Challenging the New Curse of Bigness

This article appears in the Fall 2016 issue of The American Prospect magazine. Subscribe here. 

In a January speech on the excessive economic and political power of big finance, Bernie Sanders declared, “If Teddy Roosevelt, the Republican trust-buster were alive today, he would say, ‘Break ’em up.’ And he would be right.” Hillary Clinton invoked the same legacy. “It’s time to take a page from Teddy Roosevelt’s book and get our economy working for Americans again,” Clinton wrote last fall in an op-ed that called for expanded antitrust enforcement to counteract increasing corporate concentration.

The abuse of private power was the central concern for progressive reformers a century ago—and the same issues resonate today. From railroads to oil to finance, men like Andrew Carnegie, Cornelius Vanderbilt, John Rockefeller, and J.P. Morgan had centralized control over these core industries. Some used direct corporate ownership; others established networks of companies via trusts or interlocking boards of directors.

These industries, like their modern successors, were the necessary infrastructure of the economy. That made citizens vulnerable to concentrated power: Farmers had to pay extortionate prices to ship their produce; small businesses couldn’t get credit on reasonable terms; potential rivals with better or cheaper products couldn’t compete. The result was not just concentrated economic influence but excess political influence, as these titans got favorable policy treatment that redoubled their power.

Responding to these threats of the first Gilded Age, Progressive Era reformers developed a variety of tools. The best known of these were antitrust laws designed to break up dominant corporations. But there was much more. In many states and localities, reformers defined and regulated public utilities; some state and local governments went further, creating public entities.

These three strategies—antitrust, public utility regulation, and public options—formed the backbone of Progressive Era economic reform, and informed the early New Deal. But over the last four decades, each of these tools has been blunted. Today we are seeing the costs of these policy reverses in new forms of abusive private concentration. From too-big-to-fail finance to new concentrations of power among internet and tech giants like Google, Amazon, and Uber, the problem of bigness is again a central concern. In this new Gilded Age, addressing the problem of private power requires looking back at the strategies of Progressive Era reformers, reviving and adapting these concepts and tools of antitrust, public utility, and public options to address the new forms of private power dominating today’s economy.


The Progressive Legacy and Its New Application

A key adviser to candidate and later President Woodrow Wilson before Wilson appointed him to the Supreme Court in 1916, Louis Brandeis memorably called the problem of private power “the curse of bigness.” Brandeis, like other reformers of the time, saw the problem as encompassing more than economic efficiency or consumer welfare; at its core, the curse of bigness raised fundamental concerns of economic and political liberty. The problem was that these corporate entities accumulated a kind of semi-sovereign power, but without any of the checks or balances we expect of political authorities. As Brandeis argued, the result was that “there develops within the State a state so powerful that the ordinary social and industrial forces existing are insufficient to cope with it.” For Brandeis and his fellow reformers, such private power required a variety of strategies to be curtailed.

ארכיון עין השופט/Creative Commons

For Louis Brandeis, the private power of large corporations raised fundamental concerns about economic and political liberty. 

Antitrust. A vibrant, dynamic, and free economy, Brandeis argued, depended on robust competition, but paradoxically competition and liberty alike could only be protected through extensive regulation against concentration. By breaking up large firms into smaller entities, antitrust law would prevent exploitative monopolies, and ensure a free and competitive market for businesses and consumers alike. While some commentators have since dismissed Brandeisian antitrust as a naïve yearning for a pre-industrial age, the reality is that Brandeis and other Progressive Era reformers were not anti-bigness; rather they sought to develop policies that would hold corporate power accountable, ensuring that bigness served the public good.

Public Utility Regulation. This pragmatism is exemplified by the tools that these reformers developed to complement antitrust. Even Brandeis sought to preserve some forms of consolidated production where it would serve the public interest. Unlike the trusts that served economic elites rather than the public, some monopolies in industries like transportation or other social necessities could be permitted—so long as these concentrations were closely overseen by regulation.

Starting in the late 19th century, state and local governments developed the idea of public utility regulation, imposing new legal obligations on private monopolies—for example, requiring railroads to engage in fair pricing and to serve all comers equally. These obligations had a deep history in the common-law tradition of “common carriers” and “public callings,” where industries like transportation or innkeeping were seen as providing a service to the public at large, and therefore were laden with special legal obligations to serve all comers without discrimination, to accept reasonable and fair prices, and to undertake a service once offered.

