Recently PBS news hour reporter Paul Solman talked with a billionaire venture capitalist, Nick Hanauer, who supports a higher $15.00 minimum wage, and with a libertarian law professor and economics fundamentalist, Richard Epstein. Epstein believes that government regulations are all to blame for poor economics. To read the transcript and better, to listen to the video presentation, it leaves one scratching your head and why people don’t get it that a strong middle class is necessary, and to be strong, that have to make a decent living wage to support their families and help the economy survive. Some excerpts point out the absurdity of top down economics.
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: 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.”
Hanauer has argued in a popular 2012 TED Talk, and most recently in a Politico Magazine essay, addressing income inequality, through measures like a higher minimum wage, is not simply a moral issue; it’s an economic issue because prosperity originates from having a strong middle class, what he calls ‘middle-out-economics’.”
Hanauer explains: ”
So middle out economics is essentially a 21st century way of understanding how an economy works – not as this linear mechanistic system — but as an ecosystem, with the same kinds of feedback loops. The fundamental law of capitalism is if workers don’t have any money, businesses don’t have any customers; that prosperity in a capitalist economy is a consequence of a circle of feedback loops between customers and businesses, which means that a thriving middle class isn’t a consequence of prosperity. A thriving middle class is the source of prosperity in capitalist economies, which is why a policy focused on the middle class is and has always been the thing that drives prosperity and growth — not pouring money into rich people, which simply makes rich people richer.
And so middle-out economics is the idea that if you make a policy focused on the middle class and generate demand from the middle class, you’ll both create more entrepreneurs to drive innovation, and essentially, a sale cycle and a hiring cycle for business that generates a virtuous cycle of increasing returns that benefits everybody.”