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If you are a state governor or big city mayor and want to cut taxes, don’t expect those tax cuts to automatically boost economic growth and pay for themselves. Those tax cuts might not boost growth much at all, actually, depending on how you do it. And if they do boost growth, it might take awhile. So you need to think about why you are cutting taxes.
So how about this: Cut top tax rates to attract star scientists to your state or region. Why would this be a good idea? Well, star scientists may well be top one-percenters who’ll buy a big house, a nice car, lots of pricey electronics. But that is hardly the most important reason. From the new paper “The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists” by Enrico Moretti and Daniel Wilson:
… more fundamentally, star scientists are an important group of workers because their locational decisions have potentially large consequences for local job creation. Unlike professional athletes, movie stars and rich heirs – the focus of some previous research – the presence of start scientists in a state is typically associated with research and production facilities and in some cases, with entire industries, from biotech to software to nano-tech.
And lower taxes, the researchers find, can help attract those valuable star scientists:
For taxpayers with income at the 99th percentile of their state, we find a long-run elasticity of about 1.7: a 1% decline in after-tax income in state d relative to state o driven by a change in the MTR for the top 1% of income earners is associated with a 1.7 percent increase in the number of star scientists who leave state o and relocate in state d in the long-run. As an illustration, our estimates imply that the effect of New York cutting its marginal tax rate on the top 1% of earners from 7.5% to 6.85% in 2006 was 12 fewer star scientists moving away and 12 more stars moving into New York, for a net increase of 24 stars, a 2.1% increase. … Overall, we conclude that state taxes have significant effect of the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.
Twelve new scientists? That’s it? Hardly seems worth it. But if those few transfers start what becomes a mini-Silicon Valley or tech cluster in your state, it just might be. Seattle, for instance, got lucky when two former residents decided to move back in 1979, as Fast Company tells the tale:
But in 1979, Seattle was the last place you’d think to find a growth business. It had more in common with today’s Rust Belt than Silicon Valley—its economy centered on a declining manufacturing base and the lumber industry, both of which were shedding jobs. Starbucks was just a tiny local company with three stores serving standard-issue coffee. The Economist had labeled Seattle the “city of despair” and a billboard appeared saying “Will the last person leaving Seattle—turn off the lights.’
So what changed? Two Seattle natives decided to move their 13-employee company there in 1979 from Albuquerque. The two natives were Bill Gates and Paul Allen. And the company was Microsoft. Is it possible to ascribe Seattle’s entire economic trajectory to just one company? Well, today over 40,000 people work at Microsoft in the region, and 28,000 of them are highly paid engineers. Approximately 4,000 businesses have been started by Microsoft alumni, many of which are in the region. Just one of these companies, RealNetworks, employs 1,500 people. Expedia, originally a Microsoft spinoff, employs another 14,000. The Gates Foundation itself has another several hundred employees. The economist Enrico Moretti estimates that Microsoft’s growth has directly created 120,000 regional jobs for services workers with limited educations (cleaners, taxi drivers, carpenters, hairdressers, real estate agents, etc.) and another 80,000 jobs for workers with college degrees (teachers, nurses, doctors, architects).
The growth of Microsoft also influenced Jeff Bezos to locate Amazon there in 1994 when he was looking for a city with ample tech talent to build an e-commerce company. Today, about 17,000 of Amazon’s 51,000 employees live and work in the Seattle region. If Microsoft had not been there, Bezos could easily have migrated elsewhere. The day-to-day needs of these 17,000 Amazon employees have given rise to another 85,000 skilled and unskilled service jobs locally. That’s another 100,000 jobs.
It’s hard to imagine that two people transplanting their then-tiny firm to their hometown could change a city’s economic history for decades to come. Yet this phenomenon isn’t uncommon. You can see similar impacts with Dan Gilbert relocating Quicken Loans to downtown Detroit and Tony Hsieh moving Zappos to downtown Las Vegas—these effects are simply easier to see because these firms already have thousands of employees. In Microsoft’s case the company had yet to grow and mature.
