Recession IV

[W]hat experience and history teach is this—that people and governments never have learned anything from history, or acted on principles deduced from it.

—GFW Hegel

The Great Crash in the US in 1929 followed a period of boom, a bubble. The initial government response was retrenchment, often seen as the genesis of the Great Depression. Franklin Delano Roosevelt, after becoming president, inaugurated a ‘New Deal’, a form of stimulus encompassing both social welfare and infrastructure projects. During the depression, unemployment vastly increased; read John Steinbeck’s The Grapes of Wrath to get an idea of what things were like. With unemployment went poverty, expressed in the works of official government photographers:

Migrant mother.jpg

Dorothea Lange: Migrant Mother

What’s not so well known is that deaths from road traffic collisions fell markedly during this time; people simply didn’t have the money to afford petrol. Deaths from suicide rose until the beginning of the New Deal:

Suicide.jpg

Source for this and the other diagrams: Stuckler and Basu, 2013, The Body Economic

Economics is theoretical; the equivalent of a medical ‘double-blind, randomised, controlled’ trial doesn’t exist. Modern medicine no longer believes in the power of powdered unicorn horn or of gnats’ urine. However, there are examples where similar countries have pursued very different responses to recession, a sort of ‘natural experiment’.

Communist Russia collapsed in the early nineties. Russia, and many satellites, introduced ‘Shock Therapy’, a period of very rapid privatisation of state assets, though this is now more usually associated with corruption, nepotism, asset-stripping, billionaires and their yachts and football clubs. Shock Therapy lead to mass unemployment, poverty, a great rise in alcohol consumption, and the premature deaths of 10 million Russian men.

Russian mortality.jpg

Other countries, such as Poland and some central European states, privatised much more slowly, averting much of the Russian health and mortality disaster; and their financial recovery was quicker.

Russian and central euro recovery.jpg

In the 1990s, there was a financial crisis in SE Asia. Indonesia, S Korea, Thailand and Malaysia went ‘cap in hand’ to the World Bank, and the IMF (International Monetary Fund). If the Bank provides the finance, the IMF are the ‘enforcers’ or ‘heavies’ of the financial orthodoxy. At one time the IMF thought that health services were a ‘luxury’, and could therefore be sharply cut back. Malaysia didn’t accept the tenets of austerity, while the others did as they were told. Thailand once had an impressive disease control programme, including for HIV. What happened was inevitable:

IMG_20150317_0001 copy.jpg

To return to Europe. Finland and Sweden had major financial problems in the 1980s, with greatly increased unemployment. However, both countries had ‘Active Labour Market Programmes’, a system where the unemployed had access to a counsellor and to significant financial ‘benefits’. The counsellor supported the unemployed person both financially and, if you like, ‘emotionally’ by actively and deliberately helping and motivating the person to find alternative employment. Suicide, the common result of poverty and unemployment actually fell in Sweden:

Sweden suicide.jpg

Contrast this with what happens in the UK. The Coalition has ‘reformed’ the ‘benefits’ system so that, for example, if an applicant is as much as a nanosecond late for an appointment at the Job Centre, he or she will be ‘sanctioned’, a polite euphemism for benefit reduction. Quite how this will help to motivate and support people isn’t explained. And the Job Centre staff get ‘brownie points’ for sanctions. (‘Benefits’ covers pensions, for which people have paid, as well as welfare payments, for which people may well have paid; ‘benefits’ are not a form of charity, neither are those in need the ‘undeserving’ poor of the torrid Victorian imaginations. And ‘reform’ is a euphemism for ‘change’, often for the worse.)

The recent and continuing woes of some of the Euro countries—particularly the PIIGS, Portugal, Italy, (Republic of) Ireland, Greece and Spain are well known. In Spain, the youth unemployment rate is now above 50%, as it is in Greece; the young are the people who we look to in the future to maintain and grow the economies. In Greece, the ‘Troika’ of the European Commission (EC), the European Central Bank (ECB) and the IMF have produced an economy now 25% smaller than previously, with adult unemployment now 25%. And yet this economy is expected to repay the ‘bail-outs’ it has received. Pensions and health programmes have been severely reduced; health provision funding by an initial one-third, and more subsequently. (Remember, pension recipients have paid into their schemes for years.) HIV infections have risen alarmingly; pesticide spraying programmes, to control mosquitoes, have been abandoned, with the inevitable outbreaks of West Nile fever and of malaria. Not to forget, health provision, in the eyes of the IMF, is a ‘luxury’ good. Unsurprisingly, the Greeks recently voted for an anti-austerity government.

