Nov. 16, 2022

Are Rich People Better Than You? Why Everything We Think We Know About Good Economics Might Be Backward, With Nick Hanauer

Are Rich People Better Than You? Why Everything We Think We Know About Good Economics Might Be Backward, With Nick Hanauer

Reaganomics, the prosperity gospel, and the pedestalization of the ultra-rich.

It turns out Americans have been asking the wrong question: It's not, “What’s the difference between the ‘haves’ and the ‘have nots,’” but rather…“How did those in the 0.1% end up having it all?” 

To paraphrase my guest, entrepreneur and venture capitalist Nick Hanauer (, “How do [rich people like me] manage to grab an ever-increasing piece of the pie? Is it because rich people are smarter than we were 30 years ago? Is it that we’re working harder than we once did? Are we taller? Better-looking? Sadly, no. It all comes down to one thing: economics.”

My thesis? Capitalism is the economic system that creates wealth, and good economic policy is what ensures that all that wealth doesn’t accrue to a very small group of people.

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Katie: Something bizarre has happened in the United States economy since the 1980s. The economy has grown by leaps and bounds, but the gains of the growth have been rather sticky. That is, they are stuck at the top. The rich have gotten, well, a lot richer, but the majority of Americans have not. In fact, when one controls for hours worked and the influx of women in the American workforce over the last few decades, household income for the earners at the bottom of the income distribution have actually gone down in real terms. In some ways it's not a mystery of the haves versus the have nots, it's “How do those people have it all?” I'm going to interview a billionaire who is now a civic activist working on this very problem to find out. 

Welcome back to The Money with Katie Show, Rich Fam, and not just any episode of The Money with Katie Show, but an episode I have been looking forward to for months. My guest today is billionaire civic activist Nick Hanauer, who I can only lovingly refer to as a .01% defector, valiantly betraying his cohort of similarly mega-wealthy people to call bullshit on the system that enables their wealth. I originally stumbled across him thanks to a listener—shout out Dan, who sent me his 2019 TED Talk entitled The Dirty Secret of Capitalism. Dan predicted, accurately, that I would love Nick's work after listening to my two-part series, Millennials, Money, and the Bizarre American Fever Dream, in which I attempted to make sense of the financial situation that the majority of millennials find themselves in. 

Finding Nick Hanauer and his work felt like receiving the answer to the question I have been asking of nobody in particular for years. Nick says that the reality of economics in most people's daily lives is simply who gets what, and why. He points out that part of the reason things keep getting worse is because we are trying to fix our economic problems—for example, slowing economic growth, rising government debt and inflation, wealth inequality, wage stagnation—by doubling down on the theories and policies that caused the problems in the first place. Here it is in his own words from his 2019 TED Talk.

Nick Hanauer: I am a capitalist, and after a 30-year career in capitalism spanning three dozen companies, generating tens of billions of dollars in market value, I'm not just in the top 1%, I'm in the top 0.01% of all earners. Today I have come to share the secrets of our success, because rich capitalists like me have never been richer. So the question is, how do we do it? How do we manage to grab an ever-increasing share of the economic pie every year? Is it that rich people are smarter than we were 30 years ago? Is it that we're working harder than we once did? Are we taller, better looking? Sadly, no. It all comes down to one thing: economics. Because here's the dirty secret. There was a time in which the economics profession worked in the public interest for everyone. But in the neoliberal era today, they work only for big corporations and billionaires, and that is creating a little bit of a problem. We could choose to enact economic policies that raise taxes on the rich, regulate powerful corporations, or raise wages for workers. We have done it before. But neoliberal economists would warn that all of these policies would be a terrible mistake, cause raising taxes always kills economic growth, and any form of government regulation is inefficient, and raising wages always kills jobs.

Well, as a consequence of that thinking over the last 30 years in the USA alone, the top 1% has grown $21 trillion richer, while the bottom 50% have grown $900 billion poorer,  a pattern of widening inequality that has largely repeated itself across the world, and yet as middle-class families struggle to get by on wages that have not budged in about 40 years. Neoliberal economists continue to warn that the only reasonable response to the painful dislocations of austerity and globalization is even more austerity and globalization.

Katie: My thesis today: Capitalism is the economic system that creates wealth, and good policy is what ensures it does not all accrue to one very small group of people. And hey, I'm sure there are listeners right now who are tempted to turn this off, bristling at the suggestion that policies should interfere with capitalism in any way, but I would offer a counterpoint. The market is not some pre-political natural occurrence. It is impossible to extricate the free market from the legal and political context that facilitates it. I would ask that you bring an open mind today, because I also used to think free markets were best left untouched by law, and what I've learned and experienced in the last few years has given me a still imperfect but more nuanced understanding of what is ultimately a complex doctorate-level topic that defies some of the conventional simplicity and logic with which we often attempt to settle it.

