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The challenge of addressing middle-class economic anxiety

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(Bloomberg View) — 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.

The Global Middle Class

Incomes for all but the most affluent in the U.S. 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. This is the first in a series of editorials on what such a strategy might look like.

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 Barack 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 pro-growth 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.

Secular Stagnation

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

Pro-growth 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, and the subject of the next editorial in this series.