Venture capitalist (and Democracy board member) Nick Hanauer and Oxford economist Eric Beinhocker speak with Editor Michael Tomasky about the long intellectual roots of the Biden economic program, how things have changed, and where we go from here. The conversation took place via Zoom on Tuesday, April 6.
Michael Tomasky: I’m here with Nick Hanauer and Eric Beinhocker, and we’re talking about the Biden Administration and economics, and what we all agree has been a surprisingly positive set of emphases and priorities so far by this Administration. I want to ask a question to you first, Nick, and I want to start by quoting a line of Biden’s in his speech in Pittsburgh when he was unveiling his infrastructure package. He said, “We all do better when we all do well. It’s time to build our economy from the bottom up and from the middle out, not from the top down.” When I heard him say that, especially the part about middle out, a lot of bells went off in my head, and I’m sure yours. Can you explain to people what that means?
Nick Hanauer: President Biden used two concepts that came from our book The Gardens of Democracy [Nick Hanauer and Eric Liu, 2011]. “Middle-out economics,” but also one of the aphorisms that we articulated in it: “We’re all better off when we’re all better off.” Middle-out economics is the narrative that we created over 10 years ago as an alternative to the neoliberal-trickle down narrative that had dominated economic policymaking in the United States for the prior 40 years. According to the neoliberal trickle-down paradigm, tax cuts for the rich, deregulation for the powerful, and wage suppression for everyone else was supposedly the path to shared prosperity. And we now know absolutely that it was all a pack of lies. Middle-out economics is the alternative to that framework, and we believe reflects a truer picture of how market economies actually create increased prosperity. It’s centered around the simple idea that the economy is ultimately made out of people, and the better people do the better the economy does; the focus of policymaking therefore should not be on enriching the few, but on improving the lot of the many. And when you help the broad population—the middle—become secure and prosperous, you not only have much faster rates of overall economic growth, but also a much more stable and secure democracy.
MT: How do you react when you see Biden use that phrase and see these kinds of policies actually being attempted by a Democratic Administration?
NH: It’s incredibly gratifying to see. Not just the narratives, but also, how the narratives and the policies are being blended together into this massive repudiation of neoliberal economic thinking. And I have great confidence that these programs, if enacted, will benefit the country enormously.
MT: Eric, why don’t you walk our readers through a little economic history and take people back to the economic paradigm that reigned from the 1930s through the 1970s; the rise of the neoliberals—the intellectual provocateurs of the conservative economic movement—starting in the 1940s. If you can bring that history to life for people so everybody starts to understand the full context.
Eric Beinhocker: I think as most people know, in the wake of failures of laissez-faire economics to deal with the Great Depression, Keynesian economics rose to dominance in the mid-twentieth century. In the postwar period, Keynesian policies of stimulating demand to ensure consumers have enough money to spend on businesses, which in turn would stimulate investment and employment growth, were seen as largely successful. The government was also an active investor in the economy, building the national highway system, electrifying rural areas, funding the GI Bill, and spending a lot on R&D to keep up with the Soviets. But when the stagflation crisis hit in the 1970s those policies seemed to stop working. In the meantime, a group of conservative economists—folks like Milton Friedman—had for decades been gestating a different set of ideas. They saw themselves as modern successors to Adam Smith’s free market liberalism (thus “neoliberal”) and argued that the government should stop “interfering” and set free the “supply side” (i.e., business) of the economy. These ideas were turned into policy in the Reagan Revolution of the 1980s in the form of tax cuts for corporations and wealthy people to supposedly free up and encourage investment; deregulation for businesses; anti-union policies; and virtually stopping anti-trust enforcement, thus allowing corporate power to increasingly concentrate. And all of this combined to suppress wages for the bottom 90 percent of workers for the past 40 years.
The theory was that these policies would stimulate investment, innovation, and growth, which in turn would “trickle-down” to the average worker. It didn’t work. In fact, it was a catastrophic failure. We now have data from almost five decades of this experiment, and the evidence is very clear that instead of trickling down, virtually all of the gains of growth during that period were sucked up and captured by the wealthiest 5 percent or so of the population. While the overall economy grew and productivity increased, incomes for the broad population stagnated—most families earned the same or less in real terms in 2015 as they did in 1973. Think of it, after four decades they were earning the same or less than when go-go boots were in fashion.