Let's get into it. We'll be right back after a message from the sponsors of today's episode. 

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Katie: First things first. If you're going to criticize any aspect of capitalism, no matter how small, prepare to be called a socialist. I find it very interesting the way in which capitalism is revered in our country in some circles as a perfect force best left alone, and today we're going to explore the historical underpinnings of that ideology. Challenging any aspect of capitalism can be perceived as heresy. I had never been accused of political bias or motivation in my work until I became curious about American capitalism and began asking questions about it. My own curiosity stemmed from the observation that many, many of my peers—I would say the lion’s share—struggled to afford their lives despite doing all the right things. It didn't seem to add up that my educated friends in valuable fields like nursing, accounting, education struggled to earn enough to pay for their housing, their childcare, or their other basic needs and still have enough left over to have, like, a little bit of fun and also save money. To me, thinking about our country's economy is just a natural extension of curiosity about personal finance in general. As we stated earlier, economics is merely the study of who gets what and why. So in personal finance parlance, that means, most simply, the income you have from your labor or investments, the forces that impact how much you earn and how much you have to pay for things like shelter, education, and in the US, healthcare and childcare, and it's a mystery that's rife for confusion and ideological conflict. After all, the majority of the discourse around labor and education in our country often boils down to the divide between skilled and unskilled labor. College, for example, is often positioned as the necessary way out of such a financial quagmire. That if you become skilled, you'll be fine. But Jacob Hacker and Paul Pierson, the authors of Winner-Take-All Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class, say it's not a mystery of haves versus have nots. No, the real question is how and why we ended up with a small subset of have-it-alls. “The real mystery is the runaway incomes and assets of the have-it-alls, those on the very highest rungs of the economic ladder. These fortunate few are, in general”—this is key—”no better educated or obviously more skilled than those on the rungs just below them who have experienced little or none of the meteoric gains.” That is the piece to me that is so fascinating, and why I found Nick's work so interesting, because if the ultra-rich have remarkably similar profiles to those who have just a fraction of what they do, it seems as though there is something larger and something more complex at play. 

So let's talk numbers. This is probably not surprising to anyone who's even a little familiar with the subject, but it's worth mentioning. Between January 1976 and June 2022, the income of the 1% has grown 267%. In 40 years’ time, the income of the 1% have nearly tripled in real terms. Compare that to the growth of the middle 40%, right? So it's 50% to 90%, who have seen gains of 67.3%. And the bottom 50%, so the poorer half of our country, who have seen the most meager gains of 33.1%. Consider too that since the 1970s, far more women in households are working. In other words, the working hours of each household has doubled in some cases. So when you control for hours worked, the wages of the bottom quintile of earners has actually gone down in real terms, according to the 2005 policy paper by Jared Bernstein and Karen Kornbluh called Running Faster to Stay in Place: The Growth of Family Work Hours and Incomes.

Now if you're anything like me, you'll hear these figures that the vast majority of our country's economic gains over the last 40 years accrued not just to the 1% but often to the 0.1%, and ask, why did that happen? And maybe more specifically, why was that allowed to happen? Why are we talking about it? Because your personal finance reality exists necessarily within this context. To ignore our economic reality feels like giving swim lessons on the Titanic without also acknowledging that like, hey, this ship is sinking. While knowing how to manage your money and negotiate for more and invest what you can is absolutely paramount, the reality is that if wages had kept pace with economic growth for the 90% over the last 40 years, you probably wouldn't need personal finance creators like me, because you would have enough money to live your life and save for the future. Ironically, the only reason I have this job at all is because the economic situation is so dire for so many Americans that they need this type of strategy and help to stay afloat. And those who don't get financial education, they end up falling farther behind. In some ways it feels like personal finance is the last line of defense against a bad situation that is continuously worsening.

I wanted to know where our “raw free markets” vibe came from and why you'd be dubbed a socialist if you question whether or not our very specific form of capitalism in America is really generating the best outcomes. 

So let's start at the beginning with a brief history: Reaganomics. What makes American capitalism so different from the free markets you'll find elsewhere in the world? Let's take a walk down memory lane. When it comes to this idea that unchecked free-market capitalism is the best way to structure an economy and society and that government intervention of any kind is necessarily inefficient, bad, and expensive, we can trace these ideas back to Ronald Reagan and messaging that emerged in the early 1980s. Sidebar: If you've ever heard the word “neoliberalism,” this is the ideology it's referring to—free markets, deregulation, and reduced government spending. So pre-Ronald Reagan, in the World War II and post World War II era, America had a very different view of titans of industry than we do today. An Elon Musk figure back then, for example, probably would not have been revered the way he is in 21st century American capitalism. We were far more distrustful of the rich back then, perhaps because we had a better understanding of the power dynamic between those with unimaginable wealth and those without it.