Love that story. But there is a caveat: “Of course, taxes are not the only factor that determines the location of star scientists. Indeed, we find no cross-sectional relationship between state taxes and number of star scientists as the effect is swamped by all the other differences across states. California, for example, has relatively high taxes throughout our sample period, but it is also attractive to scientists because the historical presence of innovation clusters like Silicon Valley and the San Diego biotech cluster. Indeed, California does not lose stars to Texas, even though Texas has no personal income tax and a low business tax rate.” And darn California’s temperate Mediterranean climate! Oh, you might want to take a look at regulation, too.
So the Fed’s fancy, 19-factor Labor Market Conditions Index — Janet Yellen’s jobs dashboard — “fell into negative territory in March and April for the first time since a brief spell in 2012,” according to Goldman Sachs. (See above chart.)
I mean, that hardly seems like good news. Nor maybe is a weakening in the LMCI super-surprising given the slow GDP start to the year. But if it is bad news, how bad is it? Is it losing-jobs bad? Not so bad, argues an upbeat Goldman. The firm’s own labor market tracker still “remains consistent with clearly above-trend growth.” And the Kansas City Fed’s job market index, specifically the part showing momentum, “remains in expansionary territory despite a recent decline.” But this is most persuasive to me:
… the most recent raw readings in all three of the highest-profile labor market indicators also cast doubt on the idea that the US labor market has entered a contraction. These include nonfarm payrolls (up 223k in April), the unemployment rate (down 0.3 percentage points in the past three months), and initial jobless claims (down to the lowest 4-week average since 2000).
For what it’s worth, JPMorgan seems to agree with that overall assessment. In a morning note today: “The favorable news in the claims data suggests that the weak growth from the past few months has not caused an increase in layoffs or any significant deterioration in the labor market.”
Fingers crossed …
Breaking! There’s a major disaster with possible public policy implications! Scramble the hot takes! (I know I often do.)
Here we go: “Amtrak needs help,” asserts the New York Times editorial page. But maybe the “world will lose nothing if the government winds down Amtrak by selling off its profitable lines in the Northeast to a competently-managed private company and scrapping the rest,” as the Washington Examiner argues. Then again, the Center for American Progress claims “Congress’ refusal to acknowledge Amtrak’s predicament has made American trains so inefficient that it’s actually having a dampening effect on ridership growth.” Yet National Review’s Ian Tuttle counters that “Amtrak’s history of fiscal chaos suggests that the service’s problems are not the product of congressional stinginess, but of a faulty assumption (that America needed a passenger rail service) compounded by decades of mismanagement.”
Just privatize it! (Probably won’t happen.) Just throw more money at it! (Probably shouldn’t happen.) Are there any other options? Transportation blogger Alon Levy offered a different path forward in a fascinating 2012 blog post where he sketched out a medium-term future that depicted a profitable Amtrak of surging ridership and high-speed rail. Here are its guts:
Amtrak had initially proposed to spend $117 billion on implementing high-speed rail on the Northeast Corridor between Boston and Washington, but backlash due to the plan’s high cost led to a scaling back behind the scenes. After the regulatory reforms of 2013, a new team of planners, many hired away from agencies in Japan, France, and Switzerland, proposed a version leveraging existing track, achieving almost the same speed for only $5 billion in upfront investment. They explained that the full cost of the system would be higher, but service could open before construction concluded, and profits could be plugged into the system.
To get the plans past Congress, President Barack Obama had to agree to limit the funds to a one-time extension of Amtrak’s funding in the transportation bill S 12, which would give it $13 billion for expansion as well as ordinary operating subsidies over six years. To defeat a Senate filibuster, the extension had a clause automatically dismantling Amtrak and selling its assets in case it ran out of money, leading to the first wave of resignations by longtime officials. …
Despite assurances that both the cost and the ridership estimates were conservative, the program was plagued with delays and mounting costs, and to conserve money Amtrak needed to cancel some of its money-losing long-distance routes and engage in a controversial lease-back program selling its rolling stock to banks. The modifications required to let the Shinkansen bullet trains decided for the system run in the Northeast pushed back the completion of the first run from the middle of 2015 to the beginning of 2017 … 2017 was also the last year in which Amtrak lost money. … To simplify its temporary deals with track owners in Connecticut and Massachusetts, it made a complex deal with the Northeastern commuter railroads in which it took over operations, with existing amounts of state money lasting until 2022. The primary purpose was to allow rapidly moving workers between divisions, away from commuter trains, which were being streamlined to reduce staffing, and toward the growing high-speed rail market. A similar deal was made in California, where Amtrak leveraged its operation of commuter trains in the Los Angeles and San Francisco Bay Areas and its fledgling profits to take control of the California High-Speed Rail system, whose initial operating segment opened in 2019.