There’s another, rather unpleasant, side to the negotiations around the repayments of debts by southern European countries. It’s not where the repayments end up—it’s accepted that the bail-outs to, say, Greece, while they initially go there, they are almost immediately returned to the banks who made the loans in the first place. If you or I spend beyond our financial abilities, our creditors will chase us, and we may well be made bankrupt. Our creditors, who loaned us the funds, will have to accept a much reduced repayment. But if a sovereign country, such as Greece, is in the same position, it really seems that any funds made available as a ‘bail out’ go straight to the banks, those ‘masters of the universe’ who were so foolish to lend in the first place. The condition of the Greek people is of no concern; the poor are always with us. But then banks, as we’ve seen, are ’too big to fail’, and bankers too arrogant to admit their mistakes. For whose benefit are the ‘bail outs’, the bankers or the people?

Remember too, the concept that the Euro was developed as much as anything to stabilise the German export industry. And that, to maintain and grow their exports, loans to poorer countries would allow these to access German products. As ye sow, so shall ye reap.

The unpleasant feature is the hidden political ideology behind the ECB and, particularly, Germany. Southern European countries are Catholic, though Greece is Orthodox. Northern Europe is predominantly Protestant; there are stark echoes of Jean Calvin and the Protestant Work ethos. Frau Dr Merkel’s father was a Lutheran pastor. Think of the idea of the redemption of ‘sin’ in these ideologies. Vengeance is mine, I will repay. In the past, debtors could be taken into debt peonage by their creditors, with no real possibility of ever repaying their debts. But also, long ago, there was the idea of a sabbatical cancellation of (some) debts; the peons could return to their families.

Iceland is beyond the Euro zone, yet was as badly affected by the Great Crash. The three major banks, over-exposed to the collapsing sub-prime mortgage market folded. Following the collapses, the governments called on ‘the usual suspects’, who advised the usual treatment, austerity and repayment of bail-outs. After a while the population revolted, and a referendum on this was held; 93% of Icelanders voted to ditch austerity, and not to repay the debts of the private banks (at least not in any IMF timescale). A new government did as the people, the sovereign, wished, and refused to bail out the banks. (The UK and the Netherlands are fighting this in the courts.)  Compare what then happened in Iceland and Greece:

Iceland Greece recovery.jpg

As the lawyers say, Res Ipsa Loquitur.

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Recession III

Is the US pattern of suicides and road traffic deaths in a recession/depression found elsewhere? I’m thinking specifically of N Ireland and the Republic of Ireland after the great crash of 2007/08. Austerity, imposed externally in the South came earlier than self-imposed austerity in the North, where its effects were probably less than in mainland Britain.

N Ireland

Deaths from suicide:

death by suicide NI.jpg

(Source: DHSS, here)

Deaths from road traffic collisions:

RTA deaths NI_2.jpg

(Source: PSNI, here)

Republic of Ireland

Suicides:

Ireland RTA deaths.jpg

(Source: CSO, via nsrf.ie here)

Road traffic collision fatalities

Ireland RTA deaths.jpg

(Source: Wikipedia, here)

In both parts of Ireland, there has been a decrease in deaths on the road; the figures for 2012 from N Ireland were the lowest since records began in 1931. There has a certainly been an increase in deaths by suicide in both parts, more obvious in N Ireland.

There is, however, another factor at work; the traditional response to financial, social and economic problems in Ireland—emigration. Without emigration, it’s likely that there would have been many more deaths from suicide.

In the following diagrams, numbers above the line represent net immigration inwards, negative numbers represent net emigration outwards:

N Ireland

(Numbers on the vertical axis are actual numbers)

Net migration NI.jpg

(Source; NISRA, from here)

Republic of Ireland

(Numbers on the vertical axis are in thousands)

Net migration Ireland.jpg

(Source: CSO, here)

It’s quite clear from these two diagrams that net emigration in the South began earlier than in the North, and involved considerably greater numbers of people.

Net emigration isn’t a new phenomenon. David McCann wrote about it on Slugger in August 2013, here. He wrote of  the greatest challenge to N Ireland being the loss of the next generation.