These common-law obligations were gradually absorbed into the emerging legal doctrines pertaining to highways, rivers, ports, and innkeepers, and then served as an intellectual touchstone for these new experiments with state and municipal utilities. As historian Bill Novak has argued, for Progressive Era reformers, “utilities” encompassed much more than water and electricity and railroads. Progressives created state- and city-based utilities in a wide range of goods and services, covering everything from transportation and telecommunications to milk, fuel, and banking. Leading reformers and scholars, from Brandeis to Robert Hale to John Commons, suggested that such public utility regulation could be justified not only in industries that possessed economies of scale in production, but also in those industries that provided social necessities, where the vulnerability of citizens, businesses, and communities to exploitation by the private provider was most threatening and troubling.

Public Options. In some instances, these regulatory obligations would not be enough, and reformers instead sought to provide a service directly through a government-chartered entity. During the Progressive Era, the first municipally owned utilities in electricity, water, and transportation were chartered as state-run entities charged with operating and providing the service for the public at large. Rural electrification co-ops began with government enabling legislation and subsidy. This idea of “yardstick competition”—where a state-run provider would offer not only a basic version of the service, but also a competitive benchmark on pricing, quality, and access that would drive private firms to match or better this baseline—motivated Franklin Roosevelt’s own push for public electric utilities like the Tennessee Valley Authority.


The Great Reversal

Starting in the 1970s, each of these three strategies of antitrust, public utility regulation, and public options was gradually undermined through the resurgent political power of business, given legitimacy by influential critiques from the rising conservative law and economics movement. First, scholars argued that regulatory agencies were likely to be “captured” by industry interests. Second, the new economic models promised more scientifically objective metrics for regulation based on economic efficiency and consumer welfare, rather than the vague, moralized goals of freedom from corporate dominance espoused by Progressive Era reformers. Third, these theories posited self-correcting “free” markets, in which the absence of regulation would ensure efficiency and innovation.

In the antitrust context, the focus on efficiency and consumer welfare led to a shift away from concerns of concentration toward a more narrow focus on consumer prices. In this view, falling prices indicated healthy market innovation. So long as companies did not use market power to charge higher prices, mergers and increased concentration would be permitted. Antitrust enforcement actions fell, as courts and regulatory agencies took a more permissive stance on concentration. Public utility regulation and state-run public options also fell out of favor. These critiques warned that regulated utilities would be incentivized to overinvest, driving up their base rates by gaming the formulas for determining fair prices—ultimately undermining consumer welfare. Deregulation and privatization swept industries from airlines to electricity. This dismantling of regulations was not just a conservative project. Fearing inflation and inept or captured public agencies, many Democrats in the Carter era took these critiques on board—as did Clinton-era policy-makers, to varying degrees.

Chattanooga Public Library/Creative Commons

President Roosevelt arrives in Chattanooga in August 1940 for the dedication of the Chickamauga Dam, a project of the Tennessee Valley Authority. 

Decades later, we are witnessing the repercussions of these intellectual and policy shifts. On the surface, many headline industries of the internet economy suggest a healthy level of technical innovation, rising consumer choice, and falling prices—measures that would seem to indicate a vibrant economy. But the reality is a revival of corporate power and abuse that echoes and evokes the Progressive Era abuses and reforms. As The Economist recently reported, many sectors of the economy are increasing in concentration, while new firm entries have declined. Corporate profits are at a new high; today, American companies enjoy a near-record rate of return on investment, around 16 percent. While high profits are generally good for an economy, research by two of Obama’s economic advisers, Jason Furman and Peter Orszag, suggests that profits at this level imply that American companies are extracting wealth from workers and consumers, rather than creating it.

The problem is not just market concentration, but entrenchment: Established firms are getting savvier about securing their market position, which in turn makes it easier to deflect rivals and extract rents. As Robert Reich, David Dayen, and others have documented, the corporate winners of the current economy are not small startups and innovators, but rather corporate giants skilled at locking in their market share.