Nick, in collaboration with the Rand Corporation, did a study showing that if those same families had just kept up with overall economic and productivity growth, they would have been $50 trillion richer. That is $50 trillion in “trickle-up” that gutted the middle class. In the meantime, as Jacob Hacker at Yale and others have shown, neoliberal policies made middle-class life much less secure—greater risk of unemployment, less secure pensions, higher health-care costs, college debt, etc. But this gutting of the middle class was hugely self-defeating: It’s the middle class that actually spends money in the economy; it’s the middle class that provides the high productivity workers; and it’s the middle class that also provides the innovators. If you look at where most Silicon Valley entrepreneurs come from, they’re either immigrants or from the middle class—they aren’t rich people who got a tax cut. History shows that the engine of growth, innovation, and a stable democracy is a healthy middle class.
MT: If I could stick with you for just another question…talk about some of the important economic work in the past 10 or 15 years that you think has helped shift thinking among economists.
EB: For a while now there have been two broad camps within progressive economics. In the first camp have been those who in essence bought much of the neoliberal story but re-purposed it for progressive goals. They believed in the academic “neoclassical” theories that said that people are rational and self-interested, and markets are efficient, self-stabilizing, and naturally gravitate toward full employment. But they differed from conservatives in seeing more “market failures”; places where government needed to step in, fix incentives, provide information, create public goods like infrastructure and education, and so on. But they bought the neoliberal idea that any actions to deal with economic inequality issues created a “big trade-off” where increasing social equity would harm market efficiency and growth. And similarly, they bought the idea that dealing with an issue like climate change was a cost benefit trade-off between saving the environment versus jobs and growth. Finally, unlike conservatives who only pretended to care about budget deficits (and were happy to blow money on tax cuts and defense), they actually were deficit hawks (Bill Clinton was the only president to run a budget surplus since Lyndon Johnson). This line of thinking came into prominence in the Clinton Administration under Treasury Secretary Bob Rubin and carried on into the Obama years under Rubin protégés Larry Summers and Tim Geithner.
In the meantime, a second camp of thinking had been incubating in academia and then started to gain notice in the wake of the 2008 financial crisis. While these thinkers saw markets as a key institution for organizing the economy, they didn’t put them on a pedestal. The 2008 crisis blew away the idea that markets are a kind of inherently efficient, self-regulating, self-correcting machine. Instead, as Nick likes to put it, markets are highly effective if well regulated. These thinkers also rejected the notion that there is a “big trade-off” between equity and growth. They argued that headline GDP growth is meaningless if it is only benefitting the richest 5 percent. And furthermore, they argued, gutting the middle class was killing the dynamism of the economy—robber baron levels of inequality were a drag on innovation, investment, productivity, and shared growth. If you’re a business CEO and your customers don’t have growing incomes to buy stuff, why would you invest in the future? It makes more sense to use your profits to buy-back your own stock, boost your share price and your own compensation—which is exactly what most large companies did.
But it wasn’t just on inequality where this second camp differed. On budget deficits, this camp took a more nuanced view. While it is certainly possible for large deficits to overheat the economy and create the toxic combination of high inflation and high interest rates that happened in the 1970s, that has not been the main risk we’ve faced over the past few decades. Instead, we’ve been in a low inflation, low rates, low income growth, low real (as opposed to financial) investment era for some time. We’ve relied on loose monetary policy to keep the ship moving but that has helped blow a series of asset bubbles, the biggest of which blew up in 2008. We’ve thus had a devil’s choice between stagnation or bubbles. To break this trap, we need large-scale fiscal investments in things that support productivity growth—just as Biden is proposing—and policies that stop trickle-up and encourage broadly shared wage growth. And related to this, spending and policies to prevent climate disaster are seen not as a trade-off with near-term jobs and growth, but instead triggering a modern-day industrial revolution, a transformation to a cleaner, better economy.
MT: How about a name-check of some of the people involved in this work?
EB: Well, it has been a big community of people in academia, think tanks, and activist organizations. And not just economists but people from across the social sciences. But just to illustrate how the chain of thinking has travelled from academia to the White House, my Oxford colleague, the late Tony Atkinson, was a pioneer in modern research on economic inequality. He in turn was a mentor to and collaborator with Thomas Piketty, and together they with other colleagues collected the masses of data that went into Piketty’s blockbuster 2014 book Capital in the 21st Century. That book and the buzz around it dramatically raised the profile of inequality as an issue in the D.C. policy community, which in turn helped Heather Boushey found the Washington Center for Equitable Growth which for the past eight years has done leading-edge policy work on these issues, and Heather is now on the President’s Council of Economic Advisers (CEA). But that is just one example, and Heather is not the only senior Biden figure coming out of this intellectual community—Cecilia Rouse (CEA chair) is a longtime leader on labor economics, Jared Bernstein (also CEA) has been a key voice on fiscal issues, and National Economic Council (NEC) Chair Brian Deese has deep experience on climate change. And if one looks at Janet Yellen’s academic work and her record at the Fed, she is much more willing to take on orthodoxy than people may realize. People are policy as the cliché goes, and while many of these folks served in previous administrations, Bidenomics is shaping up to be a significant break from the past.