Recession II

If ‘economics’ originally meant something like ‘household management’, today it’s synonymous with the management of wealth and productivity of a country. Economics is a largely theoretical activity, and it’s beliefs (or models) are highly politicalised. Since WWII, three models have dominated in the western world:

Neo-classical

Neo-liberal

Keynes

Economy made up of

Individuals

Individuals

Classes

Individuals are

Selfish, rational

Selfish, but layered (unquestioning acceptance of tradition)

Not very rational

Policy recommendations

Free market or intervention

Free market

Active fiscal policy, income redistribution to the poor

Response to recession

Stimulus

Austerity

Stimulus

Politics

(Almost) any

Conservative (usually)

Social-democrat/liberal

Source: based on Ha-Joon Chang, 2014, Economics: The User’s Guide

In the ’thirty glorious years’ after WWII, neo-classical theory was dominant; Thatcherism and Reaganism, from the early 1980s onwards, were based on the neo-liberal model of von Hayek and the Chicago school. This emphasised a reduction in the size of the state, the belief that markets knew best and should be interfered with as little as possible, and that the state ought not to be a provider of services. It also believed in the ‘trickle-down’ theory of wealth generation and distribution. Neo-liberalism reaches its apotheosis in the simplistic ideology of the ’Tea-Party’ faction of American republicanism, and in ‘libertarianism’, the extreme exposition of laissez-faire economics. (Laissez-faire was, after an initial stutter, the early response of the UK government to the Irish Potato Famine; it advocated ‘do nothing’, the market will take care of things. While Ireland exported grain to England, the population starved, died or emigrated.) The neo-liberal response to recession is austerity.

In the UK, the implementation of neo-liberal beliefs lead to the sale of state assets (or privatisation) and deregulation of the banking industry. The NHS, for example, was then expected to develop ‘internal markets’; more recently, the trend has been to open services to competition between all providers (also known as ‘creeping privatisation’).

If growth in the thirty glorious years was unspectacular, it was mostly positive, so that Supermac could boast, rightly, that ‘you’ve never had it so good’. (He, Macmillan, was able to build, at a time when the UK was still raddled economically after WWII, some 300,000 new homes per year.) Neo-liberalisation saw a massive increase in the banking industry, and a similar decline in manufacturing industry. Banks began to look for ever more ingenious methods to make money, because they now could. Mortgages were sold, predominantly in the US, to people who were poor risks; but packaged and repackaged with ‘insurance’ and sold as ‘risk free’. In reality, these products were junk, and were the root cause of the Great Crash of 2008/09.

The Labour government in the UK organised a massive credit package for its banks, on the basis that they were ‘too big to fail’, and attempted some modest stimulus to try to stave off a recession. When the Coalition government took power in 2010, they proceeded on a policy of austerity; a reduction in state spending, particularly on ‘benefits’ but with no rise in income tax. The Conservative part of the Coalition blamed the Labour party for the crash initially; as well as them, so-called ‘benefit-scroungers’, a supposedly vast pool of the idle and work-shy were blamed, as well as ‘health-tourists’ and the obese.

Recessions in the past have been (usually) associated with rises in unemployment, rises in poverty, rises in suicide, and other health problems. The economic cycle generally recovers, with a return of growth and prosperity, though recovery when austerity policies have been invoked is, historically, the exception. Part of the theory of austerity is that, by ‘getting a grip on government finances’, confidence will return to investors more quickly.

Despite Mrs Thatcher’s assertion, there is an alternative. John Maynard Keynes was the leading economic thinker of the 20th century. In a recession, he advocated increased government investment on infrastructure projects, and support through social welfare for those affected. Increased government spending could be financed by borrowing; the quid pro quo was that in good times, the state should build up reserves, for the natural state of economies is cyclical. This was said to be one of the failures of the recent Labour governments; they borrowed in good times to pay for extensions of the welfare state, or ‘benefits’, when they should ideally have been saving.  The graphic says otherwise, and shows that the debt ‘problem’ began with the Great Crash and the bail-out of the banks. It’s possible that the increased borrowing under the Coalition actually relates to some Keynesian social welfare stimulus, no matter that this isn’t the general understanding.