Although industry insiders believed that the takeover was intended entirely to streamline labor issues, in 2020 Amtrak announced a reorganization, in which commuter trains within each metropolitan area would be run without respect for state boundaries or previous agency boundaries. Starting with the preexisting fare union with the MBTA, from which it bought Boston’s commuter rail operations, it entered into fare union and schedule coordination agreements with the major cities in the Northeast and California, allowing the local commuter rail lines to act as complements to the urban subway networks. …
Together with aggressive construction of extensions and long-desired urban commuter rail projections, usually at much lower cost than advertised in the 2000s and 10s, the changes led to a rapid increase in ridership. Together with the commuter lines, Amtrak’s ridership was 700 million in 2020. By 2030, it had risen to 4 billion. By then, high-speed lines opened along more corridors, connecting from the Northeast to Albany, Buffalo, Pittsburgh, and Atlanta; from California to Phoenix and Las Vegas; and in the Midwest from Chicago to Cleveland, Detroit, and St. Louis. Most, though not all, are operated by Amtrak, with seamless inter-railroad operation through trackage rights, and in many of these cities, beginning with Chicago, the local transit agencies engaged in the same commuter rail modernization afforded to the Northeast and invested in additional rapid transit or light rail lines. The effect on the share of commuters using public transportation to get to work was large. In the Philadelphia region it rose from 12% in 2020 to 36% in 2040, in the Chicago region it rose from 15% to 39%, and in the Los Angeles region it rose from 9% to 40%.
All that by the year 2042! Now I don’t know to what degree all or any of what Levy outlines is practical or even possible. And, yes, it seems like a highly technocratic approach. But it doesn’t seem unreasonable that a far more logical and rational rail system is a possible. Here is Reihan Salam on the above idea:
One of the key moves in Levy’s imaginary Amtrak revival was a takeover of commuter rail services in the Northeast and California, followed by an aggressive rationalization of route structures and labor practices as the commuter rail services started to be run without respect to pre-existing agency boundaries. In the New York metropolitan area, for example, what had been Metro-North trains could be used on NJ Transit routes and vice versa, thus improving efficiency. Levy’s scenario might seem too good to be true, but the political foundations of his turnaround — reform of the labor regulations that have stymied productivity gains in the passenger rail industry, the use of a trigger that would dismantle the system if it failed to meet concrete goals — are worthy of consideration.
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Key point to remember: Older people have lower jobless rates, so do educated ones. And the labor force participation rate probably ain’t coming back. From the Chicago Fed:
Over the past 15 years, labor force participation (LFP) has steadily declined. While some of this decline is likely due to the weak economy, the bulk of it reflects demographics and other long-running trends. It is perhaps less well appreciated that the magnitude (and even the sign) of the change in the trend LFP rate differs significantly across demographic groups. These divergent trend rates have changed the composition of the labor force in a manner that should lower the natural rate of unemployment. For example, the trend LFP rate has fallen especially rapidly for teens—a group that always has very high rates of unemployment. Likewise, the share of workers without any college education—another group with higher-than- average unemployment—has also fallen significantly over time. When we account in some simple ways for these demographic and educational changes, we find support for a natural rate at or just slightly below 5% at the end of 2014. Moreover, we estimate that absent major new developments, these forces will further lower the natural rate to around 4.4% to 4.8% by 2020.
And the Wall Street Journal adds:
The findings of the Chicago Fed paper help bolster the case made by the bank’s president, Charles Evans, that raising interest rates is something that should not happen soon. While most Fed officials expect to start boosting borrowing costs this year, Mr. Evans has said the central bank should hold off until 2016. With inflation so far under the Fed’s 2% target, he sees no urgency to act, and worries moving too soon will make it harder to get back up to that goal.