MT: And what about your own work?
EB: One of the big problems with the orthodox economic theories that underpinned the neoliberal consensus was that they assumed the economy was just a linear adding up of all of the stuff in it. They assume that prosperity equates to GDP which is just an adding up of the output in the economy, and that all of the consumers add up to one giant, average “representative” consumer, and the same with firms, etc. But we know this isn’t true. A whirlpool isn’t just an adding up of individual water molecules, it is a pattern created by lots of water molecules interacting with each other in complex, dynamic ways—it is what physicists call an “emergent” phenomenon. Likewise, most of the things we’re concerned with in the economy are emergent phenomena: high-level macro patterns that emerge from people at the micro level behaving in certain ways and dynamically interacting with each other and institutions, rules, policies, etc. Inequality, economic growth, innovation, financial bubbles, climate change, and the COVID economic slump are all examples of emergent phenomena. Economies are dynamic, evolving, networked, complex systems, more like ecologies than machines.
Yet, bizarrely, standard economics doesn’t model things that way and as a result gets a lot of things wrong (again the 2008 crash is Exhibit A). My group at Oxford, the Institute for New Economic Thinking, is borrowing techniques from physics, biology, and computer science to model the economy in much more realistic ways than ever done before, taking full advantage of the immense amount of data that is now available. The bet is that more realistic, empirically grounded models will provide much better policy insight and advice. While this all sounds pretty academic, it has huge implications for everything from central bank policy to how we make the jump to a zero-carbon economy.
MT: Nick, you’re a non-economist obviously. You’re a venture capitalist. Tell people when and how you got interested in this and some of the key developments that made this your passion.
NH: Well, I don’t have a PhD in economics, but I do have the equivalent of a PhD in capitalism! Lots of folks like me end up starting one company and riding that for their careers, but I’ve helped start over three dozen companies cutting across a really broad range of industries and domains. So that experience has given me deep insight into how capitalism works in practice versus in theory. And that experience, combined with research from and collaborations with people like Eric, has convinced me that the way in which mainstream neoclassical economics has understood the dynamics of markets and how economies work was just profoundly wrong—what you discover when you look at the last 40 years of economics, is that all, every single one, of the underlying assumptions that neoliberal economists use to characterize economies and make judgments about what will be good and what will be bad are just demonstrably false. The assumptions about human behavior, the assumptions about what prosperity is, the assumptions about the dynamics of human social systems, the assumptions about how human economies create prosperity…all of that stuff, while internally consistent and mathematically elegant, is just contradicted by reality and empirical evidence. Eric and I have been collaborating together, along with many colleagues from around the world, on a new way of looking at the economy, grounded not on textbook assumptions, but grounded in the reality of how markets actually work.
And let me just highlight one particular difference between the old way of looking at the world and the new way of looking at the world. So, in the old, neoliberal way of looking at the world, we assume that people are Homo Economicus—reliably selfish and rational. That assumption undergirds all neoliberal economics, not just the models, but also the intuition and political narratives about how the world works and what we can expect out of people. And here’s the thing: If you assume that everyone is selfish, and you look at a country like the United States, which has generated a lot of prosperity—even if it isn’t always shared—then it is easy to make the leap that selfishness is the cause of prosperity, and that therefore the more selfish we are, the more prosperity we create. This thinking legitimizes the “greed is good” culture that has captured not just business but society more broadly. And it legitimizes ideas that by maximizing the value for shareholders and minimizing taxes and regulation for the rich and powerful, the public interest will be served.
But that underlying assumption just turns out to be demonstrably false. People can be selfish, of course. But mountains of scientific evidence show that people are reliably reciprocal, other-regarding, intuitively moral, and even sometimes altruistic creatures. And when you understand it in that way, when you understand that objective fact, then the prosperity that you see around you is not a consequence of selfishness. It’s a consequence of cooperation. And indeed, cooperation at scale is the secret sauce of human prosperity. That’s where it comes from: All economic life is a dance of cooperation.
