.

But let’s roll the Euro story on to 2003. The government had to make a decision, and this focused on the economics. It commissioned a huge amount of work looking at all the evidence, consulting widely among academics. These studies flagged up some (not all) of the vulnerabilities of the Eurozone that became evident in subsequent years. This persuaded first Gordon Brown and then Tony Blair to say no. I would count that as a definite win for economists.

Of course he mentions what he calls the ‘infamous’ letter from 364 economists in 1981 criticising the Conservative deflationary budget. We are told that the 364 got it wrong because the economy started growing shortly afterwards. This is mediamacro logic, just like when we were told austerity was a success in the UK because the economy grew in 2013. As Steve Nickell pointed out in this speech, unemployment peaked not in 1981 but 1986. The combination of monetary and fiscal contraction in 1981 was overkill, and on that fundamental point the letter was right.

But I will concede this. Mr. Heath and his colleagues on the neoliberal right are much better at PR than economists. They have managed to create the perception in the media that the letter was wrong and Mrs. Thatcher was right. Their strategy is that if the evidence is against you, distort the evidence.

This is the real beef that Mr. Heath has against economists: we mostly follow the evidence and not an ideology. Most economists were indeed wrong about the Great Depression, but that led to the creation of macroeconomics as a separate discipline under the guiding light of Keynes. This helped produce a golden age of growth after WWII, a fact that Mr. Heath ignores. It was brought to an end by stagflation, but that was not the surprise to economists that Mr. Heath imagines.

The irony is that the ideology Mr. Heath follows is itself based on economics: economics as understood by a first year student who only listened to a third of their lectures. For Heath economics is fine as long as it is explaining the virtues of the market and competition, but if economists look at market imperfections then they are “obsessed”.

When I see Heath and his compatriots extol the virtues of the regulation free world that will be possible once they are freed from the shackles of the EU, I am reminded of the Troika and Greece. The Troika has been effectively running Greece for 6 years, yet unlike Ireland or Spain the economy remains in depression with no signs of hope. But rather than question what they have done, they blame the Greeks for not pursuing the prescribed policies rigorously enough. The UK is one of the least regulated OECD economies, and has recently had 6 years of government spending cuts and corporation tax cuts, but productivity growth since the crisis has been painfully slow. Rather than question the efficacy of the medicine, the ideologues blame the EU from preventing them doing even more.

It also reminds me of the Scottish referendum, where those in favour of independence just did not want to hear the bad news about the short term fiscal outlook. Some decided that those bringing that news were part of some Westminster conspiracy, and all preferred to believe the wishful predictions of the SNP. I’ll repeat now what I said then: do you really want to be ruled by people who prefer make believe stories to evidence, and who are so desperate for votes they tell you to ignore an entire academic discipline.           

31 comments:

  1. I am no expert, but it seems to me that for trade to be relatively free and unimpeded, it is absolutely necessary for rules and regulations to exist. We need to know that x units of Y means the same thing everywhere in the common market, so there has to be some standard (i.e., regulation) that defines how we measure x and what corrections/calibrations need to be applied to ensure that the playing field is level. Even the methods used in establishing the calibrations are topics that can become contentious if they are not negotiated ahead of time. Thus, when I hear people talking about too much regulation, I strongly suspect they have not really thought things through.

    If the common market were to be replaced by a free trade area, would those regulations go away? No. Instead of having all the processes standardized ahead of time, they would simply be applied at the point where products go through customs. There would then be checks for compliance with safety and commercial standards when shipments go through customs, so the degree of bureaucracy would actually potentially get worse.

    In fact, my experience when I was living in Canada and I was working for a company with most of its business in the US (integrating and delivering computer vision systems) was that every time we shipped a system, we actually had to itemize the components of the system (including the components inside the PC) to list the points of origin and the net value. This was to ensure that the vendor was not some front company that would get components that were not covered under the FTA (Free Trade Agreement) between Canada and the US into the US without paying required duties. The net result was that it was possible to have systems where all the components were exempt from duties and others that were only partially exempt from duties. It was a lot more complex than people realised (a LOT of paperwork was needed).

