STEVE CANNANE, PRESENTER: Our guest tonight is a venture capitalist who wants the minimum wage doubled in the US, believing that such a measure would help avoid a political and economic disaster.

Nick Hanauer became a billionaire from far-sighted investments in Amazon and other Internet start ups.

In a recent essay for 'Politico' magazine titled 'The Pitchforks are Coming For Us Plutocrats', the entrepreneur argues that unless growing inequality is dealt with, America could have a revolution on its hands.

I spoke to Nick Hanauer earlier from his home city of Seattle.

Nick Hanauer, welcome to Lateline.

NICK HANAUER, VENTURE CAPITALIST: So happy to be with you.

STEVE CANNANE: What makes you think the pitchforks are coming, that there could be some form of uprising in the US if inequality is not dealt with?

NICK HANAUER: You know, to be honest, I wrote the piece somewhat in jest, and yet right now in our country in Missouri, people are rioting and there is a very, very tense standoff between militarised police and poor African Americans because, you know, a policeman shot an unarmed black kid.

And all of this is part of a trend in our country, a polarising trend where wealth and political and economic enfranchisement is accumulating at the very tippy top and everybody else is falling farther behind, and my point is simply this, that if this trend continues, there is simply no doubt that... that will result either in a police state or an uprising, that there just aren't any examples in human history where you could concentrate wealth and power at the very tippy top that didn't eventually end badly for everybody.

STEVE CANNANE: But have the American people got an uprising in them. Historically they haven't joined trade unions in great numbers and recently in the wake of the Great Recession, the Pew Economic Mobility Project found that 68 per cent of Americans felt like they had either achieved or would achieve the American dream. That doesn't sound like to me like a recipe for revolution?

NICK HANAUER: My point is not that a revolution is imminent. My point is that one will come if the trend doesn't change over the next 30 years.

In, the top one per cent of Americans shared about eight per cent of national income 30 years ago. Today, we share over 20 per cent, while the bottom 50 per cent of Americans share of income has fallen from 18 to about 12 or 13. If the trend continues, the top one per cent of Americans will share over 30 per cent of national income, while the bottom 50 will share just six, and that is a recipe for disaster.

STEVE CANNANE: Tell us how and when you came to this realisation that inequality was bad for you, bad for your country, bad for the middle class and the mega rich?

NICK HANAUER: You know, my own sort of personal intellectual breakthrough came in the range of 10, 12 years ago when I realised that there had been a sort of revolution in our understanding of how human social systems like economies actually work, that the neo-classical economic paradigm of believing markets are perfectly efficient, mechanistic closed systems, that they're welfare maximising, that these underlying assumptions that sort of form the basis of how we think about economics, turn out to be completely unravelled, they are all not true.

And the better way to understand an economy as an open complex system like an ecosystem, and once you see it that way, then you realise that prosperity has to be essentially a feedback loop between customers and businesses, and if you impoverish all your customers, you are not going to have any more business, and this is just an obvious commonsense way of both seeing the world and building policy.

And in the United States in particular, we've built essentially a death spiral of falling demand as we concentrate more and more income at the top and impoverish more and more people in the middle and the bottom.

STEVE CANNANE: Do other entrepreneurs share your view?

NICK HANAUER: More and more. I would say that when I first started talking about economic inequality five, six, seven years ago, it made people very angry and very defensive because people didn't feel like talking about economic inequality. It was a sort of legitimate part of political discourse, but over the last five years, intelligent, thoughtful people have come to realise that in our country, this is a severe problem and getting worse, and that if we're going to maintain both our economy and our democracy, that we have to find a way to get it back under control.

Look, I'm not saying that some inequality is bad, some inequality is necessary in any high functioning capitalist system. The problem is historically high levels of inequality growing even higher still. That's the problem.

STEVE CANNANE: One of the solutions, as you see it, is to increase the minimum wage. Now currently the national minimum wage in the US is at $7.25. You want it doubled to $15. Why have you picked that figure?

NICK HANAUER: Well, a $15 minimum wage is halfway between where the minimum wage would be if it had tracked inflation over the last 30 years, or so, and where it would be if it had tracked productivity gains, then it would be about $21.

So $15 is a number that we know our economy can support and essentially in balance with the rest of the economy. If the minimum wage in the US had tracked the wages of the top one per cent, for instance t would be $28 today, and so $15 makes perfect sense, but I should say in a city like Seattle which is very prosperous and very expensive to live in but probably makes less sense in a small town in a rural sate like Kansas or Arkansas, but in any case, the national minimum wage of $7.25 is scandalously low, and what Australian viewers should know is that it's $7.25 for ordinary workers, but the federal tipped minimum, that is to say for workers who work in things like restaurants is $2.13, and that's just ridiculous.

STEVE CANNANE: But won't increasing the minimum wage cost jobs? President Obama wants to increase the minimum wage up to $10.10 an hour and the Congressional Budget Office says that that could eliminate as many as half a million jobs. Wouldn't you your proposal get rid of even more jobs?

NICK HANAUER: The heart of our problem are these orthodox economic models that don't just show but are designed to show that if wages go up, employment must go down proportionately, and nothing could be farther from the truth. If there was a shred of truth to this idea that high wages equalled high unemployment, then low wage places like the Congo and Somalia would employ all their people in places like Australia and Switzerland and Canada would have zero workers employed because wages were so high. It's simply not true. Prosperity is a function of the feedback loop between customers and businesses and the fundamental law of capitalism is when workers have more money, businesses have more customers, and need more workers.

