JUDY WOODRUFF: We turn now to the continuing debate about how to fix this country’s economic problems. Some say we need to reduce income inequality, while others emphasize a need to create more growth and opportunity to climb up the ladder.
Our economics correspondent, Paul Solman, has been running into variations on those themes throughout his recent reporting on the battle over raising the minimum wage.
Tonight, he gets a different take on that debate, what you might call top-down economics vs. middle-out. It’s part of his ongoing reporting on Making Sense of financial news.
PAUL SOLMAN: In Seattle this spring, a win for advocates of a $15-an-hour-minimum wage, nearly double the federal minimum, as the city council voted unanimously in June to phase in $15 over several years.
Leading the charge were socialist activists, labor unions, and one most unusual suspect, billionaire venture capitalist Nick Hanauer.
NICK HANAUER, Second Avenue Partners: Stock certificate number seven from Amazon.com, from the IPO.
PAUL SOLMAN: A philosophy major who went to work in the family pillow company, where he still is CEO, Hanauer first made his fortune as investor number seven in Amazon, then with a Web ad firm.
NICK HANAUER: Which we sold to Microsoft for $6.4 billion in 2007.
PAUL SOLMAN: At which point Hanauer began publicizing his progressive views, as in this edgy 2012 TED talk.
NICK HANAUER: It is astounding how significantly one idea can shape a society and its policies. Consider this one. With taxes on the rich go up, job creation will go down. If it was true, today, we would be drowning in jobs.
NICK HANAUER: Thank you.
PAUL SOLMAN: The central tenet of Hanauer’s economic philosophy, growth isn’t top-down or even bottom-up, but, as he puts it, middle-out.
NICK HANAUER: The fundamental law of capitalism is, if workers don’t have any money, businesses that — don’t have any customers. A thriving middle class is the source of prosperity in capitalist economies, not pouring money into rich people, right, which simply makes rich people richer.
PAUL SOLMAN: But trickle-down economics is true to some extent, right? I mean, rich people get money, and then they have got to either spend it or, ultimately, like Buffett or Gates here in Seattle, give it away.
NICK HANAUER: But there is this upper limit on what we can spend. I drive a very nice car, but it’s only one car. I don’t own 1,000, even though I earn 1,000 times the median wage.
We have run a 30-year experiment in what happens to an economy when you structure it to benefit the few, at the expense of the many. And I would argue that for most people that experiment hasn’t gone very well.
RICHARD EPSTEIN, New York University School of Law: He doesn’t know what the definition of trickle-down economics is.
PAUL SOLMAN: Noted libertarian law professor and economics fundamentalist Richard Epstein, the other voice in this story.
RICHARD EPSTEIN: If it turns out that rich people hire poor people and both of them are better off in the exchange, you can start to call this a trickle down if you wanted. I would call it an overall social improvement whereby two people are made better offer and nobody else is going to be made worse of.
PAUL SOLMAN: But 80 percent, 90 percent of this country isn’t any better off than it was 30 years ago.
RICHARD EPSTEIN: This is not a function of market behavior. It is a function of the regulatory apparatus which makes it impossible to have these mutual gains.
PAUL SOLMAN: So your argument is that the reason incomes have stagnated in this country over the last 30, 40 years is largely due to increased regulation?
RICHARD EPSTEIN: Yes. You have to worry about family leave. You have to worry about anti-discrimination. You have to worry about explicit employment taxes. You have to worry about Obamacare. You have to worry about OSHA. And then throw on top of that a recession.
It turns out that the reduced demand coupled with the higher barriers to entry create the unemployment levels that we have had.
PAUL SOLMAN: But, to Epstein, perhaps the looniest regulation is the minimum wage, or, as he calls it:
RICHARD EPSTEIN: The guaranteed recipe to create massive unemployment.
PAUL SOLMAN: Don’t you have to pay people, workers enough so that there will be enough aggregate demand so that they can buy what other people are producing?
RICHARD EPSTEIN: The question, of course, is how you get to aggregate demand. I want people to be able to take jobs at 2 cents an hour if that is what it takes so that a year from now they can take $12 an hour.
PAUL SOLMAN: And if people are earning 2 cents an hour, how are they supposed to survive?
RICHARD EPSTEIN: Obviously, at some particular point, they are going to have to have two jobs.