Budget_2015__predictions_and_UK_news_-_Telegraph.jpg

Source: Daily Telegraph

Recession I

The business cycle today is characterised by periods of growth, or ‘booms’, and periods of retrenchment or ‘busts’. Booms can be worsened by over-confidence, producing a ‘bubble’; busts likewise can be worsened by over-reaction, producing a depression. Confidence, and its opposite, are psychological factors not rational ones.

One of the first recorded booms was the Dutch Tulip Mania, though there have been plenty of others, most recently the period of boom just before the great crash of 2007/08. The world-wide extent of this crash was unusual. The Great Depression, after the US stock market crash of the late 1920s is perhaps the best-remembered bust; events after 2007/08 again differ because of their worldwide reach.

Governments can respond to recession in two broad ways. They may choose a reduction in state spending, often encouraged as being to ‘balance the books’, with emphasis on health and social welfare programmes. Alternatively, they can choose to invest more in people’s health and social welfare, and to try to stimulate the economy through ‘public works’ programmes.

‘Balancing the books’ is often associated with a desire to reduce or eliminate the National Debt (and often a desire for a ‘small state’). On a personal level, eliminating our debts is a ‘good thing’. For a state, it’s not so clever. The central bank is able to issue money because people have deposited savings with it; it can use these savings as ‘collateral’ against which to issue money. If there were no savings in the bank (a ‘National Debt’), any money it issued would have no backing.

After the US stock market crash, the initial economic policies followed were what we would recognise today as ‘austerity’. However, in the 1932 presidential election Franklin Delano Roosevelt was pressurised by the unions and labour movements into offering a ‘New Deal’. This New Deal had elements of Keynesianism, a stimulus to the economy in bad times.

One curious ‘effect’ of the crash and the depression was an apparent increase in health, as measured by death rates.

(All data and diagrams from Stuckler and Basu, 2013, The Body Economic)

Crude death rates.jpg

Suggestions for this improvement included the idea that, because of poverty, many Americans were eating a much healthier, vegetable-based diet, and walking because they couldn’t afford to drive. However, other factors were lurking behind this improvement. This period is known as an ‘epidemiological transition’, a time when public health measures can be seen to be effective. Such measures included proper sanitation and the supply of clean, fresh water.

Prohibition of Alcohol, a significant ‘confounding’ factor, was lifted in 1933. In part, Prohibition was lifted because the supply of alcohol had become criminalised; it part because FDR reckoned it would be better to regulate and tax it. Deaths from alcohol-related disease immediately rose:

alcohol deaths.jpg

Mental illness, depression and suicide usually rise during recessions, and fall when the economy recovers:

Suicide.jpg

What else changed? One major factor was a very significant reduction in death from road traffic collisions (‘accidents’). Many Americans simply didn’t have the money for petrol, and so couldn’t drive.

Suicide rates

I was reading David Stuckler and Sanjay Basu’s book The Body Economic; in their chapter about Russia they describe how the end of communism and the ‘Shock Therapy’ of very rapid privatisation had vastly increased mortality there, by comparison to the US:

IMG_20150315_0001.jpg

They illustrated this further:

IMG_20150315_0003.jpg

And then compared this with the 5-year moving average (using selected data points) given in The Economist:

IMG_20150315_0003-2.jpg

They commented, saying that The Economist had backed ‘Shock Therapy’, as did many economists; while these expected some minor, transient social and health pain, this isn’t what happened.

So, I was interested to see this Tweet from The Economist recently:

Economist Tweet.jpg

Depression and suicide often, but not invariably increase with a recession and austerity: I haven’t seen the full article. Using the same numbers from the Office of National Statistics (ONS) I got this for suicides in men aged 30-49:

UK mortality.jpg

To which I added a 3-year moving average, reproducing their finding:

3-yr average.jpg

And then tried a 5-year moving average (as in their Russian Example):

5-year average.jpg

Rather than a rise in mortality recently, this moving average shows a slight fall.

Hmmm.

Austerity II

For the last 30-plus years, the dominant politico-economic theory in the West has been ‘neo-liberalisation’. Roughly, this believes in the pre-eminence of the market, that the market is always right, that government should be small and not provide services.

The response of neo-liberalism to bad times is austerity. A retrenchment of state services, and an emphasis of debt reduction.

