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Why a $15 minimum wage will make Seattle stronger

Seattle entrepreneur and venture capitalist Nick Hanauer. Credit: Photo:

Editor's Note: Nick Hanauer gave the following speech at Mayor Ed Murray's Income Inequality Symposium at Seattle University on March 27th, 2014. It is reprinted here in full.

Societies and their economies are shaped by the explanations we accept about how the world works. Let me give you a simple example: If you explain the solar system by putting Earth at the center of it, you will send a rocket in one direction to get to Mars. If you believe that the sun is the center of the solar system, you would send that rocket in a totally different direction.

People are of course entitled to their opinions. But only one of those explanations is going to actually get you from Earth to Mars. The other explanation leads to disaster.

Navigating an economy isn’t that much different. If we explain it the right way, we get where we want to go. If we explain it the wrong way, we end up adrift.

Today, our entire economy has been structured by a couple of incredibly simple, compelling and mistaken explanations. You may be familiar with them.

First, if taxes on the so-called rich “Job Creators” go up, employment will go down, and the economy will collapse.

And, its evil twin: If wages for workers go up, employment will go down, and the economy will collapse.

These paired ideas are really best understood as explanations for how the economy works. And at the root of these explanations is the assertion that the source of growth and general prosperity in capitalist economies are rich people and the profits of businesses. That the higher they go, the better off all of us will be.

These ideas define our economy. They were advanced by the right, but broadly accepted by the left. They are, in short, the anchor concepts of trickle-down economics.

But these explanations are totally wrong. As wrong as believing that the Earth is the center of the solar system. And the reason our economy is struggling — the reason the middle class is shrinking — is because we have accepted these explanations and allowed them to direct our politics and economic policy.

My goal this morning is to show you why these explanations are wrong, and to advance a different and better explanation which shows why increasing the minimum wage isn’t bad for the economy.

In fact, it’s good for the economy and for business.

If the trickle-down economics explanation for how to create jobs were true, then our economy would be in very, very, good shape. But here is where we actually are: Since 1980, the share of income for the richest Americans has more than tripled — from about 8 percent to 24 percent in 2007 — while their effective tax rates have declined by close to 50 percent.

If it was true that lower tax rates and more wealth for the wealthy would lead to more job creation, then today we would be drowning in jobs. And yet unemployment and under-employment are at record highs.

Corporate profits have gone from 8 to 12.6 percent of GDP since 1980. That’s almost an extra trillion dollars. If it were true that corporate profits led to hiring, then today shouldn’t we have 50 percent more jobs?

Since 1980, CEO pay has gone up 700 percent; median income only 5.7 percent. If the rich getting richer benefitted everyone, what happened to the middle class?

One of the central claims of trickle-down advocates is, “Yes, inequality is getting worse, but think of the growth!” So, growth in the USA, with its leading amounts of inequality must be much, much higher, right?

Not so much.

In fact, growth in the USA is comparable to Socialist hell-holes like Canada, New Zealand and Australia, Germany and Scandinavia.

But crucially, these comparative growth numbers hide something far more important: The relative advancement of the lived experience of the typical family.

Because in the USA, me and Bill Gates and Jeff Bezos are doing great – which brings up the average – but the median family struggles here, in a way you don’t find in many other advanced countries.

The problem isn’t that inequality is bad. The problem is it is getting worse every day. In 1980, the top one percent controlled eight percent of national income. The bottom 50 percent shared 18 percent. Today, the top one percent share over 20 percent; the bottom 50 just 12 percent. In another 30 years, if the trend continues, the top one percent will have about 35 percent of national income; the bottom 50 percent will share just six percent.

These trends befuddle many people because they are not consistent with what we were taught by our economics professors in college.

This isn’t “supposed to happen,” but trickle-down economics is rooted in completely mistaken 19th century economic ideas and explanations: That markets are perfectly efficient. That they tend towards stability and equilibrium. That they are welfare maximizing.

But we now know that your economics professor was completely wrong, and that the orthodox economic explanation was rooted in deep misconceptions of how the world works.

Our economy and middle class are in trouble because the policies we implemented relied on this mistaken trickle-down explanation of how an economy works. I want to show you that there’s a different and more accurate explanation of where prosperity comes from.

Prosperity in capitalist economies does not trickle down from the top. Ever. It is always built from the middle out.

Middle-out Economics

Middle-out economics rejects the 19th-century misconception that economies are perfectly efficient, mechanistic systems that operate best when managed least, and embraces a much more accurate 21st-century perspective on economies as complex, adaptive and eco-systemic.