PAUL SOLMAN: Or, at 2 cents an hour, several hundred. But isn’t that, well, absurd?
RICHARD EPSTEIN: No, it’s not. You assume that the only return that a worker gets from a job is the wage consideration. That’s just wrong. It is a whole variety of social skills that you acquire. Recommendations, connections, and network really matter.
PAUL SOLMAN: But wait a second, says Hanauer. Even if those skills were developed, isn’t it better for consumers and companies to keep workers alive than taxpayers?
NICK HANAUER: The average age of a fast food worker today is 28 years old. And those folks are being paid poverty wages. And taxpayers are making up the difference in food stamps and Medicaid and rent assistance.
Wal-Mart earned $27 billion in profit last year. They could afford to pay their bottom million workers $10,000 more a year, raise all of those people out of poverty, cost — save taxpayers billions of dollars, and still earn $17 billion in profit, right? It’s simply nuts that we have allowed this to happen.
PAUL SOLMAN: But when I talk to employers, they talk about how workers don’t show up on time. They don’t have the basic skills. So why should a company pay more than the minimum wage when they’re not getting anything more than minimum productivity?
NICK HANAUER: It is certainly true that there are many, many workers in the country that are lazy and ineffective. But it is equally true that there are an equal number of CEOs in the country who are lazy and ineffective too. And yet CEO pay has gone up 1000 percent over the last 20 years or something like that, and worker pay went up 5.7 percent.
You know, this ridiculous idea that a worker on Wall Street who earns tens of millions of dollars a year securitizing imaginary assets or doing high-frequency trading is worth 1,000 times as much as workers who earn tens of thousands of dollars a year educating our children, growing or serving us our food, throwing themselves into harm’s away to protect our life or property, that this difference reflects the true value or intrinsic worth of these jobs is nonsense.
PAUL SOLMAN: To Hanauer, it’s just crony capitalism.
But, to Richard Epstein, it’s the free market.
RICHARD EPSTEIN: The concentration of wealth at the top, if it comes not from crony capitalism, but from innovation, creates huge benefits for the rest of the system.
PAUL SOLMAN: Bill Gates’ billions, for example, are dwarfed, says Epstein, by the value consumers have gotten from Microsoft products.
As for the Wall Street wizards:
RICHARD EPSTEIN: It turns out functions that most people don’t understand, namely, how you maintain continuous liquidity in a complicated economy, is, in fact, such a difficult task that we pay people a great deal of money to become middlemen.
Remember, the guys you are talking about are not getting public subsidies from the government. They are getting paid by customers on both sides of the market.
PAUL SOLMAN: You know a lot of rich people.
NICK HANAUER: I do.
PAUL SOLMAN: If it’s so clear to you that this is dysfunctional and will hurt everybody in the end, why don’t more rich, smart people agree with you?
NICK HANAUER: This change threatens both the pocketbooks, but even more particularly the status of rich people. You know, a 15 percent tax rate on capital gains, a 15 percent tax rate on carried interest massively advantages people like me. Working people pay 39 percent. Investors pay 15, justified by this idea that the more money people like me have, the better off you will be.
Of course, if it’s the other way around, that tax break makes no sense whatsoever. And these arguments don’t just threaten pocketbooks. They threaten status. And so, when you mess with that, people get very angry and emotional and compare to you Hitler.
PAUL SOLMAN: In fact, a number of prominent private equity partners, hedge fund owners, venture capitalists have denounced recent efforts to raise the favorable 15 percent tax rate on so-called carried interest, basically their fees, which seem like income, as a harbinger of Nazism.
Epstein flatly rejects the comparison. And, somewhat to our surprise, he agrees that the government deserves more in taxes on such fees than 15 percent.
RICHARD EPSTEIN: But I’m not saying they should get 42 percent either.
PAUL SOLMAN: Well, this is the one thing that Nick Hanauer would be happy about.
RICHARD EPSTEIN: I’m not going to say that he is always wrong. I’m just going to say he doesn’t know what he is talking about. He can be right by accident, and he often is.
PAUL SOLMAN: So one modest point of agreement, but, of course, not on the larger issue of legislating greater equality of income in America.
JUDY WOODRUFF: Nick Hanauer argues we have long misunderstood prosperity to be a function of money. He explains how he defines wealth and capitalism in an extended conversation. That’s online at Making Sense.