In the 1930s, FDR denounced leaders of industry who resisted regulation. He called on the imagery of the Robber Barons, who were like the 19th century greedy, exploitative, mustached, top hat-wearing American businessmen, basically the monopoly men, to remind the American people and the titans of industry themselves that exploiting people for profit is not the American way. This was the era of heavily regulated and heavily taxed capitalism. In the decades following World War II, the largest American employer in the 1950s, GM, paid an average of what would be the equivalent of $50 an hour to its workers, which is roughly equal to a hundred thousand dollars per year salary today, and it's no coincidence then that this era saw a very large, very prosperous middle class.

Of course, it was not widely accessible to all people. Black people, other communities of color, and women were still considered second-class citizens. Though it is worth noting that a lot of social movements like the civil rights and women's movements came out of this period of prosperity and stability, but the number of individuals who were able to carve out a stable and financially secure middle-class living and support their families on one working-class income was proportionally much larger than it is today. These are the people who could buy homes with just their job money, to quote one of my favorite bleak tweets. One such reason that historians point to? The top marginal tax bracket, the highest amount of federal income tax you’ll pay on every dollar earned over a certain limit during much of that period was 91%.

Today, the top marginal tax bracket for people earning more than $523,601 is 37%. Some historians point to the much higher top marginal tax bracket and say that it disincentivized taking an exorbitant salary for oneself, because as you earn more incrementally, you get to keep so much less of it. Taxation of this kind was a wealth redistribution strategy. It was taking money from the richest people in society to put it back into the hands—directly or indirectly, but ultimately through government spending—of the regular working-class or middle-class people…you know, 90% to 99% of the rest of the country. At this time in history, the average CEO made approximately 30 times what the average worker made. For context, today, that figure is more than 300 times the amount in the S&P. 

As an aside on the topic of taxation changes, part of what's worth noting about our progressive tax system is the way in which it becomes far less progressive as you earn more. For example, if I earn $600,000 of taxable income next year, which, $600 grand, that's a lot of money, right? My marginal tax rate will be the same as someone who earns $10 million next year. My effective tax rate, meaning the total amount of my income that I'm gonna have to pay in taxes, would be around 38%. Theirs would be 43%, just a few percentage points higher, despite making more than 10 times as much. This matters, because tax codes are not naturally occurring phenomena. They are law, they are mutable, they are the result of conscious choices, and right now they're written to advantage the mega-rich far more than just the moderately affluent. We'll be right back after a message from the sponsors of today's episode. 

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Katie: Anyway, back to the 1980s. So this cultural ethos and these policies that created a very strong middle class and kept the wealth of the rich in check all began to shift with Ronald Reagan and his advisors, including econ zaddy Milton Friedman. Reagan is the president responsible for reviving Treasury Secretary Andrew Mellon's trickle-down economics theory from the 1920s, though I don't believe Reagan himself ever actually called it that. We'll get into some of the key assumptions of trickle-down in a second, but the biggest cultural change was the perception shift about the private and public sectors. 

Ronald Reagan: In this present crisis, government is not the solution to our problem, government is the problem.

Katie: Reagan's administration believed that private industry is inherently efficient because it's driven by incentives of profit maximization, and the public sector is inherently wasteful and inefficient because it's not driven by profit incentives. And it was a real shift in how Americans thought about what types of economic policies netted the best outcomes. We went from criticizing big business for several decades to criticizing big government, and that's basically what knocked down the first domino that got us to where we are today. 

Ronald Reagan: You triple our troubles and we’re better off than any other people on earth, and we've asked so much of government and we've gotten in the habit over the last 40 years of thinking that government has the answers. There's very little that government can do as efficiently and as economically as the people can do themselves, and if government would shut the doors and sneak away for about three weeks, we'd never miss 'em. 

Katie: President Reagan began deregulating energy, public utilities, banking, and finance. He is also widely known for originating the term “welfare queen” and demonizing recipients of government assistance, and he and his advisors ended a lot of FDR’s New Deal programs. This is where we started to see the concept of, like, lazy Americans who kicked back and mooched off the system. This trope was almost exclusively portrayed in media and entertainment as Black people, and specifically Black women, based on a mythologized woman named Linda Taylor who committed welfare fraud.

So we mentioned deregulation, and I think it's worth putting a finer point on this and mentioning a few patently disastrous and notable outcomes of deregulation. First and foremost, do you remember the 2008 global financial crisis? Because it was indirectly the result of the Commodity Futures Modernization Act in 2000 that deregulated speculative derivatives like credit default swaps, which were, to put it simply, the gambling device that was used to financialize the American housing market in the early aughts. The 1996 deregulation of the California electricity sector, which then promptly caused the 2000–2001 California electricity crisis. And in three words, Enron and WorldCom.

Now, Reagan was and is a polarizing figure. My history class girlies may recall that even George H.W. Bush, before he became Reagan's running mate, called his economic policies “voodoo economics,” because he felt it was, to use the technical term, kind of bullshit. 