STEVE CANNANE: If I can pick up on that point, Tim Warstall from Forbes magazine describes your plan as near insane. He says the increase in wages being paid out is going to be greater than the margin made from any extra sales?

NICK HANAUER: Yeah, and that's sort of classic limited, trickle down thinking. Look, here is a way to look at it.

So I have a 13-year-old son and so I can tell you that all 13-year-old boys unanimously agree that homework is a useless and costly exercise and an obliteration of their liberties and that's because 13-year-old boys can instantly calculate the costs of doing homework, but not the benefits, even though the benefits overwhelm the costs.

You know, a business person, when they look at increased wages can instantly calculate the costs of those wages, but can't calculate at all the benefits of operating in an economy where all workers have more money, and where their ability to raise prices and expand margins is massively changed.

And so Tim, you know, represents that sort of narrow and provincial view that if cost goes up, then the economy will collapse. I want to underscore this point. So, in my state, Washington State, we pay a much higher minimum wage than anywhere else in the country. We pay $9.32 an hour for all workers which is almost 30 per cent more than the $7.25 federal level, but is 427 per cent higher than the federal tipped minimum.

If Tim was right, then Washington State would have slid into the ocean and Seattle won't have a restaurant operating, and yet the opposite is true. Seattle Washington is the fastest growing big city in America. Washington State is generating small business jobs at a higher rate than any other big state in the country, and the restaurant business in our State is booming, in particular in Seattle and that's because when restaurants pay restaurant workers enough so that even they can afford to eat in restaurants, that's not bad for the restaurant business, as Tim would have you believe, it's actually good for it.

STEVE CANNANE: But won't it cost some of those entry level jobs on very small minimum wages that are so critical for young and disadvantaged people who are trying to get a foothold in the labour market?

NICK HANAUER: Yeah, but our problem in this country is not teenagers or a small number of disadvantaged people. Our problem is our disappearing middle class.

You know, when I grew up, the typical fast food worker earning minimum wage was a 16-year-old kid.

Today the average age of a fast food worker in the US is 28-years-old. Our problem isn't what will happen to the poor teenagers who want the entry level jobs, our problem is how are we going to re-establish a middle class in this country. So that's the first point.

The second point is that raising labour standards for all workers isn't going to exclude younger workers. It's going to enable them to... now the jobs that they will get will actually pay enough to make it worth working rather than staying on the dole.

STEVE CANNANE: How does the low minimum wage in the US hold back equality of opportunity? People who are smart or creative or entrepreneurial, but can't necessarily get a start or get an education?

NICK HANAUER: You know, the thing about poverty in a place like the US is that it's extraordinarily toxic and... how should you put it - it's expensive to be poor. You have to remember that in the US, unlike Australia, health care is not free. A university education could cost $40 or $50,000 a year, a person.

You know, we live in a society where people are very, very much on their own, and a minimum wage which has been held at these ridiculous and depressed levels traps people essentially in poverty. It makes it impossible for them to get education. It makes it impossible for them to get health care and it makes it impossible for them to take the risks that upward social and economic mobility require, right. You not going to go out and start your own company if you can barely feed yourself, much less a family. And so raising the minimum wage includes people both economically and politically in a very, very constructive way and allows them to be better taxpayers, better citizens and better entrepreneurs and customers, and that's the point of these standards.

STEVE CANNANE: You have argued that this is an economic approach that can unite both the Left and the Right. Have any of the Republicans got on board? Have any of the Coke Brothers, for instance, been calling you?

NICK HANAUER: No, I don't expect calls from the Coke Brothers, but many, many Republicans are starting to get on board. Mitt Romney, for instance, recently agreed that we should significantly increase the minimum wage. This is a common sense approach to generating more prosperity and growth in our economy, but, you know, make no mistake, there are huge vested interests that would prefer to keep these wages low.

You know, there are many big businesses in our country that are predicated on paying poverty wages, and are massively advantaged by it. Our nation's biggest employer, Walmart, for instance, earned $27 billion in pre-tax profits last year employing 1.4 million workers, but in our country, Walmart employees make up in most states the largest group of recipients of food stamps in those states. So to be clear, Walmart is earning $27 billion in profit by socialising the costs of their employees, by pushing the real costs of those employees' lives onto the public and onto the these poverty programs that we all pay for, and that makes, you know, that is just idiotic and immoral, too.

STEVE CANNANE: Seattle, where you are based passed a minimum wage of $15 a couple of months ago. In some senses this is a laboratory for your theories, isn't it? In 12 months' time we will know whether you are right or wrong?

Yeah, yeah, you most certainly will, but we are already a laboratory, as you put it, we already pay a higher minimum wage than any other place in the country and we already have more small business job growth and more growth and prosperity than most places in the country, so, you know, some people look at the $15 minimum wage we've done here as an insane and risky experiment. We disagree. We believe it is simply a continuation of a policy that is allowing our city to kick the butts, frankly, of other cities in our country.

STEVE CANNANE: Nick Hanauer, we've run out of time. Thank you for joining us tonight.

NICK HANAUER: Thank you so much. Thank you so much.