The Nick Hanauer Debate: Trickledown, Trickle Dee, And Trickle Dumb (Demo)

On July 23, 2014, Richard Levick writes in Forbes Magazine:

As professionals whose work includes a fair amount of crisis management, we’re often asked to articulate the best practices of what has for obvious reasons become a discipline of increased interest to the public. Inevitably, we include, as a fundamental point, the need to anticipate the future: the changing social and business forces that expose our clients to risk and exacerbate their liabilities.

Typically, such crystal-balling occurs within well-defined boundaries. What new regulations threaten new problems? How will a change in some overseas government put the company in harm’s way? Where are plaintiffs’ lawyers choosing to focus their energies?

Yet, for both private and public sector interests, there is also the abiding need for something more – for a discussion of the macro forces that will, for better or worse, transform the entire environment in which businesses and countries operate.

A very public dialogue of this type is occurring this summer, and it’s a dilly. NickHanauer, a successful entrepreneur who co-founded the Second Avenue Partnersventure capital firm in Seattle, delivered a forceful warning in Politico about the dire impact of wealth disparity in the U.S. It was the most widely shared article in that publication’s history – and Politico isn’t exactly Mother Jones. The alarm has apparently struck a chord with all sorts of people.

Hanauer – who, among other marketplace triumphs, was one of the first non-family investors in Amazon – is a confirmed capitalist and true believer in the potential power of capitalism to grow prosperity at every level. But the key word is “potential” as Hanauer’s message is all about how, with the massive disparities that divide the very rich from the rest of us, we’ve only been squandering the power of capitalism since 1980 when those disparities accelerated. According to Hanauer, such wastefulness has perilous consequences in terms of civil unrest, further political polarization, and the speedy isolation of those who are supposed to lead from those who desperately crave leadership.

Hanauer’s stern prognostications for the future are all the more vivid in light of the recent past. In 1980, the top 1% of Americans controlled about 8% of the national income. The bottom 50% shared about 18 percent. “By 2030, at current course and speed, the top 1% will share about 35% and the bottom 50% will share just 6%,” advises Hanauer. “Any capitalist who does not find this trend worrisome is either stupid or a sociopath.”

Hanauer urges the full panoply of corrective measures to reverse what he describes as a “death spiral of falling demand.” These measures include higher minimum wages, progressive taxation, aggressive antitrust enforcement, and more. Such discussions naturally resonate for crisis and risk managers as they ponder the varied alternatives ahead. How should companies and institutions respond if some combination of these policy adjustments is adapted? How, say, might a groundswell of support for skyrocketing minimum wage increases affect you as a retailer or manufacturer?

Conversely, what if no palliatives interpose? Well, in that instance, the risk strategy would likely hinge on worst-case scenarios, from anti-corporate demagogues in Washington to social media attacks randomly targeting industry leaders in diverse sectors, likely combined with on-the-street tactics.

In the context of increasingly foreseeable worst-case scenarios, Hanauer’s detractors have largely missed the point. Their rebukes were widespread and extensive, including a discourse on taxation and labor supply here in Forbes, a publication that Hanauer affectionately dubs “The Trickle-Down Gazette.” Yet these critics have yet to grapple with the intensity of public support that Hanauer has received. At the very least, such support confirms a pandemic anxiety about the future – a future that will be driven as much by perception and symbolism as by substantive argument.

There is no reason to expect that the passions informing the discussion will abate, and every reason to expect sustained media attention. Wealth disparity is not a one-day story. To the contrary, the topic will remain a fixture on the American scene for years to come: in fact, a prolonged battle, a sophisticated and Internet-based confrontation that will define who and what we are as a 21^st century society.

As a new leader in this battle, Hanauer is no mere gadfly or self-designated prophet of doom. As we learned during an extended conversation, his vision is multifaceted and, at least to some extent, practicable. As he noted in Politico, Henry Ford’s proverbial imperative, to pay workers more so they can buy more cars, is a reliable if unscientific place to start.

Yet Henry Ford never had any intention to close the gap between rich and not-so-rich. (If you don’t believe me, ask Walter Reuther.) Hanauer certainly understands that and, in fact, harbors no illusion or even desire to close the gaps inherent in capitalist activity. “It’s therunaway gap that I foresee will lead to disruptions right and left, from the Tea Party to Occupy Wall Street.”

Perhaps the most important point omitted from the public debate over Hanauer’s article is his own definition of what real capitalist growth means. “The orthodox definition of capitalism as efficient is wrong,” he says. “Capitalism doesn’t increase prosperity byefficiently allocating resources. It creates prosperity by effectively creating solutions to human problems. The genius of capitalism is that it provides incentives for people to solve other people’s problems. And growth is the rate at which we solve those problems and disseminate the solutions.”

From a strictly financial perspective, any corrective measure, including those espoused by “progressives” like Hanauer, cannot just be sops to an increasingly alienated populace. They must be based on some force of sound business judgment. Hanauer, for instance, is widely associated with the unprecedented $15 per hour minimum wage now in force in Seattle.

“But that’s $15, not $30,” advises Hanauer. “Just because you believe that increasing the minimum wage will be good for the economy, doesn’t mean you think the higher it goes, the better. $15 is half way between where the minimum wage would be if it had tracked inflation and where it would be if it had tracked productivity gains. When you also take into account the overall affluence of our city, $15 is defensible and, in fact, conservative.”

Meanwhile, current Department of Labor numbers directly link minimum wage increases to strong overall growth.

History provides cautionary lessons with respect to other oft-cited solutions. Remember the 1950s? It was a period of unprecedented growth girded by a progressive tax regime that significantly levelled the playing field. People got rich, but not so rich as to tear the very fabric of national unity. And their businesses just kept growing.

The culture of the 1950s encouraged the belief that money was indeed being adequately reinvested in business and growth. By contrast, in this age of disparity, the executive compensation issue has equal but inverse symbolic importance as an ominous sign (whether true or not in terms of actual numbers) that money is being taken out of business and, instead of reinvested for growth, wasted on those who really don’t need it.

The fly in the progressives’ ointment is that no amount of well-intentioned policy can close the wealth gap; that, no matter what combination of “solutions” are implemented, $100 million will always grow exponentially faster than $1 million. It’s the Iron Law of Affluence.

Yet that law does not necessarily compel our retreat from democracy to feudalism. Shared wealth does not mandate equal wealth, and competition can never be a zero sum game. If history teaches anything, it’s that the more of us who succeed, the more we all succeed.

I reckon that’s what Henry Ford was really talking about.