Venture Capitalist Out to Beat Economic Inequality

Posted by Joseph Phillips on Wednesday, November 8, 2017 at 5:06 PM PST

Venture capitalist, entrepreneur, and social activist Nick Hanauer joined the Albers Executive Speaker Series on November 7^th to speak on economic inequality and its effect on the social fabric of the US.  He argued that inequality is polarizing our society and too many are being left behind.

Hanauer is a widely admired entrepreneur and investor. He is a co-founder and partner in the Seattle-based venture capital firm, Second Avenue Partners. In 2015, he also founded Civic Ventures, an organization pursuing significant social change, and has been involved in initiatives on gun control, the minimum wage law, and homelessness.

Hanauer has managed, founded or financed over 30 companies, including companies like Amazon, Aquantive, Insitu, and Marchex.  With those bona fides, he argued, he knows just as much about capitalism as anyone else.  Hard to argue with that!

What has led to this precarious state of affairs?  Hanauer argues it is not due to forces such as globalization or changes in technology, but rather comes from our unthinking acceptance of Trickle Down Economics.  He has reprised this characterization of Reaganomics to apply it to contemporary thinking.  Trickle Down Economics includes tax cuts for the wealthy, economic deregulation, and what he terms “wage suppression.”  Wage suppression is founded on the claim that higher wages kills jobs.

Hanauer repeatedly asserted that higher wages will not result in reduced employment, but rather will increase jobs by generating the buying power to increase consumption and spur business activity.  He identified a significantly increased minimum wage law, such as $15/hour, as a sure fire remedy to the inequality problem.

Not everyone agrees with Hanauer on that point, of course, including me, but he is right to a point.  Yet there is some level at which a higher minimum wage becomes counterproductive as the unintended consequences kick in and employment opportunities fall and prices increase.

Everyone knows that the City of Seattle is running a huge experiment with its minimum wage law by boosting the minimum wage significantly – it is supposed to reach $18/hour for some employers by 2025.  Economists are studying the phenomenon to learn more about the impact of such laws.  There are competing studies coming to different conclusions about the early data, but ultimately this will get sorted out.  Data on the full effects of the law will become available.  The profession will review the studies and come to a consensus on the best methodologies and the soundest conclusions.  Of course, Hanauer does not want to wait for that.  He is advocating for minimum wage hikes nationwide now.  No surprise there – he is an evangelist, not an economist. :}

In the follow up Q&A, Hanauer was asked how he navigates between his two worlds of investors-entrepreneurs-the Chamber of Commerce and activists-unions-philanthropists.  He said he does not try to appeal to people on the edges, but looks to find a super-majority in the middle of reasonable people.  He cited the $15/hour movement as an example.  Of course, you can count on the social justice crowd to be in favor, but you also have to rally a sizable group in the middle with the argument that a higher minimum wage creates the buying power necessary for economic growth.

When asked what concerned people should be doing about inequality, he said the most important thing to do was to resist the “raising wages kills jobs” argument.  Higher wages do not kill jobs, they create them.  His idea is to shame people into not making this argument and make it the equivalent of uttering a racial slur.

He was asked what role social enterprise might play in fighting economic inequality.  He started his answer by saying we need a new measure of economic prosperity.  GDP and similar measures have a number of flaws, including an inability to consider issues of environmental sustainability.  We need a new measure that takes into account the problems that are solved, such as unemployment or low wages.  Measured in this way, social enterprise has an important role to play because it is always geared around solving a social problem.

When asked about his view of the impact of trade on wages, he said that free trade had a disastrous impact on some communities.  He said he had recently attended a conference organized by the Institute of New Economic Thinking, and found that many economists were rethinking their neo-classical views on trade policy.  He may be overstating that rethinking, but certainly even neo-classical models would not give a gold star to trade with China since so many model assumptions are violated by China’s interventionist policies on imports and exports.  And of course traditional free trade models have always punted when it comes to the distribution of the benefits of trade, knowing they would be skewed and that redistributionist policies would be needed (but never really executed).

One questioner wanted to know about the impact of the next recession (and it is coming at some point) on workers benefiting from a $15/hour minimum wage.  Won’t a recession trigger an increase in savings, a decrease in demand, and a decrease in jobs?  Hanauer noted that what is different about today is the “super abundance” of capital – there are a lot of places for business to borrow (and he could add that may not be unrelated to the unequal distribution of wealth), so there should be no credit shortage in the next recession.  Well, maybe, but lenders could impose higher lending standards and capital could be cut off that way, as occurred in the Great Recession.    He also noted that high wage/low inequality nations (read Scandinavian economies) are more resilient in a recession than other economies.

The final question asked what he saw as the difference between a good people manager and a good leader.  He responded that a leader has vision.  He or she has a clear, bold idea and they are able to energize and motivate a group around that vision.  Sounds like Hanauer on the issue of economic inequality!

As an economist, I squirm at the sweeping statements Hanauer makes about the minimum wage and trade policy.  But there is no denying that economic inequality has become a serious issue for us and we need to do more than talk about it.  Maybe he has decided this is the best way to get us to take action on this critical problem.  In any event, he is a stimulating and provocative speaker who we were happy to have on our campus!