    This is the one thing that very much irritates me (well, a lot of things do, but this is the one I have not seen much challenged - understandably so, these are complex, technical, and not particularly exciting topics) about the Brexit camp.

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  2. I do agree but I have two questions which I would be interested to hear your responses to:
    First, is there not a legitimate argument that in the long term we could benefit if we negotiate free trade with Europe and are able to negotiate better trade deals with the non-European fast growing economies?
    Second, regarding your point that neoliberals claim the deregulation was too modest / the Greek reforms not fully completed... Could the same argument not be applied to the situation of countercyclical fiscal policy in the US during the crisis - some argue it had limited effects because the concept was flawed, some argue it had limited effects because it was too small a stimulus...

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    1. As a French, I can answer you on the first point :
      UK has always been seen here as the "stowaway" of Europe, always trying to get exceptional treatment (often successfully), and always complaining of paying too much and not receiving enough. A Brexit + free trade agreement would be seen here as the ultimate step of this policy, UK keeping the biggest advantage of EU without any of the drawbacks. It would be very unpopular, and it could encourage other countries to do the same.

      Therefore, I think you can understand that negotiating a free trade agreement with EU will be very difficult, as EU leaders don't want to dissatisfy their voters, nor to promote secession. There is a high probability that UK will rather be made an example, and get the worst possible trade agreement...

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    2. I agree on your judgement that the UK will be more harshly treated than Brexiteers would like to suggest. But I don't think this will result in the UK not getting a free trade deal, I just think it will result in the UK having to continue paying a similar amount into the EU budget as is does now (and probably accept similar rules, regulations, free movement etc).

      BUT... they may well be able to improve trade agreements with non-EU countries, it seems to me at least. I would like a rebuttal of that argument if there is one?

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  3. Glen Newey at LRB blog 'Bonnie Prince Charlie on a Push Bike', 22 February 2016:

    "Leave may also swell with the Brexity froth from orifices such as the Sun (controlled by US citizen Rupert Murdoch) and the Telegraph (owned by tax-swerving Brecqhuo-residents the Barclay brothers). Then there’s the Daily Mail, now 89 per cent owned by the non-dom fourth Viscount Rothermere, whose dividends are funnelled to him via a trust in Bermuda, and the über-Europhobe Express, owned by the billionaire pornographer Richard Desmond, who slalomed round HMRC via paper loans from Luxembourg (effective rate: under 1 per cent). The Brexit revolution offers a new spin on the American one: (over-)representation without taxation."

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  4. "overwhelming majority of academic economists think there are significant long term costs to leaving"

    https://yourlogicalfallacyis.com/bandwagon

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  5. Good points, but I'm surprised that you read past the title of the article let alone refer to it here.

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    1. As the letter from the 364 shows, if you just ignore these things they can become received wisdom.

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  6. Just as you may get frustrated that the letter has been largely ignored I am growing increasingly frustrated about economists refusal to engage with responses to their economic case. (And yes I am going to continue to leave comments until someone replies)

    " In the case of Brexit the only matter to discuss is how big the costs of leaving are. Our trade can only decrease following Brexit."

    Of course we would expect trade with the eu to reduce but does the government not have the potential to boost trade with the rest of the world by lowering the tariff and non-tariff barriers the right currently has in place. All research I have seen (treasury etc) has only compared the straw-man version: where the UK's trade with the rest of the world remains unchanged.

    If the uk did adopt such policies, could it not be more prosperous?

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    1. There is another view. Why would imports be more expensive ("trade be reduced")? Where else is the exporter, running an export led policy, going to shift the vast quantity of stuff they ship to the UK?

      Why is it always the case in these discussions that imports can make their price rises stick? Why would they not have to stay the same in dollar terms and the loss be absorbed by the export nation? Generally if the price of something goes up, then less is bought. Why would the export nation not compete to maintain market share - given there is nowhere else for this output to go?

      The eurozone economy is on the floor and relies on export led growth.

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    2. Believe it or not, but the EU, represented by the European Commission is completely committed to world-wide free trade (leaving aside agricultural goods for the moment). The Trade Directorate-General, which in policy terms has always been dominated by UK and German ideas, is one of the most effective negotiators for lower tarifs and strongly resists protection in the form of anti-dumping duties. This idea that other countries will fall over themselves to give the UK favourable treatment if separate from the EU is completely unfounded - not least in the absence of any such evidence from the countries themselves. You can argue whether President Obama really should have said "back of the line" instead of "back of the queue" but not with the point of his statement.