In agriculture, seed and agrochemical giant Monsanto retains its dominant position in part by requiring in its contracts with farmers that they plant only Monsanto seeds, and by tailoring their seeds to work best with Monsanto fertilizer products. The airline industry, liberated from regulation, has continued to consolidate; four providers now carry 80 percent of passengers. Coincidentally, airfare prices have stayed level even as services, amenities, and fuel costs have all gone down. Or consider the battles over cable and internet providers like Comcast, which can leverage their control over access to telecom services in neighborhoods to jack up prices, sell additional bundled services like voice and internet access, and keep out competitors from operating in the same regions. More recently, critics have raised concerns about Google’s leveraging of free or cheap services to establish market dominance in search and information provision, which it then uses to favor its own content in searches.

These concerns—market dominance and entrenchment, price discrimination and consumer lock-in—would be familiar to reformers of Brandeis’s era. At the same time, we also face new variations on old forms of private power. New industries unheard of in Brandeis’s day—from cable giants like Comcast to online platforms like Google—use novel strategies of market power. If the Progressive Era strategies of antitrust, public utility regulation, and public options are to be effective in meeting today’s economic inequities, they will have to be revived, adapted, and combined.


A New Antitrust—and an Old Problem of Finance

Antitrust offers an important corrective to the trend toward concentrated markets, as some policy-makers are beginning to argue. This spring, Congress held a hearing on competition policy during which members of both parties raised concerns about economic concentration, calling for more robust enforcement of antitrust laws. In April, the Obama administration issued a new executive order requiring agencies to develop new methods of detecting market entrenchment and anticompetitive behavior, and to refer violations to the Department of Justice and the Federal Trade Commission.

Using existing antitrust laws, the FTC and the DOJ could scrutinize the merger boom more closely, in particular focusing not just on horizontal mergers but on vertical integration as well. These agencies might take a closer look at how patterns of investment, especially among hedge funds and other financial firms, might be centralizing investor control in problematic ways. They might also block mega-mergers that have tended to be approved in recent years, like the Charter–Time Warner Cable merger this year or the Comcast-NBC merger of 2009, which was approved in 2011. Congress could similarly update antitrust statutes to require more expansive review of market competition effects for mergers and market concentration.

Reviving antitrust tools can help address the vexing problem of too-big-to-fail financial firms. Rather than regulating such firms with expanded oversight from the Fed, the firms can be broken up into smaller entities that would pose no systemic threat to the economy should they fail, capping bank size by some metric, such as share of total deposits. Meanwhile, the problem of contagion and systemic risk—the danger that risk in one area of the financial system can trigger a collapse in other areas, eventually freezing basic lending and liquidity, as happened in September 2008—can be addressed by erecting firewalls separating these different domains of finance. This firewalling or insulating strategy also has Progressive Era antitrust roots, evoking the efforts to prevent market dominance from spilling over into adjacent sectors. The Glass-Steagall Act, part of FDR’s emergency banking legislation in 1933, famously separated investment and commercial banking. Today, Senators Elizabeth Warren, Bernie Sanders, and others have called for a reinstatement of Glass-Steagall as a firewall against risk contagion. The efforts to cordon off derivatives-trading also represents a variation on this firewalling approach. And the Volcker Rule—at least as originally proposed, before it was watered down in Congress and then subjected to intense industry lobbying in its implementation—contemplated an absolute size limitation on financial firms to less than 10 percent of the total market of deposits, plus a ban on proprietary trading.

These antitrust approaches can be combined with public utility concepts to address more fully the problems of modern financial regulation. In addition to tackling bigness and contagion, finance at its core might be considered a public utility. New Deal banking regulations imposed ceilings on savings rates and created federal deposit insurance to make banking a low-profit (but still remunerative), stable, dependable service. In effect, banking became a privately run public utility, subject to price and conduct limits, in exchange for backstops and government-supported insurance that ensured its uninterrupted—but non-exploitive—functioning. This system of “boring banking”—a system that lacked the complex array of wildly profitable and risky securities that marked the pre-1980s financial system—proved more than adequate to facilitate postwar economic growth and relatively high incomes for workers in the financial sector. To restore finance as a stable but restrained public utility today, we might expand capital requirements to force banks to become more risk-averse and limited. Or, as Morgan Ricks suggests, we might close loopholes in the shadow banking sector, bringing firms that depend on cash-like sources of financing, like repo agreements or money-market mutual funds, under the same New Deal–style arrangement, providing deposit insurance in exchange for limiting risk-taking activity, to prevent future panics.

