Relevant and even prescient commentary on news, politics and the economy.

Swedish Privatization of Education Fails

This is important. Amazingly, socialist Sweden attempted radical partial privatization of its schools with about one fourth of students now attending publicly financed privately managed schools (roughly charter schools). This daring reform was followed by a dramatic decline in scores on the PISA international standardized test including the largest decline in math scores of all PISA countries.

It is very odd that Sweden tried this. It is important that it failed. I have long argued that even if something works in Nordic countries, it is irrational and nordtopian to believe it will work elsewhere. If charter schools failed in Sweden presumably because of moral hazard and a lack of team spirit, then they can fail anywhere.

Also, as in the case of health insurance and Medicare vs Medicare advantage, these data cast doubt on the widespreadd presumption that the private sector is always more efficient than the public sector.

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Posts I Won’t Write

Buce sends us to Der Spiegel’s description of Barack Obama’s potential 2012 opponents (“You Think This is Bad?”)

John Kay in today’s FT (no link) tells us why letting economists pontificate about finance is a Mug’s Game. The mugging being of people who are stupid enough to believe economists. (If Brad DeLong or Mark Thoma links to this one, I’ll add a link to them.)

This (from Kaplan Daily of all places, but Valerie Strauss is one of the only Bright Lights there) is probably the most important general article about standardized testing and education.

This one tells the truth and shames the devil, as it were. Those fooling themselves that vouchers and charter schools will lead to improvement in anything other than excess rents going into the pockets of the people who are hired to run them (such as Christopher Cerf, President and COO and Christopher Christie, lobbyist) either have forgotten or are ignoring history:

Decades of research have shown that not only do the for-profit, corporate models being forced on school districts from coast to coast not work, they present a separate and unequal solution, and offer huge profits for investors.

Anyone stupid enough to believe the “anti-piracy” crowd has the best interest of Creators in mind needs to mark that belief to market. For another data point (via Dr. Black), see here.

On a more positive note—not to mention having grown up watching Bob Braun as a local, afternoon talk-show host—I want to note Mr. Braun being one of the only reasons to read The Star-Ledger, and especially highlight his series dealing with ICE abusing its power (nu?) and almost preventing a girl from saving her sister’s life.

This one has a happy ending.

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A little OWS, a little 99%, a little history

So today I read at the Yahoo Finance (it’s my home page because I can look at the stock numbers on the left and read the headline on the right for a guaranteed laugh) that  John Mauldin thinks the OWS would be better off if they occupiedCongress:
Mauldin believes America still has time to figure out a path out of what he says is the big problem worldwide: “We’ve over committed public monies and we don’t have them.” While some what sympathetic to the protestors’ frustrations, Mauldin says their anger is misdirected.
“My message to the ‘Occupy Wall Street’ guys: if they really want to If  they really want to go after the source of the problem, they should go occupy Congress,”
Instead of focusing on Wall Street,Washington and the protests should be focusing on reducing regulation and making it easier for new businesses to start, Mauldin says. To that end, he offers a new slogan I somehow doubt will showup at any Occupy Wall Street protest anytime soon: “Up with Entrepreneurs”
As I understand it, OWS is about economic equality. President Roosevelt referred to it as the economic royalty. I just don’t see how one can stop, look and listen to OWS and think “go tell congress to further deregulation”. John Boy can’t be this much of an idiot, can he?
My sweetheart gets home from the dentist. $4000 dollars worth of bridge work is down the drain because a tooth of the bridge went bad. 

For those who don’t know, we are the “Entrepreneurs” John Boy is referring to, thus we are paying for our health insurance, no dental. But, she was offered a payment plan. Has a nice dental name at 14.5% interest! This bit of private market solution to paying for health care is brought to you by GE Financial. Yes, the GE of Jeffrey Immelt, Obama’s job creating adviser. Hey Obama? Did you read my state of the union?  Obviously not or Jeffrey baby would not be your man.
Did you hear that JP Morgan was all blowed up? Yes, I’m not lying. People got pissed at Wall Street and blew up JP:
“During this period anarchists and socialists held protests on Wall Street out of a similar sense of frustration and rage at the banking system. The movement culminated in what was known as the greatest act of terrorism on American soil: the 1920 bombing outside J.P. Morgan and Company
Thirty eight people were killed when the horse and wagon bomb went off at noon on Sept 16, 1920. The perpetrators, thought to be anarchists, were never caught, but their exploits and the aftermath were captured by photographers.”
Check out the pictures here. 
Why do we not hear about this history considering the present times? I know, stupid question. To ask it is to give purpose to OWS. Though one sector of this nation seems to remember a portions of this history or we would not be hearing the pejoratives being slung a the 99%’ers. You know Anarchists, socialists, communists out to destroy the American Way (A catchy phrase brought to you by the National Association of Manufacturers via General Food’s CEO, the US Chamber of Commerce and AT & T’s monopoly is good all via Madison Ave, Time Magazine 9/28/1936) .
Which brings me to my original question since the shit hit the fan: HOW MANY TIMES DO WE HAVE TO DO THIS? HOW MANY FREAKIN’ TIMES DO WE HAVE TO LEARN THE LESSON?
Obviously from the above 3 subtopics, quite a few more times as we seem to have not learned the definition of Rat Race yet: A rat race is a term used for an endless, self-defeating or pointless pursuit…
I think I know what is wrong with US today. When I typed in Deja Vu at youtube,  amazingly this tune did not even come up in the suggestion list. 

