No one can quite agree on what it means, much less what to do about it, but that hasn’t stopped every announced candidate for U.S. president in 2016 from pledging to focus on it. What is it? The middle class, of course, and addressing its economic anxieties will be among the next president’s most daunting challenges.

Incomes for all but the most affluent in the United States have been squeezed in recent years, and there’s no relief in sight. Many fear that the economy is being hollowed out — that middle-class Americans rely on jobs that can no longer command good wages or aren’t needed at all. It’s a complex problem, and there’s no single answer. What’s required is a strategy that applies different ideas in a coherent way, so that hardworking Americans can once again expect to share in the country’s success.

Some of the pressure on the middle class comes directly from the crash of 2008 and its prolonged aftermath — but not all. Living standards for the broad middle class have been rising sluggishly for years, grinding away at America’s instinctive economic optimism. Parents are less confident that their children will do better than they did. The U.S. once stood for universal opportunity and mass affluence; those claims no longer seem solid.

What went wrong, and what’s to be done? One point worth emphasizing: Economic growth is essential. Over the long run, middle-class Americans’ incomes will depend on two things: raising growth in productivity and equipping workers to do the jobs that a growing economy most values.

It shouldn’t need saying that growth is what counts, but the term “middle-class economics” — an imprecise yet useful phrase popularized by President Obama — invites an undue focus on who gets what. Obama and other Democrats tend to talk more often about rising inequality than about slow growth. It’s a short step to the fallacy that middle-class Americans are falling behind because the 1 percent is enriching itself at their expense.

No question, rising inequality is a problem — both in its own right and because it’s linked to slow growth. Policies to address it are needed. Tax reform, to take the most obvious example, should strive to promote fairness as well as growth. But it’s important to understand the limits to what redistribution can do.

In the end, the size of the U.S. economy will overwhelm the question of who gets what. A vibrant, fast-growing economy is the necessary condition not just for higher living standards in the middle class, but also for a more generous and effective safety net and for policies (such as employment subsidies) that improve the incomes and prospects of the working poor.

Granted, there are limits to what progrowth policies can achieve. Over the century to 2007, growth in U.S. gross domestic product per head was roughly 2 percent a year, sufficient to double living standards every 35 years. In the 21st century, growth will almost certainly be slower. For one thing, demography can’t be denied. The labor force will be a shrinking share of the population. Also, growth in the 20th century was powered by a dramatic widening of access to education, a revolution that can’t be repeated. And maybe the next waves of innovation will be less productive than what came before. Best to keep ambitions for the future realistic.

Even so, policy errors of commission and omission are holding the economy below its potential — and the gains from correcting them could be big.

Progrowth tax reform, judicious public and private investment, smarter regulation, and vigorous competition would move the economy closer to what’s achievable. Better schools and new educational services would push that ceiling higher. Completing reform of the health care system could spur productivity in almost a fifth of the economy while strengthening the social safety net at the same time. Measures to discourage excessive debt and promote saving for retirement would help more Americans to feel financially secure.

An economic strategy focused on the middle class (or, as Hillary Clinton prefers to call them, “everyday Americans”) could dispel the current pessimism and make rising and widespread affluence a reality once more. The challenge is to be sufficiently ambitious, and to get on with it.

Where to start? With the revival of U.S. business dynamism — the engine of growth and higher living standards.

America means business — or used to. Time was anyone with a good idea and some start-up money could take a chance and open a business. That risk-taking spirit kept millions of middle-class Americans upwardly mobile, with jobs that let them buy homes, raise families, send the kids to college and retire comfortably.

That’s less true today. Americans are starting fewer businesses, even in Silicon Valley. Established companies aren’t reinvesting profits, instead spending almost all their earnings on dividends and share buybacks. Unless your company looks like the next Uber, financing is also harder to find, whether from banks, venture capitalists or the markets.

This fading of the U.S.’s risk-taking culture could help explain why it took six years for the economy to recoup the 7.6 million jobs it lost during the recession. Even now, the U.S. remains 3 million jobs short of full employment. More than is usually recognized, the middle-class squeeze reflects a slackening of entrepreneurial zeal.

A thriving economy is a turbulent economy, with lots of new businesses that start and fail — or go on to be the next Apple or Google. Companies less than five years old and with fewer than 20 employees are especially important. They are the primary source of net new jobs, but they aren’t the employment engine they once were:

As business bounces back, the picture will improve, but there’s a longer-term problem. New firms accounted for as much as 16 percent of all companies in the late 1970s. By 2011, that share had declined to 8 percent. What’s more, start-ups on average are creating fewer jobs. Last year, companies spent more than $900 billion to repurchase shares and pay dividends — the highest on record.

Trouble is brewing when the U.S. economy experiences a 30- year decline in business dynamism (the rate at which jobs are created and destroyed as companies are born and die) alongside sluggish investment. It’s a formula for less innovation, diminished competition and slower growth.

How to energize this vital part of the economy? Here are some ideas.

• State and local governments should take a hard look at their proliferating rules for occupational licensing. Public safety is unlikely to require that manicurists, for instance, receive 600 hours of training and show proficiency in English. More than 30 percent of U.S. workers now need a license to do their job; in 1970, it was just 10 percent. These rules make work for inspectors and stifle enterprise. Easing or eliminating them would encourage start-ups and increase competition.

• Congress should grant more visas to skilled immigrant entrepreneurs. They are twice as likely to start companies as native-born Americans. The politics of immigration are thorny, to say the least, but visas for entrepreneurs who come to the U.S. with money to invest shouldn’t be controversial.

• Securities regulators could help new businesses raise money by issuing long-delayed rules to allow crowdfunding of up to $1 million a year — much as they recently allowed lightly regulated mini-IPOs of up to $50 million a year for medium-sized companies. This would especially help young entrepreneurs with a lot of college debt.

• Corporate boards should try to get the buyback addiction under control. Stock-based compensation plans make it too rewarding for CEOs to spend company cash on dividends and share repurchases. Shareholders benefit from such payouts, but a better balance can be struck. Corporate managers should not be rewarded for underinvesting in R&D, technology and employee training.

It’s always possible that the U.S.’s business culture has turned against risk taking for good. But it’s far more likely that misguided regulation, skewed managerial incentives, anti- immigration fever and the financial-crisis hangover are combining to depress business vitality. Cure those ills, and American enterprise will rise again. The middle class will rise right along with it.

 

For more columns from Bloomberg View, visit http://www.bloomberg.com/view. This was the first in an anticipated series of editorials about what a strategy for the middle class might look like.