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Building shield

Some people might dismiss the entrepreneur Nick Hanauer as a member of the infamous ‘one per cent’ – that select group of wealthy Americans who now take almost all the benefits of US economic growth.

Writing for Politico, he sets the record straight – insisting that he in fact a member of the 0.01 per cent of proper billionaires and, what’s more, “a proud and unapologetic capitalist”:

“I have founded, co-founded and funded more than 30 companies across a range of industries—from itsy-bitsy ones like the night club I started in my 20s to giant ones like Amazon.com, for which I was the first nonfamily investor. Then I founded aQuantive, an Internet advertising company that was sold to Microsoft in 2007 for $6.4 billion. In cash. My friends and I own a bank… 

“I have been rewarded obscenely for my success, with a life that the other 99.99 percent of Americans can’t even imagine. Multiple homes, my own plane, etc., etc.”

In the process of building his business empire he will have provided employment for thousands of his fellow Americans. And yet he’s no fan of ‘trickle-down’ economics – the idea that if we let the rich get richer, the rest of us will benefit too.

In America, it hasn’t worked out that way. The rich have certainly got richer, but the incomes of ordinary working people have stagnated, pushing many of them into debt. Nick Hanauer isn’t happy about that – not out of some bourgeois guilt complex, but because it’s bad for business:

“The model for us rich guys here should be Henry Ford, who realized that all his autoworkers in Michigan weren’t only cheap labor to be exploited; they were consumers, too. Ford figured that if he raised their wages, to a then-exorbitant $5 a day, they’d be able to afford his Model Ts.”

If, however, the predominant business model is one of grinding down wages to the minimum that employers can get away with, then you can kiss goodbye to your domestic customer-base:

“If a worker earns $7.25 an hour, which is now the national minimum wage, what proportion of that person’s income do you think ends up in the cash registers of local small businesses? Hardly any. That person is paying rent, ideally going out to get subsistence groceries at Safeway, and, if really lucky, has a bus pass. But she’s not going out to eat at restaurants. Not browsing for new clothes. Not buying flowers on Mother’s Day.”

Of course, businesses can always sell stuff to the rich instead – but the trouble is that when income is concentrated among fewer people less of it gets spent:

“I earn about 1,000 times the median American annually, but I don’t buy thousands of times more stuff. My family purchased three cars over the past few years, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men… I guess I could have bought 1,000 pairs. But why would I?”

The rich make up some of the slack by buying luxury goods, but mostly the money is stashed away into assets like property – which at best doesn’t do much for growth and, at worst, can set off speculative bubbles.

Trickle-down theorists do still have one card to play – the growing proportion of overall income tax revenues now paid for by the rich. I’ve dealt with this point before on the Deep End, I’ll just add that if these self-styled free-marketeers need the state to facilitate the downward trickle of wealth, then they’ve lost the argument.

Nick Hanauer believes that the only way to build prosperity is from the “middle-out”. But if wages do go up for ordinary working people, won’t that mean fewer jobs for them?

Not necessarily:

“During the past three decades, compensation for CEOs grew 127 times faster than it did for workers. Since 1950, the CEO-to-worker pay ratio has increased 1,000 percent, and that is not a typo. CEOs used to earn 30 times the median wage; now they rake in 500 times. Yet no company I know of has eliminated its senior managers, or outsourced them to China or automated their jobs. Instead, we now have more CEOs and senior executives than ever before.”

These individuals would no doubt invoke the L’Oréal principle – “because I’m worth it” – in their defence. But perhaps ordinary workers might be worth it too if more employers chose to pursue business models that make the most of a well trained and properly motivated workforce.

Of course, it’s up to each business to choose which strategy to follow, but it’s also up to voters to choose which political party best protects their interests.

4 comments for: Trickle-down economics is dead, let’s build prosperity from the middle-out instead

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