They do indeed that case.
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Listening to way some pessimists talk about the US economy, one would be forgiven for thinking Americans are no better off today than back in 1980. The issue of rising living standards is the subject of the latest IGM Forum survey from the University of Chicago’s Booth business school. As the above chart shows, most economists think we are doing better than the official income numbers suggest.
Now that bit about the “9% cumulative increase in real US median household income since 1980″ refers to the Census Bureau’s data where it measures “money income.” The measure includes cash income from private sources — your paycheck and investment income, for instance — and government cash benefits such as Social Security and unemployment insurance benefits.
But it does not include noncash benefits such as food stamp, Medicare, and Medicare. And it is a pretax measure. Now some broader measures that include the stuff Census does not find median income up more like 40 percent. So while the rise in living standards may have slowed, they are up a lot more than 9 percent. Indeed, one economist comment, by José Scheinkman, thankfully mentions this: “Burkhauser et al. (2011) show faster growth in median post-tax, post-transfer size-adjusted household income including health ins. benefits.” Also lots of talk about about improper inflation measurement.
But what is really interesting about the IGM survey are the economist comments that go beyond income measures:
“I think it’s more likely than not given secular improvements in healthcare, longevity, technology, and air quality.” – David Autor
“So much of our day is spent doing things that didn’t exist back then that it’s hard to believe the #s fully account for new products” – Austan Goolsbee
“Depends how “better off” defined. Technology (eg smartphones), medical services, lower crime, etc have increased quality of life broadly.” – Bengt Holstrom
“No one I know would rather face the 1980 bundle of goods (at 1980 prices) than current bundle, at anywhere near the same incomes.” – Anil Kashyap
“Difficult question, but life expectancy is up from 74 to 79 years – seems like a substantial gain not reflected in real median income.” – Jonathan Levin
“Due to measurement issues e.g. prices, family composition, measures of income, prob understates by >1% py. Add to that price quality bias.” – William Nordhaus
But there were a few folks who took the other side of the trade:
“There are gains in health etc. not measured in earnings but also psychological costs of growing inequality and a sense of disappointment.” – Abhijit Banerjee
“Iphones weren’t available then suggesting understatement. But both partners often work, which is stressful. This suggests overstatement.” – Oliver Hart
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The co-founder of Intel and predictor that the number of transistors per square inch of a single silicon chip would double every year offers this policy advice in the New York Times today:
I’m disappointed that the federal government seems to be decreasing its support of basic research. That’s really where these ideas get started. They take a long time to germinate, but eventually they lead to some marvelous advances. Certainly, our whole industry came out of some of the early understanding of the quantum mechanics of some of the materials. I look at what’s happening in the biological area, which is the result of looking more detailed at the way life works, looking at the structure of the genes and one thing and another. These are all practical applications that are coming out of some very fundamental research, and our position in the world of fundamental science has deteriorated pretty badly. There are several other countries that are spending a significantly higher percentage of their G.N.P. than we are on basic science or on science, and ours is becoming less and less basic.
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April retail sales were flat, not up as economists had predicted. Here is JPMorgan economists Michael Feroli:
The April retail sales report was not pretty. Total retail sales were unchanged last month, and the core measure (ex-food services, autos, gas, and building materials) was also unchanged. Revisions were minor and largely offsetting. The retail sales report has generally been disappointing ever since December, and the three-month average annualized growth rate for core retail sales is now -0.7%, the worst of the expansion. The disappearance of consumer spending in early 2015 has now become even more mysterious, as some of the excuses shopped around earlier, like bad weather, are looking more stretched with the passage of time. With today’s number, real consumer spending looks to be unchanged in April, which is obviously not a great start to the quarter. We will revisit our Q2 GDP call after this morning’s retail inventories number.
As it is, the firm is looking for 2.5% GDP growth in 2Q, hardly a strong snapback after a very weak first quarter. Many thought 2015 would see a step up in economic activity. The Two Percent Economy become the Three Percent Economy. Not happening so far. Job creation is also lower than last year with 775,000 net new jobs this year vs. 900,000 in the first four months of 2014.
