Monday, November 12, 2012

Gas price contest

As all of you know, New York and New Jersey are having huge gas lines in the wake (still) of hurricane Sandy. Both are enforcing laws against "gouging," and New Jersey's attorney general, apparently having time on his hands, is going after people who listed gas for resale on Craigslist.

Let's start a little comments essay contest. If New York and New Jersey let people charge whatever they wanted for gas, and prices went up to $25 per gallon then...

Here are some ideas to get you started

  • People would voluntarily stay home.
  • Rather than allocating gas to people with time on their hands to wait in line, gas would go to people who are really busy. 
  • People would voluntarily form carpools. Better, they would advertise for paying carpool mates on Craigslist, and the minivan owner running it would be able to get gas. 
  • People who have emergencies, like wife needing to go to the hospital to deliver a baby, could get gas to do so. 
  • Ditto emergency services, fire, ambulances, cops
  • Gas stations would have bought generators, so they could pump and sell gas at a big profit when the power goes out.
  • Gas stations would buy said generators now. (We need to get rid of gouging laws on the generators too, so that gas stations needing generators can pay through the nose to get them, instead of someone who wants to recharge his iphone.)
  • People who don't have to go anywhere would siphon their gas and sell it neighbors. Or second-car gas. 
  • They'd siphon their lawnmowers too.
  • People would rent tanker trucks, drive around the northeast, buy gas and resell it in NY.
  • Actually, people might get a bunch of gas cans and drive the gas in from rural areas in the back of pickups. Not sure if this is a good idea, especially for smokers, but it would improve gas supplies.  
  • Exxon would have spent the money for more storage tanks in NJ, ready to sell gas at high prices in an emergency. 
OK, you get the idea. I took the low hanging fruit, but you've got time on your hands, obviously, you're reading a blog. Let's see some creativity here. 

Interactions between gas and New York's reported prohibitions on home made food for shelter, tree clearance without permits, restrictive taxi and limo licensing laws, taxi prices, etc. are especially welcome. 

Stories of market adaptation to rationing rules are also welcome.  I gather that with AG prosecution for gas pricing in the air, Craigslist ads now ask $5 for gallon of gas. $100 for container. Are local teenagers yet starting little businesses to go get gas for neighbors? --"For $25 I'll go wait in line and fill up your car?" Are people swapping plates yet? 


37 comments:

  1. A and B both need gas to get to work. Either will loose their job if they don't arrive.

    The only way to gas powered auto.

    Following A, should A, who is rich be able to buy his job by paying $25.00 a gallon, while B looses his job.

    Second, what about second order effects.

    If the rich are able to buy their way out, after Sandy, what effect does that have (moral hazard) on their support for pre-Storm efforts to prepare for a risk?

    In sum, we prohibit price gouging because it promotes other values.

    If it was all about efficiency, we would go back to slavery.



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    1. Two weeks of gas at $25 a gallon is not going to send anyone to bankruptcy. The idea that it's important to transfer income by this price distortion is off by orders of magnitude. I thought I was preaching to the choir here, not teaching econ 101.

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    2. What is off by orders of magnitude is that you think that economics has to do with values or how to order a society or that economics tells us how to solve distribution following a Sandy.

      Beyond that, objecting to a transfer of income has nothing whatsoever to do with economics for how all income is distributed is solely a political question.

      Steve Jobs, for example, didn't make billions because he had a better idea. He made billions because of the patent laws.

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    3. John, I am curious to hear your perspective on why we have these laws? They are extremely popular, are they not? And the econ 101 argument against them is extremely simple to understand. So why are they there ? And given that these laws and laws like them are on the books, what are the broader implications for our system? In other words, maybe pure efficiency is not possible ?

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    4. Those who oppose price-gouging because it's somehow unfair for poor people are ignoring the fact that shortages and lines can be just as harmful to those people as high prices. Not to mention that rich people are always going to have an advantage in preparing for and dealing with a disaster because they're RICH!

      When I was in law school, I took a class on international trade, and our professor taught us a valuable rule of thumb for thinking about international trade that I think applies to market systems generally: because we know from theory and experience that free trade is good, we should respond to people's legitimate concerns with free trade by directly addressing those problems, and not by restricting free trade.

      For example, people worry that free trade decreases wages/employment of some domestic workers. We should deal with that problem by making it easier for those workers to get other jobs, not by restricting free trade.

      In the disaster context, the fact that the disaster has made things difficult for poor people is a problem that we can solve by providing aid to poor people and helping them prepare for disaster. We should not, however, distort the market with price controls.