Twenty-first-century thinkers now know that economies are not efficient at all. They don’t tend towards fairness or stability or equilibrium. Left unmanaged, they allow advantages and disadvantages to compound towards instability and collapse.

A modern understanding shows that systems like economies naturally tend towards concentration and collapse. They must be managed. An un-fettered “free” market will give you the same result as an untended garden. Weeds and collapse.

We now know with scientific certainty that economies are actually a type of ecosystem and thus are characterized by the same “circle of life”-like feedback loops and dynamics found in natural ecosystems.  

Let me explain in plainer English.

As an entrepreneur and venture capitalist, I have started or helped start dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have evaporated.

That’s why it is so obvious that rich people don’t create jobs. Nor do businesses, large or small. What does lead to more employment is an ecosystemic-like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring.

In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.

Anyone who's ever run a business knows that hiring more people is a capitalist’s course of last resort – something we do only when increasing customer demand requires it. The goal, the measure of a business, is profit. But profits are made by creating fewer jobs per unit of sales than your competitors do.

In this sense, a business person calling themselves a job creator isn't just inaccurate, it's disingenuous.

Another reason the claim that rich people are job creators is so wrong-headed is that there can never be enough super-rich Americans to power a great economy. I earn about 1000 times the median American annually, but we don’t buy thousands of times more stuff.

My family purchased three cars over the last few years, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. I bought two pairs of these – what my partner Mike calls my “manager pants.” I guess I could have bought 1000 pairs. But why would you? What would you do with them?

My family business makes pillows. Pacific Coast Feather Company is one of the biggest manufacturers of pillows in the USA, but business is tough because fewer and fewer Americans can afford to buy pillows.

Because here’s the thing: No matter how big my wallet gets, my head continues to only need one pillow to sleep on. Bill Gates, Jeff Bezos, they earn 10-100 times as much as me. Still, one pillow.

But an economy where we made a bit less and everyone else made a bit more would mean everyone could buy more pillows. Which would be good for you. And – here’s the amazing part – good for me too! Good for the middle class. And great for business.

This is why the most pro-business thing we can do in capitalist societies is support the middle class. Balancing wages and profits is great for everyone.

The central feedback loop in a capitalist economy is between consumers and business. Which is why the fundamental law of capitalism is that when workers have more money, businesses have more customers. Which makes middle class consumers — not rich businesspeople — the true job creators.

Rising wages and more investment in workers shift money in the economy to those with the highest propensity to spend, increasing sales for businesses, which in turn leads to hiring and more sales.

This means a thriving middle class isn’t a consequence of growth, which is what the trickle-down advocates would tell you. A thriving middle class is the source of growth and prosperity in capitalist economies.

Which means, in turn, that a policy focus on the middle class that balances the effect of natural compounding – like true progressive taxation, balancing the power of workers and owners, investments in education and R&D and things like raising the minimum wage – are not harmful to capitalism.

They are essential to its success. They are essential to growth and prosperity for everyone, consumers and business owners alike.

All of which brings us specifically to raising the minimum wage to $15 here in Seattle. Should we do it or will we destroy our city and perhaps the country? Will Seattle slide into the ocean? Will we all go to capitalism Hell?

A Seattle $15 Minimum Wage

To be clear, believing that raising the minimum wage will help the economy is not the same thing as believing that the higher it goes, the better. We could go too far, and raising it to $15 sounds like an exorbitant leap to some.

But if the minimum wage had merely tracked productivity gains since 1968, it would be $21.70, and if it had tracked the wages of the top one percent, it would be $28. In a city as expensive as Seattle, $15 is in balance with the rest of the economy

Our economy has changed, lest you think that the minimum wage is for teenagers. The average age of a fast food worker is 28. And minimum wage jobs aren’t confined to a small corner of the economy.

By 2040, it is estimated that 48 percent of all American jobs will be low-wage service jobs. As a society, as employers and policy makers, we need to reckon with this. What will our economy be like when dominated by low-paying service jobs? What proportion of the population do we want to live on food stamps? Fifty percent? Does it matter? Should we care?

Some people do not care. This just in from Speaker of the House John Boehner, commenting on the idea of raising the federal minimum wage: "When you raise the price of employment, guess what happens? You get less of it.”

Really, Speaker Boehner?