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Yesterday was a bad day for the big Pacific trade deal as “Senate Democrats on blocked consideration of giving President Obama power to accelerate a broad trade accord with Asia, a rebuke that the president helped bring on himself,” the New York Times writes. No, the deal is not dead but the timing is getting funky with summer almost here — not mention the political difficulties of the approaching election year. Beyond that, there is a fascinating Democrat vs. Democrat dynamic developing, which the trade troubles reflect. This Politico piece on the party’s internal struggles is amazing:
In the fourth quarter of his presidency, without another race to run, Barack Obama has gone to war with what he sees as an out-of-touch, stuck-in-old-thinking Washington liberal elite — Elizabeth Warren’s the most famous member, but AFL-CIO president Richard Trumka and a coterie of Hill Democrats are up there with her. Obama advisers say the president sees Democratic opponents of his trade agenda as just as detached from reality as Republicans in Congress who held four dozen Obamacare repeal votes or turned raising debt ceilings and fiscal cliffs into government crisis carnivals. … For Obama, there’s a direct connection between bringing the Democratic Party into the 21st century on trade and his sense of himself as ushering in a generationally transformative foreign policy. Aides say Obama views both ideas as pragmatic, dealing with the reality in front of him. Both are about engagement. Both are about what he says is an orientation toward the future instead of sticking with the ways of the past. You can’t be a progressive on trade, he believes, unless you’re willing to talk about a new way to make trade actually work.
Well, there goes the GOP theory that Obama’s trade push is just some elaborate charade since someone as far left as Obama couldn’t possible want a free trade deal. This piece make Obama out to be more technocratic, third-way guy than hard lefty ideologue. More Tony Blair than Ed Miliband, you might say. At least on this issue. And certainly not Bill de Blasio. In the WSJ, William Galston has a must-read take on the Dems economic split. Here’s a bit: “Democrats on the left focus on the conservative political mobilization of recent decades; policies that undermine labor unions; failed financial regulations; corporate self-dealing; and one-sided trade treaties that disregard the interests of ordinary Americans. Center-left Democrats emphasize technological change and globalization (as distinct from treaties); a mediocre educational system; a slowdown in innovation; and the failure of the public and private sectors to invest adequately in the future.”
The Inequality Democrats vs. the Innovation Democrats. Or given the recent UK elections, maybe the Miliband Democrats vs. the Blair Democrats. Maybe the former would raise the top income tax rates, eliminate the capital gains tax preference, break up the banks, reign in executive pay, increase Social Security spending and taxes, support public unions, especially teachers. Protectionism on trade. On the redistribution vs. growth debate, a heavy thumb on the redistribution side. The latter would maybe support trade, eliminate high-end tax breaks rather than raising tax rates, support charter schools, lowering corporate tax rates, emphasize boosting public and private innovation investment. On the redistribution vs. growth debate, a heavy thumb on the growth side.
The Inequality Democrat agenda might be best represented by the recent Center for American Progress report on “inclusive prosperity.” The Innovation Democrats might look to this new report from the Information Technology and Innovation Foundation, written by Robert Atkinson, formerly of the Progressive Policy Institute, a Bill Clintonite, New Democrat think tank It has the rather pointed title, “Inclusive Prosperity Without the Prosperity: the Limits of the ‘Middle-Out’ Strategy.” And it has this handy chart summing up the two views:
Right now, likely party presidential nominee Hillary Clinton — looking to stave off a primary challenge — seems to be going the Full Middle Out. But if elected, hopefully she would be more innovationist, though one could see how this could also descend into cronyism. Pro-business vs. pro-market and all that. But I really like innovation as the lens through which we judge public policy.
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The Great Recession ruined everything, including our economic data. This from Barclays bank:
The advance estimate of Q1 15 real GDP growth came in well below expectations at 0.2%. While we attribute a portion of this underperformance to transitory factors including above-average snowfall and the West Coast port strikes, a weak Q1 seems to be the new pattern for US GDP growth.
We find that Q1 GDP growth has systematically underperformed since the 2008-09 recession, with growth in Q1 averaging 1.9pp less than the remaining quarters in the same calendar year. This residual seasonality in US GDP data was apparent prior to the crisis but has become significantly more pronounced since.