      What a failure of leadership for Chris Christie. If he's unaware of the deleterious effect of these price-gouging laws on people, then shame on him for enforcing them. If he's unaware of such basic economic concepts, then shame on him for his ignorance.

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    5. Wouldn't B sell to A, and be happy?

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    6. Wow...I have to agree with the professor. The original anon needs a lesson in econ 101.

      The price rise has other, perhaps to anon, unforeseen, consequences. A price rise is a signal to other gas sellers to get more gas into the area where they'll make more profits. That benefits everyone, rich and poor, in the area of the shortage. In addition, the higher price encourages conservation. If the price didn't rise I might buy some gas and just cruise around the area looking to pick up chicks. The higher price discourages that kind of behavior, leaving more gas for those that really need it, which benefits everyone, rich and poor, in the area of the shortage.

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    7. Anon 3:24 AM,
      "What is off by orders of magnitude is that you think that economics has to do with values or how to order a society or that economics tells us how to solve distribution following a Sandy."

      This is exactly economics -- how people distribute scarce resources

      Delete
  2. When I was stationed in Baghdad, Iraq, there was a thriving market for gas that was run by pre-teens. These young enterprising boys (I never saw a girl doing this for cultural reasons, probably) selling gasoline in 2 liter plastic bottles. They would fill a couple of them from a much larger drum and sell them. Once they had exhausted their supply, they would fill a couple of more and repeat the process.

    Unfortunately, the same folks that have given us the anti-gouging laws have also given us child labor laws.

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  3. Under price controls it is also the rich who end up getting the gas by paying others to queue for them. Under market prices additional, previously less useful resources like generators, tanker trucks, pickups, etc., get mobilized so more gas becomes available for those who need it. Larger gas supplies mean lower prices. So, when including the price of queuing time, prices in a free market are lower than prices under anti-gouging norms - to the benefit of rich and poor people alike.

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  4. ...sociologists and other lefties on college campuses would crack huge smiles and celebrate in private, knowing that they can stretch their careers another two decades by writing about how economics is so cruel and pretending to care about the welfare of poor people and other "marginalized" groups having to suffer in the face of greedy capitalists and high gas prices, despite said "researchers" being against oil drilling and refinery construction?

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  5. The Feds would tax $25 per gallon gasoline at 80% in the name of fairness of gas for all, to Federalize national flood insurance for those unfortunate enough to live in waterfront property and to help reduce the excess of Wall Street, whose speculators clearly created this problem in the first place. And if this didn't work, nationalization of the pumps.

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  6. If price gouging were allowed, low wage earners would not be hired to wait in line and fill up for higher wage earners, so low income workers would suffer, at the hands of the wealthy.
    Demand for the merchandise sold in gas station convenience stores might rise, if people only buy a little bit of gas at a time, becuase they would make more trips to the gas station. The economy would be stimulated. Alternatively, demand for the merchandise might fall because people can't afford the merchandise after paying the "gouge" prices for gas, so people would eat less junk food and drink less beer, causing lower demand for health care, a lower total societal expenditure on health care, and fewer unsightly obese people.

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    1. "If price gouging were allowed, low wage earners would not be hired to wait in line and fill up for higher wage earners, so low income workers would suffer, at the hands of the wealthy. "

      Then I suggest we set price controls on everything. Low wage earners will be so much better off since they can now earn their living by waiting in lines and resell the goods at a profit to high wage earners. Inequality problem solved.

      Oh wait, aren't the low wage earners demanding a payment for waiting in the line? So that the price of gas for the high wage earner is the actual cost PLUS the payment? So aren't the low wage earners actually price gouging, and thus violating the law?

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    2. The price of gas to the rich would be the gas station price, plus the payment to the line sitter, minus the value of the rich person's time that is put to an alternate use while the helper is waiting in line.
      I agree, let's control the price of everything. We need to hire more law enforcement to monitor and punish the price gougers. We need to stimulate the economy that way.
      Incidentally, is price gouging all that important of a phenomenon? It occurs once in awhile, not more. I've spent my whole career trying to gouge others, completely without success.
      And what is the sense of framing so many issues as rich vs poor? Aren't there far more people in between? And isn't there a continuum of people running between rich and poor? Some are in the middle, others just above or below the middle, etc. Somehow I don't see this occasional price gouging as having much effect on either rich or poor.
      The better question is why we call some things "gouging" while other things are "public services provided by government at a cost above what the private sector would charge, for which we should be grateful?"