No, I had to actually know that CSNY wrote what I consider the true musical capture of the concept of deja vu…the song that is most appropriate for the application of the concept today. I say this because they intentionally wrote the song so that it does not repeat any one section (heard years ago in an interview).

Get it?
(I haven’t forgotten the tax tables. It’s a coming.)

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The 2% (non) Solution: Part Two

Had a long day of Social Security related blogginess so will just put up this to spark some discussion:

In Part One of this post I discussed the danger that the 2% ‘temporary’ payroll tax cut might be a Trojan Horse destined never to expire in full or at all only to have any continuing backfill from the General Fund (by then surely to be described as a ‘subsidy’) subject to an ongoing series of ‘compromises’ that gradually phase in benefit cuts rather than take the whole thing at one gulp.

In Part Two I want to discuss a quite different threat. In this scenario the employee share of the payroll tax is allowed to reset to it 6.2% but as a seeming sweetener taxpayers will be allowed or perhaps required to divert it into a Personal Savings Account with the explanation that it really wasn’t a tax increase at all! Nope the money is still ‘yours’, just tucked away for your own future use rather than being co-mingled in the Trust Funds where you don’t have an ownership interest at all, why the Supreme Court said so in Flemming .v. Nestor. Well a visit to the link shows that this doesn’t mean what opponents often take it to mean, but the idea that the PRAs would be in any fundamental sense different is illusory, but before getting to that I want to point out a curious coincidence (or not). The 2% payroll tax holiday is the same amount of diversion proposed in most straight PRA proposals out there. Cynical people might suggest that this number was not just plucked out of the air, or back computed to approximate the typical effect of the expiring Make Work Pay tax credit which it is replacing, but instead to put in place elements of say Obama advisor Jeff Liebman’s Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan or even the more recent Galston-MacGuineas Plan which has a mandatory diversion of exactly this amount.

As I have said in other contexts, I don’t much believe in coincidences. This 2% cut is somewhat under-motivated in policy terms, there were other, simpler, and more targetted ways of putting dollars in workers’ pockets. But as part of a co-ordinated plan to sell some sort of PRA carve out as part of a larger Social Security ‘reform’ it makes all too much sense.

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There is a difference between then and now?

By divorced one like Bush

The following from Robert’s post got me thinking about railroads.

“There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution.”

I talked about what was the same in the “second” wave then as today in my Taxation Rhetoric posting. As far as I’m concerned it had little to do with financing great industrialization and more with our first big flirt with financialization which is why we got the financial regulation in the 30’s.

As for the third wave, I believe there was the reporting of stupid money chasing anything with a dot com skirt on. Before that, in the 80’s we had “greenmail”, a smaller housing bubble and Milken et al. This got me thinking about the railroads and stories about how people would start building parallel lines just to get the big boys to buy them out. Early versions of greenmail? Stupid money chasing anything with a train. This was the biggy of the “first” wave.

So I went looking in order to write up something real to respond to Robert’s post and found that today is just like yesterday except that yesterday we actually got something when the people’s money was being used to line a private pocket.

Historical Handbook Number Forty
1969

This publication is one of a series of handbooks describing the historical and archeological areas in the National Park System administered by the National Park Service, U.S. Department of the Interior. It is printed by the Government Printing Office and may be purchased from the Superintendent of Documents, Washington, D.C., 20402, Price 60 cents

Both companies therefore resorted to a favorite device of 19th-century railroad builders—a construction company with interlocking directorate free of Government regulation…

The 1864 Act made the United States “virtually an endorser of the company’s bonds for the full amount of its own subsidy,” and now both the U.P. and the C.P. could draw on double the amount of subsidy granted for each mile of completed road.