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  7. "The first is a poll conducted by the Economist in 1999 about whether the UK should join the Euro. Here the split was basically 2 in favour for every one against. But there is a crucial difference from Brexit. In the case of the Euro every economist would acknowledge (see the Economist article) that there were good arguments for and against. In the case of Brexit the only matter to discuss is how big the costs of leaving are. Our trade can only decrease following Brexit. Foreign direct investment can only decrease. Migration, which is also a plus for the economy as a whole, is likely to decrease following Brexit."

    What about our contributions to the EU, which will presumably decrease or be eliminated following Brexit? And I don't see why trade should decrease following Brexit, as we would be able to do more suitable deals with countries outside the EU, which constitute the majority of our foreign trade.

    "Of course he mentions what he calls the ‘infamous’ letter from 364 economists in 1981 criticising the Conservative deflationary budget. We are told that the 364 got it wrong because the economy started growing shortly afterwards. This is mediamacro logic, just like when we were told austerity was a success in the UK because the economy grew in 2013. As Steve Nickell pointed out in this speech, unemployment peaked not in 1981 but 1986."

    It is surely growth, not unemployment, that determines whether the 1981 budget was a success or not, and that restarted the year after the 1981 budget. The continuing rise in unemployment despite the strong growth of the mid-1980s was caused by women being drawn into the labour market for the first time, keeping men out. Difficult to blame the 1981 budget for that.

    "This is the real beef that Mr. Heath has against economists: we mostly follow the evidence and not an ideology. "

    I don't think that's his beef at all, though if you can show me where he says it, feel free to contradict me. I just think his view of the evidence is different from yours.

    "When I see Heath and his compatriots extol the virtues of the regulation free world that will be possible once they are freed from the shackles of the EU, I am reminded of the Troika and Greece. The Troika has been effectively running Greece for 6 years"

    That's completely unfair on Mr Heath, who has been a consistent critic of the Troika and Greece.

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    1. 1) Why do you assume the UK could do better trade deals with, say, the US than the EU as a whole?

      2) Growth is the wrong measure. Growth would have been faster without the 1981 budget, which would have reduced unemployment more rapidly. Just basic macro.

      3) Look at the how he uses 'evidence' in his article!

      4) I also mentioned Scottish Independence, which I doubt Mr. Heath was in favour of either. That is not the point. Its about trying something that does not work, and then finding a scapegoat.

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    2. On (1) trade deals could be better for the simple reason that the EU does not want free trade with much of the world. Agricultural interests are too strong that tariffs inflate the price of food and subsidies take money out of people's pockets to fund farmers sitting on plots of land that could be used in so many better ways (housing, energy generation etc.).

      This argument becomes all the more compelling when you consider the impact of the developing world, consisting of ever increasing (for now) populations and economies. With the EU (Britain excluded) consisting of 12% of the global economy and falling, surely there is an argument that moving further away from the EU to trade more with the rest could be beneficial.

      This is definitely strong enough of an argument to warrant notice, and attempts by economists to analyse the leave case by considering the impact of Brexit with no policy change only discredit economists and their arguments: as the analysis can (and has been) quickly dismissed as straw-manning.

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  8. As Allister Heath would have us ignore economists, then presumably he would want us to ignore him too, as he is by training and economist.

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  9. I don't disagree with the rest of the article, but this sentence attacks a strawman:

    do you really want to be ruled by people who prefer make believe stories to evidence, and who are so desperate for votes they tell you to ignore an entire academic discipline.

    Even if they vote to leave, people won't be voting to be ruled by EU-skeptics in the referendum. They'll still have a free-ish (within the constraints of the UK system) vote for the next government after leaving.

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  10. 1) because we'd be doing trade deals looking out for our interests rather than those of Greek farmers or Polish steelworkers or whomever. We could therefore optimise them accordingly.

    2) why is growth the wrong measure? Recessions are defined in terms of negative growth (2 quarters of falling GDP) not rising unemployment. Structural changes in the labour market say nothing about how healthy the economy is overall.