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  7. If people bought the same amount or close to the same amount of gas, tax revenues would rise, leading to more government spending and speed up the recovery from the recession.
    On the other hand, if the high price reduces economic activity in sectors where lots of gas is used, the overall GNP might fall, leading to a Sandy recession. Perhaps a look at 1973 would tell us whether recession or recovery would be more likely.

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  8. Actually, it is not so easy to predict how people will respond to a change in incentives. Maybe this calls for government to have better computers with which to organize our lives.

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  9. people would drive less, air in NY would finally be clean and the positive effect of Pigouvian taxes would be finally recognized.
    As a consequence, immediately after there would be a dismantlement of three Governmental Agencies:
    1) EPA
    2) The Dept of Energy
    3) I don't remember this one

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  10. What accounts for the sudden spike in demand for gas after a hurricane?
    You'd think it would be the opposite.

    Perhaps it's similar to bank runs: people fear they won't be able to get gas so they do a "gas run" and the shortage becomes a self fulfilling prophesy.

    In that case, allowing prices to rise might deter lines and hence stop gas-shortage fears from spreading.


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  11. Most of the cars on the road would consist of the more modern/expensive (and fuel efficient) variety, compounding the reduction in pollution.

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  12. I am surprised that we even need to have this discussion. Price gouging laws exist because the market does not function when there is a blatant inequality of bargaining power. Would you want to live in a society where ambulance drivers can make a take or leave it offer to a traffic accident victim ("either you pay me 50k or I will leave you for dead")? That is just an extreme version of what happens during crisis episodes such as Sandy. A fellow citizen needs some gas urgently, there is no other gas station nearby, I do not want to live in a society that allows the gas station owner to hold up his fellow citizen. Last but not the least, that is not Econ 101, but Econ 201, where we learn or teach the assumptions needed or efficiency in the Arrow-Debreu model, among them the impersonality of trades. That is clearly violated in a setting with local monopoly power as in the aftermath of a hurricane.

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  13. If $25 per gallon then ...
    I would personally load up my pickup truck full of 55 gallon drums of gasoline, drive to NYC and sell for $24 per gallon. I would be constantly worried that by the time I got there, so many other entrepreneurs had the same idea that this price not prevail when I got there. I suspect I would only be able to do this once before the price declines made it worthwhile only for people living closer to NYC than I do.

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  14. Grumpy Econ EnthusiastNovember 14, 2012 at 12:54 PM

    If prices were not restricted, gas sellers would have more incentive to stock up in the future (before the next storm).

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  15. It seems to me that some of these things are likely to happen in a regime of price gouging laws. The opportunity cost of obtaining gasoline has gone up as a result of the scarcity (and maybe even more because of the rationing rules). The first-order problem is that people are wasting time in the process of obtaining gasoline, and time spent by the consumer cannot be transferred to the producer. From your list, I expect the following to still be true:

    People would voluntarily stay home.
    People would voluntarily form carpools. Better, they would advertise for paying carpool mates on Craigslist, and the minivan owner running it would be able to get gas.
    People who don't have to go anywhere would siphon their gas and sell it neighbors. Or second-car gas.
    They'd siphon their lawnmowers too. [Seems like a natural dodge to the regulation]

    Indeed, the effective marginal effective price of gasoline might even be higher on account of the price gouging laws, which could have a larger effect on people voluntarily staying home, advertising on CL for carpooling, and other demand-side conserving actions.

    Note that this could lead to inefficiently too many people waiting at home (because supply of gasoline would be encouraged by allowing the price to rise... for all the other reasons in your list).

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  16. If New York and New Jersey let people charge whatever they wanted for gas, and prices went up to $25 per gallon then...

    1) The free market would have solved the gas shortage in 2 or 3 days. People from all over the Northeast would have trucked gas and generators to NY and NJ. After several days of $25/gallon gas, prices would start to fall as gas flooded into affected areas.

    2) Gas station owners could pay for generators and pump the gas sitting in tanks under their stations - gas that was under their stations when Sandy came ashore and gas that is still there today.

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    Replies
    1. Finally, we're getting some sensible answers!

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    2. OK, So why do we have these laws? Because legislators in Albany are dumb ? ok, but why are these laws so popular? Do you realistically expect anti-gouging laws to ever be repealed, say in the next 20 years? I think there is somewhat of a shortfall of understanding of fundamental human behavior on the part of economic libertarians.