The Union Pacific’s construction company was the Crédit Mobilier of America. In 1864 Durant bought the Pennsylvania Fiscal Agency, a corporation loosely chartered by the Pennsylvania Legislature to engage in practically any kind of business, and renamed it the Crédit Mobilier. The directors and principal stockholders of this company were virtually the same as those of the Union Pacific. Greatly simplified, the process worked like this: The Union Pacific awarded construction contracts to dummy individuals, who in turn assigned them to the Crédit Mobilier. The Union Pacific paid the Crédit Mobilier by check (i.e., cash, for the benefit of Congress), with which the Crédit Mobilier purchased from the Union Pacific, at par, U.P. stocks and bonds, which it then sold on the open market for what they would bring. The construction contracts were written to cover the Crédit Mobilier’s loss on the securities and to return generous profits. In this manner the directors and principal stockholders of the Union Pacific, in their opposite role as directors and stockholders of the Crédit Mobilier, reaped large profits as the rails advanced.

The Big Four used an almost identical device to build the Central Pacific. Although in practice continuing to share in the management of the Central Pacific, Crocker resigned from the directorate and formed the construction firm of Charles Crocker and Company, in which Stanford, Hopkins, and Huntington were the only stockholders. The connection between the two companies was too obvious, and in 1867 the Big Four organized the Contract and Finance Company, with Crocker as president. Acting for the Central Pacific, they awarded to this company the contract for building the road from the California line to the junction with the Union Pacific, as well as for supplying all materials, equipment, rolling stock, and buildings. The chief advantage of the Contract and Finance Company over the Crédit Mobilier, as railroad historian Robert E. Riegel pointed out, “was that it was able to get its accounts into such shape that no one has ever been quite able to disentangle them.”

It all sounds so deja vu. But, unlike our $1 trillion and climbing paranoia driven military program we invested in today, these guys got us a real asset that paid dividends and they did it in 4 years instead of the 10 years planned for while lining their pockets.

Such techniques not only pushed the railroad to completion in record time, but also made its financiers extremely wealthy men. The Union Pacific cost about $63.5 million to build, of which about half represented the Government s loan. The best estimate of profits gained is about $16.5 million, although the enormity of this figure emerges only when it is understood that at no one time did invested capital exceed $10 million. Profits thus amounted, not to 27-1/2 percent, but to more than 200 percent. The Central Pacific’s figures are more difficult to arrive at, mainly because many of its books were “accidentally” destroyed by fire during the Congressional investigation of the Crédit Mobilier, The best authority, however, places the cost of construction at $36 million. The company received land grants and Government bonds valued at $38.5 million, while Stanford admitted that $54 million in Central Pacific stock transferred to the Contract and Finance Company in payment of construction contracts represented virtually net profit.

Alas, there was a price to pay, a lesson that should have been learned. It took 1929 to actually learn it.

There was an inevitable reckoning. Both railroads were burdened with inflated capitalization that meant decades of high rates and operating losses. The Crédit Mobilier investigation in 1872, moreover, brought the railroads bad publicity that strained relations with the public and the Government for many years and produced hostile legislation. Nevertheless, almost all railroad historians, while deploring the financial buccaneering of the Pacific Railroad builders, agree that only through such methods could the railroad have been built without far more liberal Government aid.

Did you catch that? We either put up the money or we let the private sector do it at a higher cost? Another lesson we seem to not want to learn (health care anyone?).
And, how did our governmental department view all this creative financing in 1969?

Their methods were those of the 1860’s, employed by most of their contemporaries in business—practices condemned as thoroughly unethical by today’s standards. Thus the truly great achievement of hese men has been tarnished by the judgment of a later generation. They were, in fact, the first victims of the revulsion against such methods that swept the country during the early 1870’s.

It’s just heart breaking that they only got 200% on their money.

See, it’s always there. ALWAYS, THERE. And, just like 1969, we hear cries that the perpetrators are victims. Just simple mistakes made. Of course, that would imply some lessons were learned. That we are repeating again today, yesterday, puts the lie to the entire argument of victum and mistake. Yet, as I said, we got something for all this personal self interest with the peoples money in the past, unlike today’s privatization of the: military, health care, schools, roads, utilities, environment. All failing, all in need of major capital investment. All representing investment made, value lost.
Munsey’s Magazine 1903 reprint:

The money invested in the railways that we had in operation in 1880 was comparatively a few millions. Today the railway systems of the United States represent an investment of three billions and a yearly earning capacity of hundreds of millions.