AP Photo/Chattanooga Times Free Press, Doug Strickland

The TVA Today: A control room at TVA headquarters in Chattanooga, where the city uses public power to offer fast, cheap internet. 



Public Utility Regulation and the Internet

The best example of the public utility concept revived today is the net neutrality debate, which raises anxieties that would have been familiar to Progressive Era reformers. In the modern infrastructure of the internet, for end users to access the content provided by companies like Netflix, Google, or YouTube, they depend on internet service providers like Verizon and Comcast to faithfully and equally transmit data from content providers. This creates a potential risk of blocking, prioritization, or rent extraction: The broadband providers can slow down content they disfavor—for example, because of relationships with competing content providers like cable networks—or speed up access to content from providers like Netflix willing to pay them higher fees (so-called “paid prioritization”). Like the railroads of old, Comcast could extract higher fees from firms like Netflix desperate to transmit their data to users faster, and in the process screen out the viability of smaller startup content providers unable to pay extractive rates.

In the end, it was Progressive Era ideas of public utility that shaped the policy response to this problem of internet monopolies. Common-carriage norms had already been absorbed into the laws governing the telecom industry, enabling the Federal Communications Commission to require fair prices, equal access, and nondiscrimination for telephone companies. After a series of legal and political battles, the FCC ultimately issued its final net neutrality rules in 2015, reclassifying broadband internet providers as “telecom” firms subject to these common-carrier requirements, while issuing rules against blocking, slowing down, or interfering with internet traffic.

As the FCC noted in its initial 2011 rule, these public utility–style regulations were necessary because internet service providers were so dominant that ordinary market competition and consumer choice could not check practices like paid prioritization: There are so few alternative channels for transmitting data that most consumers or content providers have nowhere else to go. This reality captures neatly the way in which public utility regulation as a tool to counteract private power necessarily complements antitrust tools. In some cases, goods and services can’t be provided effectively through small-scale market competition; in these settings, we need regulatory oversight to ensure these consolidated firms still serve the public good.

Furthermore, the FCC argued that these public utility–style regulations were not an inhibition to innovation and dynamism, but instead would promote a more socially useful form of innovation. Innovation by content providers like Netflix or YouTube depends on low barriers to entry and no restrictions on transmitting content to end users; to allow companies like Verizon and Comcast to block access to some content, or to fast-track other content in exchange for higher fees would undermine market innovation. Allowing paid prioritization would allow Verizon and Comcast to extract innovation-inhibiting rents in the name of “innovation.” Just as antitrust can be understood as promoting beneficial competition, this public-utility approach similarly drives companies to innovate in more socially beneficial and desirable ways.


A New Threat: Platform Power

While finance and internet service providers are closely analogous to the corporate titans of the Progressive Era, today’s reformers must also grapple with the concentrated private power in a new domain—the information economy, dominated by internet-based tech giants, from Google to Facebook to Amazon to Uber. These companies—among the most valuable and fastest-growing in the world—seem a godsend for consumers and economic growth, expanding choice, reducing prices, and creating new conveniences driving productivity. But the danger arises not from their sheer size and valuation but from their fundamental business model. These businesses all share a common structure: They operate online interfaces that function as marketplaces and clearinghouses—in short, as platforms—linking producers and consumers of goods, services, and information. This gives these firms a unique kind of “platform power,” influencing production, distribution, and access.

By controlling the platforms that link buyers and sellers, producers and consumers, these companies are able to use their leverage to extract disproportionate fees from either end, whether it is Google extracting a disproportionate share of ad revenue from content providers dependent on the search engine to attract viewers, or Uber extracting a high cut of drivers’ revenues. This platform power can be checked by adapting and combining antitrust and public-utility principles.

First, these platforms represent a kind of monopoly power: Users are locked into a single platform, which then leverages this user base and vast store of underlying data to grow even bigger, colonize adjacent markets, and eventually, once other competitors are no longer a threat, raise prices. In the 1990s, Microsoft leveraged its overwhelming dominance as the default PC software platform to attempt to colonize related services like internet browsing. Similarly today, Google’s dominance in search sets up possible entries into other information-based markets, like insurance and travel. This dominance is only increased as Google enters markets such as online streaming and cable boxes to capture valuable user data. Uber’s dominance in ride-sharing is already driving the company’s turn to shipping and logistics.