George H.W. Bush: Well, what I said back then, it's very hard to find the…actually, let me start over. One, I didn't say it. 

Katie: Economists still to this day disagree about whether or not Reaganomics was ultimately successful. Fans of Reagan will praise the economic growth that followed his administration, where inflation went down and American GDP post-1980s exploded. Ironically, tax revenue under Reagan actually went up, because of the growth, despite individual and corporate tax rates being cut. So in some ways it seemed like it worked. The challenging balance to strike, of course, is that as GDP grew, so did income and wealth inequality, which intimates that the class of beneficiaries of such growth is becoming increasingly smaller, and the Organization for Economic Cooperation and Development, or OECD, estimates that worsening wealth inequality has actually slowed our GDP growth in the 21st century. Another complication and misconception is that the US's economic growth from the 1980s until now outpaced the growth of our peer nations in Europe, where incomes are less unequal. But according to World Bank data, that is not the case. While the American economy is richer, the rate of growth has been remarkably similar over time. All that to say, income inequality is not a necessary side effect of economic or even technological growth, which is another popular reason proffered for why the US economy has grown so unequal in the last 40 years. 

So while people point to policies in the Reagan era that did achieve what they were supposed to, trickle-down specifically has more or less proven ineffective. The wealth did not trickle down to the lowest rungs of society. It proved to have a thicker viscosity, and mostly stayed at the top. The other rather paradoxical aspect of the Reagan administration is that despite all of the anti-big government talk, the government gross federal debt actually tripled under Reagan, from $900 billion to $2.7 trillion. The myth that he cut spending is so pervasive because the “small government” messaging was so effective, and like we said, tax revenue did rise and inflation did slow. So that's how I conceptualize the beginning of American capitalism as we know it today. And I think it's crucial to recognize that this version of our economic system is barely 40 years old. A lot of the truths that we consider to be Econ 101 are no more than theories, and chief among them is this trickle-down theory. 

So let's talk about a few of the fundamental assumptions of the economic system we have now. People are greedy, and greed is good because it drives competition. People are inherently selfish, and that drives incentives. That if you pump wealth into the top, it'll trickle down to the lower rungs of society. That if you raise wages, it'll eliminate jobs, because there's a sort of equilibrium that needs to be maintained between the two. And if you give in one place, you have to take from somewhere else. If you raise taxes on the wealthy, innovation will stop, because the rich are the ones who innovate and create jobs. And that the best solution to anything is a free market. Those are some of our fundamental assumptions that are governing the economic policies that we have today. And as you'll hear from Nick Hanauer in the interview in a little bit, they don't really pass the fact check.

One interesting piece that I came across in preparing for this episode offered the idea that a large middle class is not a naturally occurring side effect of capitalism. This doesn't just happen. That there's nothing normal about having a middle class in a capitalist system, because in true, pure capitalism, aka a system wherein all of a country's trade and industry are controlled by private owners for profit rather than by the state, the most natural outcome is a socioeconomic breakdown that looks something like this: At the top, you have a very, very small class of super, super rich—today, we'd probably call them the 1%. Immediately below them you have a slightly larger, but still relatively small middle class. The lawyers, the doctors, the small business owners who essentially keep society running for the ultra rich. This is another between 5% and 10% at the most. And then everyone else, the vast majority of the population in what would be considered the working poor, often 90% or more of a population, ends up in this group. They have little to no wealth at all. That's what's considered the default state of textbook capitalism, capitalism without any checks and balances, regulation, or intervening policy.

Ironically enough, I first heard this idea discussed on a hedge funds podcast, of all places. They were discussing expansionary monetary policy, so think money-printing, low interest rates, et cetera, and the work of an economic researcher named Ole Peters. It sounds really, really lofty, but listen to this: 

Speaker 1: We have become so enamored with the idea of meritocracy and current outcomes being demonstrative of capability. Jeff Bezos is the richest man in the world. Or, I guess, actually here's the irony. I think Elon Musk is currently the richest man in the world, right? And that is supposed to speak to his capability. That is evidence of his capability. Well, if Elon Musk didn't have 17 children or however many he has, if he had a single child and that child were to inherit that, would that then be indicative of that child's success? No, it would not. It would be indicative of his social status, right? It would be indicative of the genetic origins of his wealth. We have systems that are like that in history, right? We have systems of nobility and aristocracy that have enabled that sort of behavior, but we don't have to do that. And we can recognize that a system that not only socializes losses, but also recognizes that socializing gains can play an important role in building robustness of the society, I think is actually a really important conversation to begin having.

