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RESTORATION CALLS: ECONOMY

The 1 Percent Solution

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?

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Occupy Wall Street protesters clash with police at Zuccotti Park.(Craig Ruttle/AP)

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.

(RELATED: Too Hot for TED—Income Inequality)

 

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.

(RELATED: TED's Curator Responds)

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.

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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.

This article appears in the May 16, 2012 edition of National Journal Magazine.

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