In today’s money, that 1903 railroad investment has a value of:

$757,220,398,593.20 using the Consumer Price Index
$604,412,640,969.90 using the GDP deflator using value of consumer bundle
$3,333,116,883,116.90 using the unskilled wage
$4,369,728,261,008.50 using the nominal GDP per capita
$16,503,666,443,504.30 using the relative share of GDP

What a shame we let ourselves be talked into the “creative destruction” of the rail system, an asset that represents $3.3 trillion dollars in unskilled wages. That’s a lot of labor just gone. It represents a relative share of GDP bigger than our actual current GDP! It makes you think about who has managed their wealth better; the US? or Europe who did not creatively destroy their original investment, but built upon it and thus saved themselves from having to generate as much income as we have had to in order to have our now killing us (war for oil?, pollution, resource waste, etc), personal transportation system. I guess that is why we don’t get to have 6 weeks vacation for all, we have to work to rebuild what we had. Can you say Rat Race?

Can we broaden the discussion now?

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Chrysler and Cerberus

Full article here

Chrysler is the smallest of the Big Three automakers, but it stands apart from its peers in another crucial respect. While General Motors and the Ford Motor Company are public corporations, Chrysler is controlled by one of the world’s richest and most secretive private investment companies.

That investment company is Mr. Snow’s employer, Cerberus Capital Management, which has used its wealth and deep connections in Washington to shape the debate over the foundering automakers to its advantage.

In recent weeks, Mr. Snow has personally lobbied Mr. Paulson and others for a federal rescue that would salvage Cerberus’s investments in Detroit. Cerberus has also deployed a corps of lobbyists and former government officials to secure a bailout and protect its interests.

Whether its efforts will work is unclear. But if they fail Cerberus and its partners could lose their daring bets on Detroit. Without a bailout Cerberus could lose about $2 billion and suffer a stinging blow to its reputation. With one it might eventually profit from its troubled deals.

Last year, Cerberus and about 100 co-investors bought 80.1 percent of Chrysler for $7.4 billion from the German carmaker Daimler. It also bought a controlling stake in GMAC, the finance arm of General Motors. Since then Chrysler has eliminated more than 30,000 jobs and struggled to keep itself afloat while its sales have plummeted. Cerberus is pressing to have Chrysler merge with G.M., but G.M. has said a tie-up is off the table. Chrysler is asking the government for $7 billion to get through the next few months.

Cerberus, named after the mythical three-headed dog that guards the gates of Hades, has a fierce reputation on Wall Street. Many bankers and investors are reluctant to talk openly about the company, which is renowned, even feared, for its hard-nosed deal-making.

Update: Open Secrets hat tip Anna Lee

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In Which I Fail Basic Budget Math

CNN does some he-said, she-said, but throws in some data:

The administration’s proposal also requests that Congress authorize an increase to the nation’s debt ceiling. Currently, it’s set to rise to $10.6 trillion for fiscal year 2009 – which runs from October 2008 through September 2009. But the proposal requests that limit be increased to $11.315 trillion to allow for the purchases of mortgage-backed assets. [emphasis mine]

Now, strangely, I have always heard that assets have a positive value. When I buy $100 worth of a stock—say, PWND—my Net Asset Value doesn’t change. The same should be true of buying a MBS worth $0.30 on the dollar.

So why would we need to increase the deficit ceiling by $700,000,000,000 if we’re buying assets worth $700,000,000,000?

The only reasonable conclusion is that we plan to pay $700,000,000,000 above market for the securities. No wonder it has to be “clean and quick.”

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Saying It All

Unlike Fannie and Freddie, AIG was royally and truly doomed. The Fed tells us so:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe. [emphases mine]

The notes are for two years at LIBOR + 850. Yes, you read that correctly: 8.50% over the London Interbank Offer Rate.

Three month LIBOR is currently around 2.81%. That makes the all-in Cost of Funds at par right now 11.31%

For comparison, Ford bonds in the secondary market, are yielding around 9.50% for similar maturities.

And the Fed is the only entity willing to offer such terms.

Let’s ignore that they’re making the same mistake they did with Fannie and Freddie, creating a structure that ties the firm to its past mistakes, providing no incentive or changes to the business process, and all the while socializing the risk. Let us just repeat the dismal chorus:

The Fed is the only entity willing to offer AIG terms that are about 180 bp wide of where Ford Motor Credit is trading.

Come to think of it, let’s not ignore the mistakes, for after giving Daniel “son-of-Roger-acts-like-Harry” Mudd $14MM to Just Go Away:

The Fed is the only entity willing to offer AIG terms that are about 180 bp wide of where Ford Motor Credit is trading, and Hank Greenberg—who ran the firm into the ground but remains a major shareholder and on the Board of Directors—will still have a piece of the “nationalised” firm.