    3) I have, and I haven't seen anywhere where he complains about economists following evidence, but as I say, I may have missed something.

    4) I think Mr Heath is more pragmtic than that (though I hold no particular brief for him), but I think we can agree to differ on that point.

    Incidentally, just because I disagree with you, doesn't mean I don't appreciate your blog or your willingness to discuss serious issues so thank you.

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  11. "Migration, which is also a plus for the economy as a whole, is likely to decrease following Brexit."

    No, this is very controversial. It is highly questionable whether immigration on this scale and at this speed is good for the economy as a whole. And sensible economists acknowledge this even if neo-classical theory can't. It entirely depends on the context. For example David Card, who is probably the most sensible and balanced economist there is argues that it is good for Florida, but not necessarily for Los Angeles.

    You are right that market failures and market imperfections can be brought into neo-classical theory which starts from a default position of perfect competition. But this involves tweaking models and theories. You need to ask in any analysis whether it is proper to start from such a position.

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    1. With whom would the UK want to limit migration, and why?
      And the same with trade tariffs.

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    2. There is two types of immigration we have to limit for political reasons due to uncontrollable immigration from Europe (read Eastern Europe) which has completely free movement.

      (1) Refugees (eg from Syria and Libya)
      (2) Skilled immigrants/students etc from outside the EU (eg, Canada, India, and many other places) that fills in vital gaps in the labour market and do not compete with low income labour or the terminally unemployed

      If we can control who comes in we can have more of (1) and (2). This type of immigration is also likely to be less of a problem because they are not directly competing with the low income native population. People say EU immigrants do work that local people do not want to do. May be that is because they are underpaid/and or there is no incentive to train local populations through apprenticeship schemes as they can employ them on the cheap from a virtually unlimited supply.

      On refugees it is scandalous and frankly immoral that we complain about letting in Syrian 20000 refugees in Calais when we are talking about 300000 EU immigrants that enter unimpeded every year. This is distortionary and unfair. For example even if a Brit marries a Syrian, the Syrian cannot enter the UK. An unmarried EU national, however, can, and stay and work.

      I see absolutely no reason whatsoever, economic, social, or humanitarian why free movement privileges should only be bestowed on nationals of EU countries.

      On tariffs, nobody is advocating tariffs. Although if we felt that tariffs should not exist (eg on agricultural products) or should exist (eg on dumped steel), a sovereign country can implement these. But I do not think tariffs are central to this debate.

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    3. So if no EU country wants to see extra tariffs on its exports to the UK, and likewise the UK to EU countries, then the economic argument against Brexit rather falls down.
      As for migration, personally I am happy for people to migrate to and from the UK. We have to be careful regarding what entitlements migrants have while here, and for that we need to define what a UK citizen is and what they are entitled to (and what other nationals are excluded from), and to do that we need Brexit.
      So for improved trade and freer migration, I vote Brexit.

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  12. "In the Nineties, they botched the Soviet Union’s transition to capitalism and assumed that Western central bank independence and inflation targeting would end boom and bust."

    That is actually a very pertinent comment. And I see very little humility shown by mainstream economists for these catastrophic errors and stratospheric hubris.
    The Soviet Union, but not China, followed advice given by the IMF and mainstream economists that it should go for a 'big bang' or in American English 'shock therapy' approach when they entered the international economy. And wise China was.

    The second criticism relates to silly models used by New Keynesian economists which fueled hubris that allowed them to keep their eyes off what was really going on in the world economy; 2008 was the result.

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  13. More accurate to say 'Economists are wrong, so ignore them on Brexit'.
    Which seems to be fair enough.

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  14. 'do you really want to be ruled by people...'

    I find this a bit weird, to be honest. Is a vote for Brexit equivalent to a vote for, say, Boris Johnson for PM? I hadn't so far perceived it that way - I've found the arguments of Labour Leave persuasive, for example. Is there some evidence to support the idea that the Johnson-Gove-Farage axis would consider Brexit a mandate to move policy in their direction? That might be a compelling reason for me to vote remain.

    On the other hand, if that is the case, is a vote for Bremain equivalent a vote for Cameron? Because that would be a compelling reason to vote leave.