Because here’s an odd thing. During the last 30 years, wages for CEOs grew 127 times faster than workers and are up an astonishing 1000 percent since 1950. CEOs that used to earn 30 times the median wage, now earn 500 times. Yet no company I know of has either eliminated or outsourced their senior managers to China, or automated their jobs.

Oddly, Contrary to Boehner’s prediction, we now have more CEOs and senior executives than ever before. So too for financial services workers and technology workers. These folks earn multiples of the median wage, yet we somehow have more and more of them.

Surely, if “raising the price of employment got you less of it” as Boehner claims, then we’d have fewer CEOs, investment bankers and tech workers today than we did 30 years ago. And low wage workers — whose wages have declined in real terms — would not be at record levels of unemployment.

Again, think eco-systemically: Businesses effectively “eat the wages” of their customers. That is, they consume wages in the form of sales. The more wages their customers have, the more businesses can consume and grow.

That’s why Boehner saying that higher wages shrinks employment is as silly as claiming that when plants grow, animals shrink.

So while higher wages for workers may in some cases encourage businesses to find ways to shed workers by automating to keep profits high and expenses low, the benefits of workers having more money to spend increases demand and counteracts or overwhelms this effect. And the process of automation marches on anyway.

The trickle-downers will also tell you that raising wages will increase prices for consumers. "INFLATION!" they will tell you. And certainly, to some extent, this may be true.

But here’s another super odd thing. Corporate profits as a percent of GDP are at a 50-year high. They are literally double what they normally are. 12.6 percent versus 6 percent. So why are these trickle-down folks not warning us about the tremendous inflationary costs to consumers of these huge profits? Inquiring minds want to know.

Pre-tax corporate profits in the USA were over 2 trillion dollars last year. Lets say, for grins, you took 1 trillion of that and divided it evenly among the 50 million lowest paid American workers. That would be $20,000 more per worker a year. And prices to consumers would not have to go up one penny. Not one penny.

Oh, there you are, middle class. You thought we lost the middle class. We didn’t lose it. It’s right over here. In our wallets.

It may be useful to question the logic that argues that high profits for owners and astronomical salaries for executives are “essential for businesses and the economy,” but higher wages for workers simply “raises prices for consumers and makes our great nation less competitive.”

To a somewhat objective observer, this makes no sense. This extra trillion dollars of profit could be used for wages. Or alternatively, be converted to lower prices for consumers. This trillion dollars isn’t profit because it has to be or needs to be. It is profit because the powerful prefer it that way.

Business people tell me they cannot afford higher wages. Not true. They can adjust to all sorts of higher costs. The minimum wage is much higher here than in Alabama, and we have McDonalds here. The minimum wage is 17 dollars in Australia, and McDonalds is thriving there.

Businesses adjust to higher costs, even when they say they can’t. If I told businesses in Seattle that rent was going to double, many would say they would go out of business, but rent in New York is triple our costs and miraculously business is booming there.

Some of you in the room no doubt believe that compelling businesses to pay workers more is somehow unfair, or is too much government interference. You think that we should just let good examples like Costco or Tom Douglas or Starbucks lead the way.

But here’s the thing. When Walmart or McDonalds or any other guy like me pays its workers the minimum wage, that’s our way of saying, “I would pay you less, except then I’d go to prison.”

Let me analogize. Our transportation system is made safe and effective by stop signs and speed limits. These are not suggestions or examples. These are rules with consequences — like prison.

Because, in any large group, some people absolutely will not do the right thing. Our economy can only be safe and effective if it is governed by the same kinds of rules. Because some capitalists – I know this may be news – actually don’t care about other people, their communities or the future.

And their behavior, if left unchecked, has a massive effect on everyone else’s behavior, as the good people struggle to compete with the bad people. Walmart and McDonalds are not going to pay living wages unless their only alternative is prison.

This is why we business people need to be compelled, not encouraged or implored, to pay workers decent wages. And oddly this will work out great for almost everyone. Because, when every business is required to pay more, every worker earns more and every business has more customers and every tax payer benefits from not having to pay taxes for the government programs that support workers who are paid poverty wages.

Trickle-down advocates would have you believe that a $15 minimum wage makes Seattle less competitive. I disagree.

Yes, there may be businesses that today depend on paying workers near-poverty wages that will need to change their ways – or leave.

But making Seattle the highest minimum wage city in America gives businesses a more secure and growing base of customers, and from that base, this city becomes a better place to be an entrepreneur and innovator. And being a high-wage city attracts the best and the brightest — people who will help our economy and community thrive.