Privatize the profits, socialise the risk. Paul Kedrosky is correct when he says we should not throw around phrases such as “moral hazard” and “risk homeostasis,” yet we are left once again to realize and document that those who were paid to be responsible shirked their duties, and we must now wonder—the year after Hurwitz, Maskin, and Meyerson were awarded the Riksbank “Nobel” in Economics whether anyone who has been running and regulating financial firms for the past seven years really understands mechanism design, or even “creative destruction.”

David Leonhardt tries to put a positive spin on things. In the immortal words of Tom Paxton, he “fails miserably” when he also tells the truth:

But if you take a moment to think through the full Chrysler story, you start to realize that it’s setting a really low bar. The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.

He goes on to cite Barry Ritholtz‘s forthcoming book, Bailout Nation:

If Chrysler had collapsed, [Ritholtz] argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

So let’s be optimistic. In thirty years, we may not have much of the vestiges of AIG to kick around any more, and American insurance companies will look on these as “the good old days.”

Come to think of it, when did optimism and pessimism come to the same result?

UPDATE: Brad DeLong summarizes the situation in one line:

LIBOR + 8.5%—now that’s lending freely at a penalty rate! They’ve given AIG a credit card!

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The Efficiency of the Private Sector

by cactus

The Efficiency of the Private Sector

Recently, the wife and I moved to a new state. When you do that, you need to get a new driver’s license, plus re-register your vehicles. The whole process, including taking the written (well, computerized) exam, from the moment we walked in until the moment we walked out, newly minted driver’s licenses in hand, took 50 minutes. My only real complaint – the picture on my license is awful.

The same week we went down the Verizon store. Essentially, we wanted to see if there was a plan that made more sense for us than the Verizon plan we were already on given that we aren’t getting a land line. We were told when we walked in by the young lady taking names that someone would be with us in ten minutes, fifteen at a max. We finally walked out the door plenty pissed an hour and twenty minutes later. We didn’t look at any new phones, we didn’t ask for brain surgery, heck – we didn’t even ask to re-register our vehicles or get a driver’s license. We just wanted to inquire about the cost of plans.

And yet, I keep hearing about the efficiency of the private sector.

(Rdan here…the all or nothing guys can’t handle this nuanced approach)

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You Call This a State University?

by Tom Bozzo

Some of you may remember that there once was a time when a gaggle of relatively centrist Republican governors from the Upper Midwest a la Wisconsin’s Tommy Thompson and Michigan’s John Engler were thought of as a AAA farm team for national Republican office. As it turns out, up here we’re dealing with longstanding fiscal problems from this particular brand of ‘don’t tax but spend anyway’ Republicanism, and one of the stranger metastases is a long-running and (on one side) exceptionally idiotic partisan battle in the Wisconsin legislature over the state’s support for the University of Wisconsin system.

More below the fold.

When driving up to the Twin Cities, we’d joke at rest stops about the (modern and clean) Tommy G. Thompson Memorial Bathrooms. (Considering that Thompson was governor for 14 years and a notional supporter of passenger rail, another legacy is our unimodal ground passenger transportation system, but that’s for another time.) But the macro feature of the Thompson-era budgets was a massive increase in spending on prisons offset by reductions in state support for the University of Wisconsin system, a pattern broadly repeated throughout the Big Ten. There were votes in locking up small-time (and mostly non-white) drug offenders, but otherwise this is a crude and cruel parody of a long-term pro-growth policy.

So here’s the picture from the UW system’s 2006-07 biennial operating budget request [pdf]:

That $1.044 billion is 24% of the operating budget (that’s for the whole system, not just the Madison campus); in the 1970s, the figure was around 50%.

Even capital spending is increasingly privatized. One of the big projects that’s keeping area non-residential construction afloat, the Wisconsin Institutes of Discovery (a multidisciplinary facility intended to capitalize on the UW’s position in stem-cell research) is more than half-funded by a large private gift and the Wisconisn Alumni Research Foundation (which manages patents and other IP generated from UW research); state money is around a third of the bill.

I see an opportunity if big elite-university endowments were to be forced to operate in the general-public interest as a condition of maintaining their tax-exempt status. Why should Harvard get all the glory via the Harvard University of California at Berkeley? Lake Mendota may not be quite as scenic as San Francisco Bay, but it’s more usable for recreation, and the Yale University of Wisconsin at Madison would be a relative bargain.

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