    Yours in confusion,

    JMH

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    1. We get Boris in a month and Corbyn in 2020.

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  15. "Economists are losers so ignore them on Brexit" - they are, so that is excellent advice.

    Better to argue like this:

    The EU is like a meddlesome mother-in-law - infuriating, but the only way really to get rid of her is to divorce your partner. Is that worth it?

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    1. Maybe you would be happier with several concurrent consensual relationships and no mother-in-law.
      Who wouldn't?

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    2. I do not envy Mrs. P.

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  16. You say, "That the overwhelming majority of academic economists think there are significant long term costs to leaving might therefore be useful information for voters". Might I ask, why "voters"? Do you mean those presently possessed of the franchise? Do you mean all those who will have the franchise in 2030? Given that GNI per head is absolutely dependent on who comes into the country, what they manage to do and what we end up having to give them, the idea that the main focus of our calculation should be the total size of the economy (or anything similar) is silly. Argentina has a larger economy than Switzerland, but you'd rather be Swiss. The "impact of migration" that you talk about - which economists understand better than the rest of us - includes things that economists know little or nothing about, such as the social consequences of having a society that trends towards the "low-trust" US, or the particular reaction of migrants from poor countries who learn the nature of "tax" (i.e. withdrawal of benefit) rates of 70% or more. How do Bulgarians react to this on a twenty year time-frame? We're engaged in a really interesting and non-reversible experiment to find out.

    You say, "Our trade can only decrease following Brexit. Foreign direct investment can only decrease. Migration, which is also a plus for the economy as a whole, is likely to decrease following Brexit." Now the last remark on migration is just false: the UK spends £11,000 on state services per resident, most people aren't net contributors, nearly all of our costs (even defence) increase with population and migrants will probably be no more productive and (in the medium term) no less needy than the indigenous population. You could probably say that migrants are a plus for the economy were they are German-style guest workers, but as recipients of all state services, with unknown long-term characteristics, with an enduring right of residence you just aren't entitled to claim that they're a benefit for the economy. If a billion Chinese and Indian workers came to the UK and produced £10,000 of goods each the debt to GDP figures would look good for a split second, but I'd venture to suggest that the deficit might move in the wrong direction and we'd have to rethink our social policies. As to the other remarks on trade and FDI, you can argue that they’ll go up, down or remain the same, but to claim that it’s a law of nature that they can only go down is false. There could be a trade deal with the EU which would facilitate the trade we presently have, and we could trade more freely with the rest of the world. You think that won’t happen, but words mean what they mean. To say “can only” is false.

    You say that Keynesianism "..helped produce a golden age of growth after WWII". No. We had Keynes and we had growth. Reasonable men can differ as to whether - considered over a reasonable period of time, and noting all of the behavioural changes that followed once government action was baked into the expectations of everyone - Keynesianism produced a golden age, or in fact took some of the shine off it.

    People ignore economists because economists overreach.

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  17. There are some interesting comments on this blog. I tell you what if you really wanted to the country a service why don't you explain - in words - the model the Treasury and the IFS are using, what are the key assumptions and what is the underlying philosophy behind it. I suspect the IFS and Treasury are using basically the same theory and the same model, which is why they get the same result. And then critics can say why these models are likely to be biassed and why the assumptions and theory used lead to that bias. Critics say for example that a reliance on foreign labour creates disincentives to train up local labour and leads to marginalisation and social exclusion which in itself is a source of low productivity. How is this factor captured in the Treasury's model?

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  18. Economic trade analyses always have assumptions and here there's the assumption that we can continue to run a trade deficit with the EU quite happily as we have doing for hundreds of years. Yet isnt that the problem for Italy, Greece, etc ?

    Immigration economic analysis is also a job in progress. And many of the assumptions made may not be relevant to the problems complained of. The eastern euopean immigrants since 2p04 have put huge localised pressure on schools hospitals, housing etc in our poorest areas while doing jobs at low pay and paying very little or no tax. Yet economic analyses use average tax UK tax figures and take no account of costs as they age.

    Self-government is the normal aim for Leave supporters rather than wortying about a little dip in growth.



    No one really knows how to stimulate growth.

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