Speaker 2: One of the more interesting experiments that Ole participated in was this thought experiment where he conceived of a simple economic framework and a simple transaction mechanism and savings mechanism and redistribution mechanism. And he played out, he simulated the evolution of systems, where each of those layers is parameterized in a slightly different way. And this experiment yielded some really fascinating results. One of which is that without distribution in a conventional capitalist system, even if all agents begin with the exact same productive capacity, eventually all of the resources in the economy will accrue to a single individual.

Katie: So to reiterate, without distribution in a conventional capitalist system, even if all agents begin with this exact same productive capacity, eventually all of the resources in the economy will accrue to a single individual, right? So this idea that absent any sort of intervention, all capital accruing to one person is the natural state of pure capitalism. That's obviously the most extreme version, but it's a little frightening how close we already are to some degree, when we look at figures like Jeff Bezos and Elon Musk, who between them control more wealth than roughly the poorest third of Americans combined. 

Obviously that type of outcome is rather antithetical to a widely prosperous society, which is why you have some economists who argue fervently that if we want a middle class, we have to make specific policy decisions to create one. It doesn't happen on its own. It comes down to this concept, which again is more nuanced and is not as simple as “the free markets will cure all,” that free markets are more like a garden than a jungle. They have to be tended with things like intentional tax policy and corporate regulation, and that when left to grow unchecked, they become overrun with weeds. They don't do what we want them to do, because of course this is in direct opposition conceptually to the libertarian approach to markets, which says any form of government intervention will immediately make things worse.

It's probably worth asking, worse for whom? But anyway, it's an idea we can trace back to the Reagan administration. How much has neoliberal economics cost your average Americans over time? Well, in 2020, the Rand Corporation, a nonpartisan nonprofit think tank, did groundbreaking work that was able to quantify for the first time just how much wealth has been transferred from the bottom 90% of Americans to the top 1% since the 1980s. They found that a real distribution upward of $50 trillion occurred over the 40 years. They found that had wages continued to keep pace with economic growth the same way they had until the 1980s, the median wage in the US today would be $120,000, which is roughly double what it actually is.

To reiterate, this is not a fantasy world in which the US economy grew more, or even a perfect egalitarian one in which everyone has the same. This is merely a counterfactual wherein the wages of each group—low, middle, and upper classes—grew at the same rate and benefited the same amount from the actual economic expansion that occurred, instead of majority of the gains landing with the richest 1% of Americans. 

Now, ideologically, this worldview is now pretty entrenched, thanks to things like the prosperity gospel. Making matters even weirder in the US is the strain of religious belief known as the prosperity gospel preached by megachurch pastor centimillionaires like Joel Osteen. If you haven't watched The Righteous Gemstones on HBO, put that on your weekend to-do list. It is a hilarious parody of this exact strain of bizarre American theology. This is a quote from Vox: “The prosperity gospel is an umbrella term for a group of ideas popular among charismatic preachers in the evangelical tradition that equate Christian faith with material and particularly financial success. It has a long history in American culture, with figures like Osteen and Jim and Tammy Faye Bakker—glamorous, flashily dressed televangelists whose Disneyland-meets-Bethlehem Christian theme park, Heritage USA, was once the third-most-visited site in America.

A 2006 Times poll found that 17% of American Christians identify explicitly with the movement, while 31% espouse the idea that if you give your money to God, God will bless you with more money. A full 61% agree with the more general idea that God wants people to be prosperous. It's worth noting that Jim Bakker went to prison for fraud. Hilariously, only in America could a religious system thrive that says an omnipotent almighty power blesses those he loves most with more money. But even if you weren't a direct subscriber to this myth-making, it influences the way we think in this country, that rich people must be smarter, better, more moral, holier, even, at extremes. That we should worship at the altar of capitalist success.

Oprah Winfrey: So do you make any apologies for your grand piano? 

Speaker 3: I really don't, Oprah. We just feel like this is God's blessings, you know? 

Katie: But the prosperity gospel's roots don't come from the Bible. After all, I learned in my 12 years of daily religion classes in Catholic school that Jesus was basically a radical figure who had no money. It comes from a tradition called capital N, capital T, New Thought, which is, by the way, a killer name for a podcast, you guys. Again from Vox, a quote: “The upshot of New Thought was the quintessentially American idea that the individual was responsible for his or her own happiness, health, and situation in life, and that applying mental energy in the appropriate direction was sufficient to cure any ills.” End quote.

Now, I'm not gonna say that taking responsibility for your own happiness and getting your mindset right is a bad thing, right? We've even recorded an episode all about shifting from the victim to the victor mindset. Obviously, individual responsibility, hard work, and taking matters into your own hands can be very powerful. But applying a layer of moral or righteous superiority causes issues for obvious reasons, because it confuses correlation with causation. But we tend to skip all that when we talk about someone like, say, Jeff Bezos. And we're more inclined to ask what his morning routine is than whether or not he feels weird that his workers have to pee in bottles. I googled Jeff Bezos’s morning routine and was served hundreds of thousands of variations on the same article that credit something called “puttering around” with Bezos's success, chock full of mind-blowing advice for success, like “drink coffee” and “make pancakes” and “do things you love when you first wake up.” But this prosperity gospel cause and effect belief system, whether we are consciously aware of it or not, is dangerous precisely because it is so intellectually lazy. It says someone must be more equipped, more qualified because they're very wealthy. That they must have needed those traits to become wealthy. And as a result, we should continue to trust them to make more decisions for the future.