EB: Just as a historical note, people often assume that the “greed is good” idea came from Adam Smith and his notion of “the invisible hand.” But that’s a misinterpretation that came largely from Milton Friedman’s popularization of Adam Smith to support Friedman’s own agenda. Smith scholars note that Smith was a deep and subtle moral philosopher who understood that not only was greed bad, but that empathy and the other-regarding behaviors Nick described are the essential glue that holds society together.
MT: I think of a lot of us have known these things for a long time. We’ve certainly known for a while that tax cuts don’t increase revenue, and that many of the things that Friedman and the supply siders said aren’t borne out empirically at all. And yet nothing changed politically. Finally, though, something shoved that door open. What was it?
NH: Well, it was a lot of things. One big factor was the gradual realization by folks in the Democratic Party that they had been sold a bill of goods—that these wrong theories were stopping them from doing things that were clearly good for people. For example, for decades Democrats thought raising the minimum wage was a losing issue—from the neoliberal perspective, it is an absolutely insane idea. Right? Super counter-productive job killing disaster! When we cooked up the idea for a $15 minimum wage [Editor’s Note: Hanauer was one of the instigators of the Seattle “Fight for $15” ballot initiative] and began to socialize it in Democratic circles, everyone thought we had lost our minds. Because even progressive economists still saw the economy as an efficient market equilibrium machine where if one thing goes up, another thing has to go down; for example, if wages go up, jobs must go down.
I would argue that the movement for a $15 minimum wage is in many ways a product of seeing the economy as an ecology, referencing back to what Eric said. If you see it as an ecology, then you see it as an increasing returns system—where one part of the system positively reinforces another and vice versa—sort of like a food web of plants and animals. So, claiming that when wages grow jobs shrink is as absurd as claiming that when plants grow animals shrink. No, that’s not the way that system actually works. As we put it in the Seattle campaign, when restaurant workers can afford to eat in restaurants, that’s good for restaurants. Decades of evidence have shown that claims that the minimum wage is a job killer are simply false. And slowly over years, a group of us tore down the credibility of these neoliberal ideas by relentlessly pointing out the facts, and you know, the facts eventually start to seep through.
So, I think the most important way to understand the $15 minimum wage is not just as a policy to increase wages, but also as a way to re-litigate how prosperity is created in market economies. Because if you accept the old framework, the neoliberal framework that raising wages kills jobs, then the $15 minimum wage is completely nuts. But if you see it in the middle-out economics way, then when you pay workers more money, businesses have more customers, and then they hire more workers in an ecological feedback loop of increasing returns. And that’s what middle-out economics is, seeing the economy in this way. It’s not to say that incentives don’t matter, or the business investment doesn’t matter. Of course they do, but they matter as part of this positive feedback loop of growth. Prosperity is the product of a feedback loop between increasing amounts of demand and innovation to meet that demand with new and better ways to satisfy people’s needs. As a venture capitalist, one of the most basic questions I always ask a business is who is going to pay for your product? After five decades of wage stagnation and rising inequality, that question became harder and harder to answer for our economy. Broadly shared, inclusive growth spins up the wheel of demand, innovation, and growth; neoliberal trickle-up kills it.
MT: Eric, what’s your sense of how the zeitgeist changed here?
EB: First as Nick was saying, the accumulation of evidence has become so overwhelming it’s hard to ignore, and it’s actually almost embarrassing when Republicans still parrot trickle-down ideas from the 1980s now, because they’re just so detached from reality (although that seems to be a more general theme these days). And the evidence says that not only did the ideas fail to work, but they were actively damaging the economy; not only were they hollowing out the middle class, but they were killing social mobility and the hopes that one’s children would do better than oneself—the data says that the American Dream is more alive and well in Denmark than in America. And these feelings of stagnation, insecurity, fears of downward mobility, fears for one’s children, and feelings of betrayal by an elite that ran off with the loot have then been hugely corrosive for our politics, stoked racism, created fertile ground for populism, and led to a near-death experience for U.S. democracy. So I’d say the first thing that changed the zeitgeist was a harsh collision with reality.