This path to dominance is subtle in part because it can masquerade as being consumer-friendly: Initially, the aggregation of services and users on the platform simply makes the platform more desirable and useful for consumers, but once competitors are sufficiently weakened, these platforms can increase prices as monopolies or monopsonies. These challenges fit fairly closely to antitrust concerns about market share, pricing, vertical integration, and stifling of innovation, and could be addressed by expanded antitrust enforcement by agencies like the FTC. By imposing higher scrutiny of firms seeking to colonize adjacent markets, a modern antitrust approach to platform power could work not just by breaking up concentrations, but rather by erecting “firewalls” that limit the spillover of dominance from one industry to another.

A second problem arising from platform power is the risk of discrimination of various kinds. Through their underlying algorithms shaping how users access information, goods or services, these platforms can engage in algorithmic price-fixing, charging different prices to different consumers based on their inferred income level, race, gender, or geographic location. Civil-rights advocates are increasingly raising concerns that the algorithms governing platforms like Uber and Airbnb are creating subtle forms of racial discrimination against minority buyers and sellers. There is also the related concern that these platforms can invisibly alter the kinds of services and information that users can access in the first place. This is an especially troubling concern in the context of information platforms like Google and Facebook. Google has already been investigated once by the FTC for manipulating its search results to favor its own properties. Fair search results are increasingly make-or-break for businesses trying to reach consumers. The platform’s influence on information can even have electoral consequences. A recent study found that Google and Facebook, by reordering search results and newsfeed content, can have large impacts on voter behavior in elections, shifting up to 20 percent of undecided voters—a problem internet scholar Jonathan Zittrain calls “digital gerrymandering.” Most troublingly, these results can arise even in the absence of an employee intentionally skewing the results, emerging instead from how the algorithms adapt to the frequencies of queries. Facebook’s growing dominance as a communications platform shaping access to news and other kinds of written media magnifies these concerns.

Here we might adapt public utility regulations to assure the equal transmission of content, nondiscrimination, and equal access to services, akin to the net neutrality barring of paid prioritization. Some reformers have suggested that regulators like the FCC or the FTC create a category of “information fiduciaries,” requiring that platforms use the aggregation of data in ways that serve the interests of the end user as a way of mitigating fears of discrimination and invasion of privacy. But a broader response would establish public utility obligations backed by expanded regulatory oversight—for example, by auditing the underlying algorithms of Google’s search or Uber’s ride-sharing systems to ensure nondiscrimination and fair access. Through such regulatory oversight, we might also require an “interoperability” standard to prevent lock-ins, essentially requiring platforms to disclose application program interfaces and to enable other services to plug in—a sort of digital equivalent to the interconnection requirements in telecommunications regulation.


New Public Options

The public option approach provides a critical complement to these revived uses of antitrust and public utility regulation. Platform power might also be countered by public options, which would provide more equitable and accessible alternatives that compete with private companies and induce higher standards for nondiscrimination, fair prices, and openness. Frank Pasquale has suggested the potential need for a public option in search engines to balance Google. A public competitor to Google may seem a little far-fetched, but consider the wide and growing use of what is termed peer production in the digital universe—not-for-profit collaborations, the best known of which is Wikipedia. Venture capitalist Nick Grossman has suggested that we subject platforms like Uber to competition from rivals that are “thinner,” offering only the basic service that treats consumers and workers fairly.

AP Photo/Eric Risberg, File

The Transamerica Pyramid is reflected in the window of the main branch of Citibank in the Financial District of San Francisco. 

Public options can also complement net neutrality regulations by addressing the “digital divide,” the severe lack of broadband access for rural and minority urban communities. Market competition is insufficient to incentivize private broadband providers to build the infrastructure to reach these communities. In response, several cities have begun using municipally chartered utilities to provide cheap, high-speed internet access to these communities. Chattanooga, Tennessee, for example, now offers its own government-provided broadband service that is more affordable and oriented to reach schools, libraries, and minority communities through its Electric Power Board municipal utility. The potential power of this strategy is apparent in the cable and internet industry’s continued efforts to shut down these public alternatives. This policy was initially challenged in court by Comcast, and the Tennessee state legislature passed a law preventing municipal broadband provision. At the same time it issued its net neutrality ruling, the FCC overturned these state laws to open up the field for municipal broadband providers to address gaps in access, quality, and pricing. But here too the municipal broadband push has faced difficulty, as the Sixth Circuit Court of Appeals just invalidated this FCC ruling, effectively restoring the state laws prohibiting municipal broadband as well as the market power of cable and internet companies.