When we equate wealth with goodness, we are lining up for a greased-up sled ride down a very, very slippery slope. These beliefs, which many of our policymakers hold earnestly, drive the decisions about how our country is run, and spark recurring debates on the national stage about how to fix wage stagnation, the housing crisis, and more, that often culminate in the suggestion that: 

Speaker 4: Get your fucking ass up and work. It seems like nobody wants to work these days. 

Katie: With that, let's welcome Nick Hanauer, our 0.1% economic vigilante to the show. Nick, I am so honored that you're here today. I am honestly fangirling quite a bit, so thank you sincerely for joining us. 

Nick Hanauer: Lovely to see you, and thanks for having me. 

Katie: Absolutely. To jump right into it, it's funny to admit this, because it does run a bit counter to the general ethos of this episode that, no, rich people are not inherently better, smarter, more qualified just because they have money. But I do find your point of view on these things credible, explicitly because you have been the beneficiary in the past of the neoliberal capitalist model that you point to as being problematic. Can you explain what neoliberalism means? Like, in simple terms, why are rich people so much richer today? How come a Fortune 500 CEO makes more than 300 times what their average worker earns? Where did we go wrong, Nick? 

Nick Hanauer: Yeah, so it's a great question. Does have a somewhat complex answer. So neoliberalism is the label that we put on a very particular kind of economic reasoning that has dominated policymaking for the last 40 or 50 years, really since the mid-seventies, early eighties. And it is linked to the sort of prevailing orthodox economics that is taught in universities and that everybody learns, pretty much. And that economics you can call neoclassical economics, but anyway, it's a framework of thought that is based on a bunch of idealized assumptions about human behavior, about the origins and nature of prosperity, about the dynamics of human social systems, about the sources and causes of economic growth, and so on and so forth. Anyway, a framework of thought based on a bunch of idealized assumptions that were formed over the last hundred years or so, that they weren't maliciously created, but they were idealized. These assumptions undergird this framework of thought that is internally consistent, it is mathematically elegant, but it is completely untethered from anything that actually happens on planet earth, because all of those assumptions are just objectively false. 

One of the assumptions is that people are what's called homo economicus, which is “reliably selfish and rational.” And that turns out just to be factually incorrect. People are actually not inherently selfish. We're group-ish, other-regarding, innately moral, and cooperative, mostly, although we can be selfish and awful.

Another assumption is that the economy is what's called the pareto optimal equilibrium, and that also is false. The economy isn't in equilibrium or an equilibrium system at all. It's an open, complex, adaptive ecology. The idea that price equals value and, you know, that growth is a product of factors of production—all of these things are plausible. They're tractable with mathematics, but they're just not true. 

And it would be bad if they were just not true, but what makes them truly awful is that if you take these assumptions seriously, if you make policy on the basis of them, there is really only one outcome which is possible. And that is that the rich will get richer and everyone else will get poorer. And let me give you just two quick examples. One of the baseline assumptions of orthodox economic thinking is this idea that the economy is this pareto optimal equilibrium within which if anything from the outside changes it, it destroys the efficiency of the system. So in other words, if one thing goes up, another thing must go down, within this way of thinking. So for example, if wages go up for low wage workers, then using this logic, it has to be true by definition that the number of jobs will go down. And that would be true if the economy was a pareto optimal equilibrium. It's just that it's not. It's an open ecology. And claiming that when wages rise, jobs decrease would be like claiming that when plants grow, animals shrink. It's just not the way the system works. 

And so all of these idealist assumptions were over decades weaponized into what has essentially become a protection racket for the rich. And the sad part is that because this is what everybody learned in college, Republicans and Democrats, policymakers from both parties implemented legislation and enacted policies on the basis of this thinking, which resulted in this massive transfer of wealth from the bottom 90% of Americans to the top 1%. And that is the big problem. 

So that's what neoliberalism is, is this way of thinking about economic cause and effect that leads you to believe, among other things, that if you raise wages, it kills jobs and therefore you should never do that. And that tax cuts for the rich create growth, so you should always do that. And that any form of constraint or regulation on corporations will reduce their efficiency and productivity and will be bad for everybody, and so on and so forth. Sort of the trickle-down playbook. And none of this turns out to be true. It's all nonsense. 