But then the second thing that changed is that while many people have kind of intuitively known those neoliberal ideas were wrong and thought that policies like raising wages, helping people get health care, or saving the planet from mass extinction might make sense, they didn’t have the courage of their convictions. For decades all of these economists with Nobel Prizes and fancy titles had been saying that these things that are good for people would somehow hurt the economy—think of the absurdity of that for a second. But since the 2008 crisis, and spurred on by issues like inequality, technology acceleration, and climate change, the economics community has been engaged in a major period of reform (see for example, INET and Economists for Inclusive Prosperity). It is far from complete, and Nick and I argue it still needs to go much further and deeper, but it is having an impact. All of this work is putting some rigor and muscle behind the policy ideas which in turn gives people the confidence now to actually act on them. So, it’s not just Nick and Eric’s crazy ideas, or someone’s gut intuition; rather, folks in the Administration or Congress now have a deep well of work to draw on from a community of people who’ve been actively working on these ideas for more than a decade that can give them confidence that they’re making the right decisions and backs up their political arguments.
NH: I think it’s really important for folks to recognize, particularly readers of Democracy Journal, that the old neoliberal ideas were super deeply embedded in the Democratic Party. Recall that the Obama Administration had to be dragged to support a minimum wage of just $10.10 and most of the Democratic Senators that I met with were convinced that raising it would be a huge job killer. Likewise, I once asked President Obama about his views on economic inequality and he basically gave the neoliberal answer that what mattered was growth not inequality. Eventually, in his second term, he came around and called inequality “the defining challenge of our time.” But by then his administration had run out of road and couldn’t do anything about it.
MT: Let me express a couple of slightly cautionary notes. I think we’re still a long way from changing this paradigm. The relief bill is great. We don’t know what’s going to happen with these two”Build Back Better bills. It’s going to be touch and go all the way. And then even if they pass, they have to work.
EB: The huge scale of these bills has been criticized by figures like Larry Summers on the Democratic side, some prominent economists like Olivier Blanchard, and just about every Republican in D.C. on the right (though interestingly less so by Republican governors and mayors). But one thing we’ve learned, from the Obama stimulus to the minimum wage campaign and the climate fight, is that going too small is the fastest way to fail. The scale of these bills is necessitated by the scale of the challenges. The COVID relief bill is filling a giant hole that’s been cut in the economy for obvious reasons. And the risks are asymmetric—the pandemic still isn’t over (e.g., the variant that slammed the UK is now in continental Europe and starting to impact the United States too), the Fed already has their foot hard on the gas, and if the bill was too small there would be little anyone could do; while if things bounce back quicker than expected and look to be overheating, the Fed can pretty easily start tapping the brakes.
While the COVID bill is explicitly a near-term stimulus bill, the infrastructure bill is a different kind of animal. It is filling a giant hole left by decades of underinvestment from neoliberalism. It attempts to address some of the deep racial inequities in our economy. And it provides a base for getting serious about the epochal challenge of climate change. That bill is aimed at kicking the economy onto a different path, creating a modern, inclusive, innovative, and clean-energy based economy. This bill is the closest thing we’ve had to an answer to the geopolitical challenge presented by China. But it won’t be enough. It will eventually need to be paired with an economic reform bill that takes on issues like the minimum wage, increasing worker power, shifting corporate governance from the neoliberal shareholder max model to a more balanced model, getting Wall Street to actually serve Main Street, corporate tax avoidance, monopoly power, and a host of other structural reforms to get American capitalism working for the American people again. That will be a much harder lift—not just because of the need to get around the Senate filibuster, but because of the powerful, well-funded interests that will be arrayed against it. That kind of deep economic reform will likely not come without equally deep democratic political reform first.
NH: So, here’s my view. We’re not out of the woods yet, far from it. But it is a big step that the Biden Administration is pursuing the right policy agenda and using an accurate and persuasive narrative. And if they are successful in enacting these next couple of big bills, the infrastructure and human capital bills, and can then take on the kind of economic reform bill Eric described, it will set the nation on a profoundly new and better economic course. It will be the first time in decades that anyone has effectively challenged the neoliberal framework. So, they certainly get an A for effort at this point, right?
Will it work? There are lots of reasons to believe it will. Will everything be perfect? Absolutely not. That’s impossible. But even if one is skeptical, it’s an experiment we’ve got to run. Five decades of trickle-down has almost killed our democracy. In 2013, Democracy ran a symposium called “The Middle-Out Moment” that Eric and I contributed to, as well as various folks who are now either in or influential with the Administration. We were about eight years too early, but the moment really has come. Trickle-down has unambiguously failed—it is time to try middle-out.
MT: Thank you both.