What effects does austerity have on health? It’s not so easy at this stage to be factually certain, for statistics often have a significant lag. However, some trends are quite clear.

There has been a reduction in social care recipients in England (Figure and data from Danny Dorling, 2014, Inequality and the 1%) :

D_Dorling_01 1.jpg

Lack of social care can be expected to increase loneliness, and loneliness is clearly associated with poor mental health.

There is a clear increase in poverty, as ‘benefits’ are reduced; poverty is associated with feelings of shame, and this too is associated with poor mental health.

At the same time, funding for the NHS in England is not keeping up with inflation, and it is expected that there will be a real 4% reduction in funding. This hasn’t been achieved before, but clearly can only be approached if there are significant reductions in provision. And mental health services have always been a ‘Cinderella’.

An extra 23,400 people in England and Wales died between 2012 and early 2013, equivalent to a 5% rise in mortality. While this was blamed on flu, this is very unlikely. (In the pea-souper for of 1952-53, there were 12,000 excess deaths, which were also blamed on flu. Again, incorrect.)

For the first time in many years, life expectancy for women in England now shows a decrease.

These can all be designated as ‘lead indicators’, and we can expect further data to show worsening levels of health as austerity continues.

All the UK political parties, except the Greens, are signed up to austerity. I’m not clear what the economic policies of SF and the DUP are—though for them, ‘flegs’ emblems, marches and bickering seem much more important that people’s health.

Austerity I

The dominant politico-economic theory in western countries has been, for the last 30 plus years, ‘neo-liberalism’. It was the work of the Austrian Friedrich von Hayek, and the subject of a symposium at Mont Pèlerin just after the end of WW2. It was also advanced by the Chicago school of economics under Milton Friedman.

Neo-liberalism is so-called because it harks back to the liberal economics of the 19th century, when a particular feature was laissez faire, the idea that the market knows best, and government should not interfere with its workings. At the start of the potato famine in Ireland, the prime minister, Sir Robert Peel, had to covertly buy ‘indian maize’ for distribution. (Unfortunately, Irish mills couldn’t process such maize, and the population didn’t know what to do with it.) Soon after, Peel was replaced by Lord John Gordon; he was very disinclined to interfere with the ‘market’, though, after a while, a series of public works measures were introduced. And, during this whole period, Ireland still exported grain to England; that was the ‘market’ at work.

Dr Ludwig Erhard was finance minister in the first governments in (West) Germany after the war; he joined the Mont Pelerin Society in 1950. Though credited with being the architect of the German economic miracle, he did have to distinctly compromise the ideas of the Society.

Neoliberalism believes in the market, and that government should not interfere with them, nor should governments provide services; rather this is the preserve of private enterprise. Unfortunately, the originators  of neo-liberalism didn’t foresee just how much instability and inequality would come from the application of their ideas. In the US, the Republican party, and their ‘Tea Party’ elements are the major mouthpieces for neo-liberalism. But then Americans think that ‘socialism’ and ‘communism’ are pretty much the same thing.

Since the 1980s, with Thatcherism in the UK and Reaganism in the US, governments have ‘privatised’ state holdings, sold off council houses, deregulated financial services and banks, and markedly reduced taxation on the rich.

We all know what happened; sub-prime mortgages, strange financial products that no one seemed to fully understand, the ‘greed is good’ mentality; and a very marked rise in income and wealth inequality. Even after the market crash, when recovery began, the rich, the 1% (and less) still claimed around 95% of this recovery.

The neo-liberal response to an economic downturn is austerity; a further retrenchment by the state, a reduction in government spending, though not increased taxation for the rich. The neo-classical approach would be state intervention in a downturn; Keynesians would do likewise, but (attempt) to save when times are good.

In the UK, this reduction in state spending is justified by reducing the ‘deficit’, the difference between government revenue and spending; the national ‘debt’ is what the state owes. This deficit reduction is seen as a ‘good thing’ by comparison to individuals. If you or I outspend our income, the bank will want their overdraft back, and want it back soon—certainly before we die. This is a major flaw in reasoning; governments don’t die. They may not be eternal, but they are very long lasting. In England, and later in the UK, the state has been borrowing for a millennium; and if it takes a century to pay back a loan, so what? We accept that a century from now there will still be government in the UK, even if we can’t really say what sort of government it will be, or what sort of place the UK will be.