Similarly, the idea of a public option can complement the efforts to regulate finance in today’s economy. In addition to concerns about financial crisis and systemic risk, there is also a pervasive problem of discrimination and limited access to financial services among poor and minority communities. Here, public options, where the government provides a basic form of savings, checking, and credit without the harsh fees that often trouble poorer communities, could offer a solution. In the 19th century, Populists called for “postal banking,” where the Post Office provided basic financial services without the extractive fees charged by big financial firms. This idea is making a comeback today as a way to address financial inclusion—and in the process, provide some competitive pressure on private banks to offer more accessible services.

The combination of public options with public utility regulations represents a broader strategy for ensuring equal access to moral necessities and preventing exploitation by private actors, applicable to a variety of policy debates and sectors. Take health care as an example. The modern term “public option” was first used in early proposals for the Affordable Care Act, in which a public insurance alternative like Medicare could crowd out less-efficient private insurers—a strategy echoing FDR’s yardstick competition. As Nick Bagley has recently suggested, private insurers could also be regulated as public utilities to prevent discriminatory pricing and slow the explosive growth of health-care costs. The combination of these approaches would go a long way to ensuring equal and fair access to health care for all.

Or consider the growing concern over affordable housing. Escalating housing costs play a major role in increased inequality, and tenant vulnerability to landlords is a major concern. Public housing is vastly oversubscribed, and HUD’s Section 8 program for housing vouchers reaches only 17 percent of eligible people. While some housing activists are renewing calls for housing as a basic right, we might make more progress through a combination of public option strategies, such as expanding Section 8, and public utility regulations, such as robust nondiscrimination and anti-harassment protections for buyers and tenants.


Enduring Progressive Principles and Tools

Even if they could not imagine the dangers posed by internet platforms, Progressive Era reformers like Brandeis and Hale would not be surprised to see how readily their frameworks adapted to a very different economic and social context. For Progressive Era reformers, these three strategies of antitrust, public utility regulation, and public options were complementary tools for combating concentrated private power. These tools were not meant just for sectors with increasing returns to scale and tendency toward concentration; they also emerged in sectors where private actors might start to centralize control over social necessities—goods and services upon which businesses, individuals, and communities were so dependent that private provision might create dangerous forms of extraction, exploitation, or exclusion.

This fluid view of when to invoke these strategies explains why they can so readily adapt to our modern concerns, from Comcast to Google to too-big-to-fail finance. It also represents an important recovered insight for today’s progressives: A progressive economy depends on first identifying those industries that provide essential necessities for economic and social citizenship, and those that also have a particular risk of domination by private actors. These tools were not intended, as is often caricatured, to assert the primacy of government over markets to the exclusion of innovation, dynamism, and economic progress. Rather, these tools prevent extraction and exploitation from taking place under the guise of “innovation”—and in so doing encourage the right kinds of socially productive and equitable market innovation and dynamism. As such, these tools are also oriented toward a distinctly progressive vision of economic freedom. Freedom is a term that is most often bandied about by conservatives in their attack on “big government.” But for Progressive Era reformers, freedom meant something else: It meant the freedom from the private domination of robber barons, monopolies, and market forces preventing access to necessities; it meant the freedom to be a fully capable—and creative—member of society, capable of innovating and contributing by virtue of fair and equal access to basic needs and services assured by public utilities and public options. Such freedom depends on government to construct markets that operate fairly and equitably.

Recovering this progressive vision is critical to overcoming the legacy of late–20th century conservatism. But it is also a lesson for liberals. Since the Reagan era, some liberals have sought to “reinvent” government by absorbing conservative critiques of capture and failure, espousing more market-friendly views of economic regulation, and narrowing economic regulation to those projects that could be justified in economic and consumerist terms. In the years since the financial crisis, progressives have been seeking a more robust response to the challenges of private power and unchecked markets. The vision of progressives responding to the first Gilded Age offers a richer foundation for progressives responding to today’s second Gilded Age.


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