Katie: You've said another, I mean I've heard you, I think it might have been the TED Talk that you did where you had mentioned, like, not only are these things wrong, but they're just backwards, but they're so insidiously baked into the framework of our politics and our economics that you challenge them and you're immediately met with this idea of like, well, it's Econ 101 that these things are true. And it's like, well, but if Econ 101 was wrong, then where does that leave us? And you had mentioned something in your answer that I wanted to kind of dig a little bit deeper in, because it stood out to me quite a bit. So when you say that modern economics, we know it's based on this theory, people are inherently selfish, inherently rational actors, they're motivated by self-serving incentives, and you're pointing out that no, actually the anthropological perspective of human nature and incentives says the opposite. Humans are not inherently self-serving. They are actually biologically wired to be cooperative to participate in a collective. How does that finding or correction change what we believe to be true about what makes markets work best?

Nick Hanauer: Yeah, that's a terrific question too. And right at the heart of where we went wrong. To answer that question, the first thing to try to understand is what prosperity actually is. And the conventional view is that it's best represented by money or GDP or something else like that. And that also is not true. It's a convenient way to look at it, but it's not true in any meaningful sense. Prosperity in human societies is best understood as the accumulation of solutions to human problems. And the difference between a poor society and a wealthy one isn't the difference in the amount of money kicking around. It's the degree to which that society has solved the problems facing its citizens. And so in a primitive society, maybe you can get a hammock and some bananas and if you get sick, you're on your own. And in an advanced society, you have a comfy bed and air conditioning, and if you get sick there's antibiotics available, and so on and so forth. And so if you understand prosperity as the accumulation of solutions to human problems, then you can see that the point of the economy, and in fact the reason that markets are a positive social technology, is that it enables groups of people to come together to solve increasingly complex problems. And that process is all based on cooperation. Competition actually plays an exceedingly small role in producing the things that improve our welfare. And once you understand that and you merge that with the…effectively, as you put it, the anthropological fact that humans were wired to be cooperative, you can see that cooperation is our superpower, not this sociopathic competitive thing that neoliberalism and sort of the modern take on capitalism insists.

You know, and as I've said before, being rapacious doesn't make you a capitalist. It makes you a sociopath and an asshole. That, I mean, competition is an indispensable part of a functioning market, but cooperation is the thing that makes it go, and is the source of all of the cool new things that a functioning economy can produce to make people's lives better. And so what we should be encouraging is more cooperation and not necessarily people being ever more competitive. 

Katie: I also wonder if it maybe is what's happening here with…I wanted to ask you about this idea that everything should be a market, right? Like I heard you and Oren Cass, in an interview on your show Pitchfork Economics, talking about how not everything should be a market, that a free market is not a solution to all of our problems. And I was immediately reminded of how ridiculous and indefensible it is that we have for-profit health insurance marketplaces in the United States. Because not only is it dystopian from a human perspective, but it actually ends up being less efficient, more expensive, and crucially, results in less consumer choice than a single-payer model would, because of the in network/out of network racket. To me, this is like the quintessential example, but I find that this assertion that a free market is not always the best solution defies that conventional economic wisdom, because most of us just assume that the best, most efficient way to run anything is with the market. It's Econ 101, right? 

Nick Hanauer: That's right. 

Katie: Can you speak to this a little bit more? Like why is a private market not always in the public's best interest? 

Nick Hanauer: Yeah, so Katie, I think you're really onto something there, and are correct. So again, the conventional neoliberal view of markets is that they are efficient, that they efficiently allocate scarce resources, and that is the source of how they create value in the world. And that is objectively false. Markets are not efficient at all. 85% of all businesses fail within a year, a year and a half. Like Microsoft bought one of my companies for six and a half billion dollars and destroyed 100% of the value within 24 months. There's nothing efficient about that. But what markets are superb at, unmatched at, is effectively evolving new solutions to human problems. So markets are not efficient, but can be incredibly effective if well-constructed and well-managed.

And so there are some circumstances in a human society where that…by the way, there are evolutionary processes where that evolutionary dynamic can be insanely useful. So a market works super well if you have, for example, a whole bunch of companies which are essentially independent organisms cooperating to compete to find a, for example, a new way to inoculate people against a pandemic. That's the canonical example of, like, when markets really work great. But private health insurance, for example, is a great example of where markets do not work. Because when you put private insurers in between doctors and patients, for every healthcare transaction from the most mundane to the most serious, like from burning a wart off your pinky to brain cancer, what you have effectively done is created an incentive within the healthcare system to turn molehills into mountains. Because if the intermediary makes 15% or 20% on every transaction, well, guess what? You wanna make every transaction an expensive transaction, right? Without creating any value. Like why in the world do you need an insurance company to be the payer if you go to the doctor and get a wart burned off your pinky? This is just nuts, right? So this is a great example of where a public institution, like a single-payer system, could drop that transaction charge from, let's call it 15% or 20% of the average medical transaction cost, plus remove the incentive to turn everything that's cheap and easy and inexpensive into something which is expensive and hard to do and bills a lot. This is why the United States spends approximately twice as much per citizen per year on healthcare as all of the countries in the world that have single-payer systems where they have gotten rid of this abomination, right?