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    3. Cochrane's assertion that the "solution" is sensible reflects his fundamental bias and prejudice, but is not fact based.

      while the scenario appears attractive, long experience shows that such is not necessarily so

      the laws against price manipulation arose out of such abuses

      for example, suppliers could just as easily conspire to withhold supplies and raise prices even further

      Further, there are risks in transporting items like gasoline.

      There are risks of contaminated foodstuffs, etc.

      Cochrane's fundamental problem is that he doesn't understand what is actually the subject of economics, but fortunately others at Chicago have a idea. From a recent interview elsewhere

      The fundamental shift from Smith and Marshall to Robbins is to rid economics of its substance — the working of the social institutions that bind together the economic system. Afterward, economics has turned into a discipline without a subject matter, advocating itself as a study of human choices. This shift has been assisted by what Hayek (1952) criticized as the growing trend of scientism in the study of society, which took mathematical formalism as the only secure route to truth in the pursuit of knowledge. As economists become more and more interested in formalism and related technical sophistication, it becomes secondary whether the substantive questions that they choose to perfect their methods or to illustrate their theoretical models bear any resemblance to the real world economy. By and large, most of our colleagues are not bothered by the fact that what they profess is mainly “blackboard economics.”

      We are now working with the University of Chicago Press to launch a new journal, Man and the Economy. We chose our title carefully to signal the mission of the new journal, which is to restore economics to a study of man as he is and of the economy as it actually exists. We hope this new journal will provide a platform to encourage scholars all over the world to study how the economy works in their countries. We believe this is the only way to make progress in economics.

      Last, and most importantly, for reasons having to do with the irrationality of economic actors and lack of information (as best explained by Soros), it is very doubtful the price mechanism will actually function as Cochrane argues. He assumes a price of $25.00, but the market could just as easily reach $300 a gallon, followed by a price drop the next day to $4.15. This price action may or may not be a good thing.

      If one have the POV that confidence is the key (see Suskind, Confidence Men: Wall Street, Washington, and the Education of a President), then this price movant may have very bad long term consequences.

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    4. If there were no price gouging laws, then there would be
      very high prices, which would lead to
      mega arbitrage, which would lead to
      a mega increase in supply, which would lead to
      mega profit for arbitragers, which would lead to
      mega self-righteous people going on TV to scold arbitragers, which would occur simultaneously with people making too many similar comments on forums, which would lead to (oh by the way)
      a quick end to the initial problem, which would lead to
      a lack of straw men (or women) for politicians (and the like), which would lead to
      the creation of new straw men (or women), which would lead to
      straw men not fuel shortages.

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  17. If New York and New Jersey let people charge whatever they wanted for gas, and prices went up to $25 per gallon then...

    1) The central planners in Trenton and Albany will have realized that they cannot direct the lives of tens of thousands of people from the comfort of their executive chairs and well appointed offices.

    2) Spontaneous order will once again amaze and befuddle those who persist in perpetuating the misguided notion that even the narrowest sliver of our amazing, $15T economy can be managed by 536 people in Washington DC or 1 person in Trenton NJ.

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  18. The price of gasoline in NY and NJ rises to $25. Under normal conditions daily sales amount to about 5m gallons, and inventory at most gas stations is about one week's supply. So the value of inventory rises from around $140m to about $875m. As suppliers from the north east rush in to undercut, the incumbents set about defending their windfall (incentives!). Just at a time when law enforcement is stretched to the limit, I think you'd need a lot more law enforcement.

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  19. If New York and New Jersey let people charge whatever they wanted for gas, and prices went up to $25 per gallon then...

    People in the front of the line would only buy as much gas as they needed instead of filling up their tanks. After the people in the front of the line stopped taking as much gas as they can carry, there would still be gas left for the people at the end of the line. Once people realized that everyone in line could get gas, they would stop hoarding gas and the gas lines would disappear.

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  20. This post is so detached from reality of what I saw and felt during the shortage. Here is what did really happen.

    People would voluntarily stay home. (They were doing this already)

    Rather than allocating gas to people with time on their hands to wait in line, gas would go to people who are really busy. (Why this is a good thing)

    People would voluntarily form carpools. Better, they would advertise for paying carpool mates on Craigslist, and the minivan owner running it would be able to get gas. (Again they were doing this already, not much in Craigslist and more with friends and co-workers)

    People who have emergencies, like wife needing to go to the hospital to deliver a baby, could get gas to do so. (Do you think we New Yorkers are so heartless that make a man wait in line in case of emergency. You could go in the front and get gas if that was the case).