The residual seasonality in GDP can be traced back to the monthly source data the Bureau of Economic Analysis uses to prepare the quarterly National Income and Product Accounts. We believe the Census Bureau’s monthly Value of Construction Put in Place Survey, source data for nearly 20% of quarterly GDP estimates, is a major source of this pattern, as are exports and federal defense spending.
After removing residual seasonality we find that growth in Q1 15 would have been reported at 1.8% instead of the 0.2% in the BEA’s advanced estimate. Since 2010, our procedure to remove residual seasonality boosts growth by an average of 1.7pp in Q1 while reducing growth in remaining quarters by an average of 0.6pp, with the largest reduction occurring in Q3.
The boom and bust cycle the construction industry experienced over 2005-10 may have made it difficult for the Census Bureau to accurately seasonally adjust construction spending data. Annual revisions to the Value of Construction Put in Place Survey and GDP may correct a portion of this trend, but absent a major methodological shift, we expect residual seasonality to persist for some time. In the meantime, GDP data will be less informative.
The residual seasonality in US GDP data is one reason why we continue to put significant weight on other high frequency economic indicators, including the monthly employment report and ISM surveys. These indicators are easier to prepare, are revised less frequently, and are an important tool for taking the pulse of the US economy in real time. We see them as likely to be more informative about the pace of activity and state of the economic cycle than GDP.
So believe the jobs numbers, not the GDP numbers.
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Actually, he has a broad economic plan, which he outlines in the Wall Street Journal today. Christie would cut taxes:
Let’s lower the rates for every American by simplifying the income-tax system to just three individual income-tax rates, instead of the current six. The top rate should be no higher than the 28% set in the country’s last major successful tax-reform effort—the Bradley-Gephardt reform during the Reagan era. And the bottom rate should be a single digit. We should eliminate or modify enough deductions, credits and targeted provisions in the code—both on the personal and the corporate side—to ensure that the plan, combined with other measures I am proposing, is revenue-neutral and doesn’t materially increase the deficit. One approach in this regard would be to cap the total amount of deductions and credits that an individual or married couple could take. The deductions for charitable contributions and for interest on home mortgages—at least for a first home—should remain intact.
Beyond that Christie would try to make regulation “rational, cost-based and used only to implement actions that are explicitly authorized by statute.” He would “build the Keystone XL pipeline, lift the ban on crude-oil exports, create fairness in the way the energy industry is regulated … .”
So pretty much what one might expect from a GOP presidential candidate these days. But there were a few interesting things in the piece. First, Christie says he does not want his tax plan to be a big revenue loser. (Good, though I would be more impressed by specificity on the base broadening and a hint at the distributional analysis. The static analysis of the thing, sans pay fors, will be absolutely brutal.) Second, he would eliminate payroll taxes for young workers. (I like the thinking here, the generational equity, but payroll tax cuts raise tough political issues given their link to entitlements.) Third, he would increase basic research spending. (Yes, please.) Also, unfortunately no tax relief if you only pay payroll taxes. I would also prefer — shock! — an expansion of the child tax and earned income tax credits. Also interested if there is more there somewhere on expensing and investment taxes. Then there is this graf:
Finally, these past six years have seen a weak economy combined with a set of monetary policies that were geared for the wealthy, exacerbating the very problem the left loves to harp on: income inequality. The best way to address income inequality is to nurture overall growth. Incomes for most Americans grew during the economically healthy 1980s and ’90s, and inequality increased during the anemic 1970s.
I think that is a misreading of both monetary policy — would the middle class be better off with EU-level jobless rates — and of the forces driving income inequality. No mention of globalization or automation. And if a rising tide is not lifting all boats because some are anchored or full of holes, then faster alone growth won’t help much. Me:
And, more important, what is the right set of policies to avoid such a lopsided world and create one where growth and opportunity is more widely generated and available? How do we patch the holes in all those boats (rather than anchor the ones that are rising)? I would argue the economy demands radically reformed education, increased economic dynamism, and a modernized safety net, among other ideas. (Bonus: All these ideas are intrinsically good ones anyway.) These are the questions the GOP 2016ers should be asking themselves and their policy advisers.