I think Seattle’s new $15 minimum wage policy should advantage locally-owned small businesses over quick-serve national chains that are economically extractive and culturally dilutive. I believe in phasing this law in over several years. I believe that we have to look at a reasonable compensation picture, like tips, commissions, piece work.

I am also a huge believer in the process that the Mayor has initiated in good faith. And I would urge my friends in business to look beyond the easily-calculated risks of paying workers more to the less easily-calculated, but overwhelming benefits of operating in a community where most people can afford to buy more from you, and no one needs food stamps.

I urge my friends on the left to give credit to a Seattle business community that mostly genuinely agrees with the goal of paying workers a living wage. Let’s not let the perfect be the enemy of the good. Let’s compromise and find a way to make this law work for everyone and become a national model.

Which brings us to the civic dimension of what $15 is really about.

Why a $15 Minimum Wage is Good for Community

Seattle is undeniably a highly civic place. But we’re also, undeniably, becoming a more unequal community — in incomes and in opportunity. The danger we have to face is that economic inequality always begets political inequality, which always begets more economic inequality.

Low-wage workers stuck on a path to poverty are not only weak customers; they’re also anemic taxpayers, absent citizens and inattentive neighbors.

Economic prosperity doesn’t trickle down, and neither does civic prosperity. Both are middle-out phenomena.

When workers earn enough from one job to live on, they are far more likely to be contributors to the civic prosperity — of your community.

Parents who only need one job, not two or three to get by, now can be available to help their kids with homework and keep them out of trouble — in your school. They can look out for you and your neighbors, volunteer and contribute in your school and church.

I urge you to acknowledge that our prosperity does not all come home in our paycheck. Our prosperity, really, is our lived experience.

And living in a community of people who are paid enough to contribute to your community, rather than require its help, may be more important than your salary. Prosperity and poverty are like viruses. They infect us all, for good or ill.

It is reasonable to question why so many business owners and CEOs believe that paying their workers higher wages is bad for the economy, yet higher wages for themselves and higher profits for their company is good for it. These beliefs aren’t so much a reflection of actual evidence or truth, as of social and moral preferences.

Economics is a tool humans use to clothe and express our cultural and social preferences and to embed or protect personal advantage. When someone says that higher wages for low-wage workers are “bad for the economy,” he is not so much describing the economy as he’s making an assertion of how he views the worth of different classes of people in our society.

But a man-made economic arrangement that pays a Wall Street worker tens of millions of dollars per year to do high frequency trading, and pays just tens of thousands to workers who grow or serve our food, build our homes, educate our children, or who risk their lives to protect our life or property, isn’t an expression of the true value or economic necessity of these jobs. It simply reflects a difference in bargaining power and status.

An arrangement created by and for those who benefit most from that arrangement.

Many of you in the room believe that capitalism itself is the problem. I disagree.

Capitalism, when well managed, is the greatest social technology ever invented to create prosperity in human societies. But capitalism left unchecked tends towards concentration and collapse. It can either be managed to benefit the few in the near term, or the many in the long term. The work of democracies is to bend it to the latter.

Capitalism works best when policies both encourage and require including the most people as consumers and entrepreneurs. These inclusive economies always outperform and outlast plutocracies. That is why investments in the middle class work. And tax breaks for the rich don’t.

There is a world of difference between the policies that benefit capitalism broadly, and those that benefit a few capitalists narrowly. Balancing the power of workers and owners by raising the minimum wage isn’t bad for capitalism. It’s an indispensible tool smart capitalists use to optimize capitalism, despite what some shortsighted business leaders may tell you.

The oldest and most important conflict in human societies is the battle over the concentration of wealth and power. Those at the top will forever tell those at the bottom that our respective positions are righteous and good for all. Historically, we called that divine right.

Today we have trickle-down economics.

Individual prosperity recirculates into our economy, nourishing it. Better-paid workers make better citizens, better tax payers, better customers, and better customers make better neighbors, in an endless virtuous circle. Raising the minimum wage in Seattle won’t just be good for the poor. It will be good for everyone, including businesses.

The trickle-down explanation for economic growth holds that the richer the rich get, the better our economy does. But it also clearly equally implies that if the poor get poorer, that must be good for our economy. Nonsense.

Some of the people who benefit most from that explanation are desperate for you to believe this is the only way a capitalist economy can work. $15 means saying screw that — and them.

At the end of the day, $15 isn’t about just rejecting their version of capitalism. It’s about replacing it with one that works for every American.

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