    Gas stations would have bought generators, so they could pump and sell gas at a big profit when the power goes out. Gas stations would buy said generators now. We need to get rid of gouging laws on the generators too, so that gas stations needing generators can pay through the nose to get them, instead of someone who wants to recharge his iphone. (First, the generators that can power gas station have a much larger capacity than the home used ones. Second, The problem was not power outage of gas stations but the disrupted supply line. Most of the gas station in my area had power right after the storm but no gas.)

    People who don't have to go anywhere would siphon their gas and sell it neighbors. Or second-car gas. (No they wouldn't, everyone with a car needs to go somewhere and everyone is afraid that they wouldn't find any gas later so everyone was hording. Even if that was the case, how much gas do you think are in lawn mower and second cars.)

    They'd siphon their lawnmowers too. (We did that, no need for 25$ a gallon price )

    People would rent tanker trucks, drive around the northeast, buy gas and resell it in NY.
    Actually, people might get a bunch of gas cans and drive the gas in from rural areas in the back of pickups. Not sure if this is a good idea, especially for smokers, but it would improve gas supplies. (If you do the math on how much gas you can get to northeast this way vs how much was needed, you would realize that it doesn't work this way. You cannot replace even half of the lost supply this way)

    Exxon would have spent the money for more storage tanks in NJ, ready to sell gas at high prices in an emergency. (No they wouldn't, the investment in the storage tank is far, far more that what you can get from price gouging after an occasional storm. The risk of not having another storm in near future or the government being more prepared and faster to reopen those ports and oil pipes would send away investor away).





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    1. So I live in New Jersey and what I found most fascinating about was the reaction when I stated how annoying it was that the government created the shortage instead of just letting the prices rise.

      Trying to explain the stupidity of price gauging laws to your average college-educated person (who doesn't understand the Law of Supply and Demand) is like trying to explain the futility of laws governing planetary motion to someone who doesn't accept the law of gravity.

      You'd think Supply and Demand were some concept that I cooked up in a drunken stupor. Some intelligent and otherwise well-educated folks (similar to David above) even formulated detailed arguments against "my theory".

      Can you imagine similar laws based on similar level of superstition and ignorance of evolution? Anti price-gouging laws are the modern equivalent of anti-witch laws and yet basic economics is such a threat to the left's agenda that even Nobel-prize winning economists happily hack away on the pages of the NYT.

      -Mercy

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  21. $25!?!? Pickup trucks and gas cans? You're underestimating the colossal stupidity of this policy.

    Try $5 or 6/gallon and tanker trucks.

    A quick Google search shows that the average cost of a tanker truck per mile is $1.40 and those trucks hold 9,000 gallons. But let's be generous and say we spend $2/mile. The cost per gallon to ship a gallon of gasoline 1000 miles is just 22 cents. TWENTY-TWO CENTS.

    When the transportation costs you pay for a $4 gallon of gas are measured in nickels and dimes you have VERY LITTLE room for alternatives when prices are fixed at the price for the ultra-efficient normal distribution system. There was no shortage a few hours away in Pennsylvania and Connecticut and there were plenty of ports within half a day's drive. Shipping gas a few hours further using tanker trucks is a nickel and dime proposition.

    Suppose that pre-Sandy the gross margin at a station is 10% or 40 cents a gallon. So a station owner that could make special arrangements to have gas trucked in for 50 cents per gallon would be losing money on every gallon.

    With a 10% gross margin, a gas station owner would normally make $3600 of gross profit on one tanker truck of gasoline at $4/gallon. At $6/gallon he has an $18,000 of ADDITIONAL incentive to get that gas from somewhere else.

    You don't have know much about trucking to know that for $18,000/truck load there would be a convey of tanker trucks from Texas if they had to. Truck drivers would be three-to-a-cab so that they could drive in shifts. The reality is that the gouging laws didn't even allow gas from three hours away. And remember that this went on for THIRTEEN DAYS.

    Our criminally incompetent politicians and "policy expert" academics put close to 20 million people through two weeks of unnecessary misery when there was plenty of gasoline just hours away that we couldn't even pay a modest toll to have shipped to NY/NJ without threat of criminal prosecution.

    After waiting 4 hours for gas a full SEVEN DAYS after the storm, I seriously considered printing up a document with Chris Christie's ample mug on it along with a brief economics-101 explanation of the insanity of using gouging-laws to create artificial shortages.

    -Mercy





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    1. This was the best so far...
      It's interesting that the left answered so quickly, and the free market answers I was looking for took a while. I thought I was all alone for a few days. Something about time on hands I guess.

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