To further justify austerity, scapegoats have to be identified; clearly, the poor are benefit scroungers, people who can’t be trusted with managing their own finances (the poor are usually very good at managing); immigrants who flood in from eastern Europe, not only to benefit scrounge, but for ‘NHS tourism’. Even the obese are vilified. None of this is correct; and the real rascals, the villains whose activities precipitated the present position—bankers and the ilk—aren’t penalised, taxed or jailed; their activities are supposedly so important as drivers and creators of wealth. Of course, the wealth that they create goes mostly into their own pockets.

Perhaps it’s me, but I hear so many politicians these days saying things like, ‘but the truth is such-and-such’ as if they all have knowledge of exact truth, rather than positions; often such ‘truth’ is partial and incomplete. So, if we hear that the 1% pay a quarter of all income tax (or whatever the fraction is today), this statement is correct; but what isn’t said is that they don’t pay nearly enough income tax, and they don’t pay any wealth tax. The poor certainly pay income tax; but all classes pay taxes on ‘consumption’ such as VAT. The poor pay a much higher percentage of their income on all these taxes, the rich a much smaller proportion of their ‘earnings’. I say ‘earnings’ for much of their rents are capital gains, and these are taxed at lower rates than income; how many of the poor have vast capital gains, do you suppose?

We’ve all heard of people on benefits where these have been reduced (the ‘bedroom tax’), people with major disabilities, the seriously ill and the dying who have been ‘sanctioned’ and told they are fit for work. You might think that education of the young (and even the not so young) is important for the future, for their future earnings and the future of the country. But the educational maintenance allowance was discontinued; university fees were raised, even though it’s realised that a very sizeable proportion of graduates won’t (can’t) ever fully repay them. And for those graduates who do get a good job, such that their income is taxed at 40%, will have to pay an additional 9% to repay their fees. At 49% their tax rate will be higher than the 1% who are only paying 45% (if they are paying, that is). Is that reasonable or fair?

Even the churches are having a say about the effects of austerity on the poor; increasing numbers of kids going hungry because the money isn’t there to feed them. The Trussell Trust now has 14 food banks in N Ireland. Not, surely, an ‘achievement’ to be proud of.

Yet the government proudly claims success because of its policies; in reality, it might just be despite their policies—for, except in tiny countries, austerity simply doesn’t work. You cannot shrink the state and the economy and expect debts to be repaid. But, they tell us, private enterprise has produced so many thousands of new jobs; but how many of these are people now self-employed, or employed on the minimum wage on a zero hours contract. Even a full time worker on minimum wage will have earnings well below the poverty level.

Does austerity have any effects on health outcomes? I’m not thinking about Greece, where the health service barely functions, where HIV infections have risen, but the UK. Here, it’s clear that there has been a (slight) reduction in life expectancy. (If you are really cynical, this is to be welcomed, for it means a saving on ‘benefits’, for the state pension is classified as a benefit, albeit one that most people have paid for.)

What’s to be done? All political parties, except the Greens, are for neo-liberalism, austerity, debt reduction and so on. (Cynically again, you could say that we have a government of the 1%, for the 1% and by the 1%.) It will take a major culture change before policies alter; a major change in viewpoints. And, if you’ve ever tried to do a culture change, you’ll know just how hard this is. I’m not sanguine at present.

There’s another view of economics and economists, as a newspaper correspondent observed:

In the 1980’s when I was student at the LSE, I recall attending a lecture from the late Dame Ragnhild Hatton, the intellectually intimidating Emeritus Professor of International History. She was commenting upon the fact that even in times when devotion to religion was overwhelming, such as in Cromwell’s New Model Army, policy makers and senior officers remained convinced of the value of Astrology to inform their decisions. Dame Ragnhild then paused, looked over her glasses at the students before her and said, “Is anyone here studying Economics as their core degree subject?” About half the students in the hall put their hands up. Addressing them she said, “Well, ladies and gentlemen, Astrology in those days was viewed in the same way that we view Economics today. It was seen as a way of divining the future, whereas of course, as centuries of research have shown, both Astrology and Economics are pseudo-sciences with no basis in logic at all. They are the incoherent ramblings of third and fourth rate academics who falsely claim they can predict the future. They are the intellectual equivalent of the Fortune-Teller in a tent at a fair. Now, let us return to Cromwell”.