The 100% Economy: Why the U.S. Needs a Strong Middle Class to Thrive

More

Nick Hanauer is the kind of innovator and venture capitalist expected to power the country's next wave of growth. So why does he insist that only the fading middle class can rescue America?

615 crowd reuters.jpg
Reuters

SEATTLE--Nick Hanauer toddled through his early years in a cramped Greenwich Village apartment. His mother waited tables at the Bitter End. His father worked low-level jobs on Wall Street and as an editor at a publishing house. When Nick was 5, his folks left New York to join a family pillow-making business in the Pacific Northwest. They raised their three sons in a three-bedroom house in the suburbs and sent them to public schools. After Nick, the eldest, earned a philosophy degree at the University of Washington, he went to work for his father. In his 30s, he scraped together $45,000 to invest in a small start-up that sought to revolutionize American retail. It was called Amazon.com.

This is how Nick Hanauer has come to be standing in the owner's box at a Seattle Sounders FC professional soccer game, snacking on chicken fingers, and listing the very expensive things he owns.

"I told you about Mexico," he says, meaning the villa in Cabo San Lucas. "Did I tell you about the fly-fishing ranch?" Meaning the 170 acres in Montana.

Yes, he did. He also mentioned the ski chalet in Whistler, British Columbia, the hideaway in the San Juan Islands north of Seattle, and the private jet. "And," he added helpfully at one point, "we have a really big boat." Last year, his wife and some of her friends decided they would like to renew their wedding vows. So Hanauer and a few buddies invited nearly 80 couples to Las Vegas for a vow-renewal ceremony featuring three officiants, followed by a private after-party in the rooftop lounge of the Palms Casino Resort. All captured by a professional filmmaker.

Hanauer is 52 and worth several hundred million dollars. His brown hair is thick and mossy, with just a fleck or two of gray, and he is fond of wearing dark denim pants and shirts with open collars. An ace venture capitalist, he is the founder of several companies, including one called aQuantive that he sold to Microsoft for $6.4 billion. On the day of the sale he personally banked $270 million.

In 2011, Hanauer says he paid an effective federal tax rate of 11 percent. He occupies the upper echelon of an elite group of Americans, the top 1 percent of all earners, who have amassed the lion's share of the nation's wealth gains over the past several decades. Many economists expect he and his class of entrepreneurs to fuel the country's next great engine of growth.

Like a lot of self-made rich guys, Hanauer has developed a theory on how to fix the ailing economy. He preaches it in op-ed columns, television interviews, political gatherings, and casual conversations with Seattle's innovation royalty. He was invited to give a speech this spring by the organizers of TED, the nonprofit that has grown famous for commissioning "TED talks" on such diverse topics as the nature of innovation, the science of global warming, and the need to spread contraceptives throughout the developing world. Hanauer's pitch took five minutes at the TED University conference on March 1. Afterward, organizers seemed keen to post it on their website. Then in May, they abruptly told him his remarks were too controversial, too political for TED, and wouldn't be published online.

The disqualifying notion at the center of Hanauer's talk was that the innovators and businessmen are not, in fact, "job creators"--that the fate of the economy rests instead in the hands of the middle class. So Hanauer wants to tax rich guys like himself more, to pay for investments to nurture middle-class families.

"We've had it backward for the last 30 years," Hanauer said at the TED conference. "Rich businesspeople like me don't create jobs. Rather, they are a consequence of an ecosystemic feedback loop animated by middle-class consumers." When the middle class thrives, he said, "businesses grow and hire, and owners profit."

Emerging research from high-powered experts across the ideological spectrum backs that economic inversion. Their work shows how America's long-term prosperity is in jeopardy because the middle class is struggling and the super-rich are pulling away.

Widening income inequality helped drive us into the Great Recession and is holding back our recovery. It is tempting to view the stagnation of the middle class and the disappearance of middle-skill jobs as a problem for only some of us. That's simply untrue. Mounting economic evidence suggests strongly that Hanauer's argument is correct and is, in fact, fundamental to America's future. It's not a do-good argument. It is a selfish one, both for innovators and for every other American counting on the innovator class to power growth for decades to come.

The evidence suggests that the United States needs a vibrant middle class. Not for any of sentimental reasons, but because it's a very dangerous thing not to have.

As Hanauer is discovering, that's not something many American elites want to hear.

DOING LESS WITH MORE

Economists don't even broadly agree on who is in the middle class. Some say it's anyone within a 50-percentile ring around the U.S. median income. As good a general definition as you'll find comes in a new paper summarizing the economic case for how the middle class spurs economic growth from economists Heather Boushey and Adam Hersh of the liberal Center for American Progress. "A middle-class family has some economic security," they write, "be that a good job with health insurance and a retirement plan, or some savings in the bank to tide them over in an emergency or to send a child to college or even float a family member who wants to start up a business."

By any definition, the middle class is eroding. Real median household incomes basically flatlined over the past 30 years. Each of the last three recessions has vaporized huge numbers of the middle-skilled jobs that used to pay a good family wage, on factory assembly lines or in customer-service centers or, most recently, in classrooms and city halls. This has led to what the MIT economist David Autor calls the "hollowing out" of American jobs, with a few middle-skill workers finding training for high-skilled, higher-paying careers, and the rest shoved downward into low-wage, low-skilled jobs or onto the unemployment rolls.

If the decline continues, this is what research suggests the U.S. will look like in the years ahead: Roads and bridges will fall into disrepair. Public schools will struggle to graduate students prepared for the job market. Consumer spending will tumble. Small businesses will close, and fewer and fewer new ones will spring up to take their place. Corporations like Amazon and Apple will scrounge the country to cope with chronic engineering shortages. Rich guys like Hanauer will find themselves with fewer customers, fewer potential employees, and many more worries about the swelling ranks of the have-nots breaking out their pitchforks.

The timing couldn't be worse. The United States was first a resource economy, then a production economy, then a full-fledged industrial economy. In the past two decades, globalization turned the nation into a consumption economy--we bought things from other countries and from one another, increasingly with borrowed money. That model collapsed in the financial crisis.

Jump to comments
Presented by

Jim Tankersley is a correspondent (economics) for National Journal.

Get Today's Top Stories in Your Inbox (preview)

Why Did I Study Physics?

In this hand-drawn animation, a college graduate explains why she chose her major—and what it taught her about herself.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Why Did I Study Physics?

Using hand-drawn cartoons to explain an academic passion

Video

What If Emoji Lived Among Us?

A whimsical ad imagines what life would be like if emoji were real.

Video

Living Alone on a Sailboat

"If you think I'm a dirtbag, then you don't understand the lifestyle."

Video

How Is Social Media Changing Journalism?

How new platforms are transforming radio, TV, print, and digital

Video

The Place Where Silent Movies Sing

How an antique, wind-powered pipe organ brings films to life

Feature

The Future of Iced Coffee

Are artisan businesses like Blue Bottle doomed to fail when they go mainstream?

Writers

Up
Down

More in Business

Just In