And so what we've done in the United States in the interest of serving the neoliberal efficiency gods is created a healthcare system which effectively is the world's biggest price-fixing scheme, right? It's just this insane, nutty system which, by the way has some good parts, you know, like our pharmaceutical…that whole industry is super corrupt and charges too much and blah blah blah blah blah. But we are pretty innovative here and have come up with some pretty great stuff to make people's health better. So it's not all bad, but, but you're exactly right, is that there are these places where markets can create enormous social value, and places where they just do not belong at all.

And again, you know, the neoliberal view that everyone…it looks at everyone as a sociopath. That's the problem with homo economicus, is if you take it seriously, then you cannot permit the possibility that there are groups of people who wanna do the right thing just because it's the right thing and they care about other people. That's impossible in that world. And so it reduces, for example, every worker in the government to this self-interested jerk who's just trying to make things worse for everyone. And school systems, you know. The whole thing is just, it's nuts and it's just not true. That's just not what people are like, and although they can, of course, people can be awful. But anyway, so you're dead right. 

Katie: Well, I would like to talk to you a little bit about another thing that I kind of group in with healthcare from a human need perspective, and that is shelter. One of the biggest problems facing American cities today is a lack of affordable housing. And you wrote that across America, housing costs have been rising faster than incomes for decades, with every hundred dollars increase in median rent generating a staggering 15% increase in homelessness. And you say trickle-down economics is to blame here as well. Can you tell me more about that? 

Nick Hanauer: Yeah, well this is a classic instantiation of where the market failed. The housing problem is a very, very complicated problem. But the market is organized not to solve problems the society faces. It's…under the neoliberal conception, the only point of the market is to enrich shareholders. And yeah, often the activities involved in enriching shareholders have almost nothing to do with solving the problems the society faces. I think that the country needs to approach housing like we approach transportation a little bit more. We need to invest collectively in building housing that people can afford. You know, we built the national highway system, right, a long time ago as a country, and we paid for it and have amortized it over decades and decades and decades. But imagine if that highway system was owned by private interests and every year they jacked up the rates that we all had to pay to drive from one place to another. How horrific that would be, instead of just driving on the roads. Well, this is what happens in the housing thing, is that if all of the housing is owned by private interests, when the market gets good, well, rates go up. But you know, prices to build, rents go up, so on and so forth. But imagine if instead, the country had built a huge amount of middle-class housing in cities around the country, and the public owned it like they do the roads, and instead of jacking up the rates every year, we simply charged people the amount that it took to maintain those houses over decades.

This is not to say you want to outlaw private housing, fine—build it. But if we had spent some fraction of what we spent on transportation on housing in the places where everybody's living, and the public owned it and people rented it for what it costs to build, not what some private equity firm can charge you by owning it, well, then we wouldn't have a housing crisis. By the way, I'm not imagining this scenario. This is what places that have solved this problem have done. That's what they did. 

Katie: Yeah. Yeah. 

Nick Hanauer: The only bad part about this approach, of course, is it's very difficult to solve today's problem quickly. You have to do this over time. 

Katie: Yeah. And massive investment. It's a…give a public sector option, right? For these things that are necessary. It's not saying you can't have the private sector too, but it's funny, because when we did an episode a couple weeks ago about kind of the bootstrapping, rugged individualist ideology in the US, and that if you can't do all of these things for yourself, you know, the government's not there to save you and that they're not there to help you. Which okay, first of all, yes they are. That's literally the point of the government. But there was one kind of piece of criticism that stuck out to me, 'cause someone was like, “Well, it's not good to be so individually reliant on anyone.” And I was like, bingo. It's not good to be individually reliant on anything. And right now in our current system, we've granted so much personhood to these corporations. You’re individually reliant on your employer, who probably employs you at will, which means they can terminate you whenever they want. 

Nick Hanauer: That's right. 

Katie: Taking with them your income, your health insurance, you know, and obviously the income is what you use to pay for the skyrocketing cost of housing, childcare, all of these things. So I agree we should not be individually reliant on any one thing, but that's frankly the system that we have right now. So, bit of a soapbox. But all that to say, I am in complete agreement, and I think this is a great segue to middle-out economics and policy, and you know…middle-out economics, this is your baby, you coined this term.

Nick Hanauer: It is. 

Katie: It basically says growth in an economy actually happens from the working class up and the middle class out. It is basically the antithesis of trickle-down economics. I was listening to your new episode that came out this morning about how important this narrative is to creating systemic change. This idea that middle-out policies have to be framed accurately to get the buy-in they need—that they are intended to right the scales, if you will, of an economic and political system that has for decades prioritized the super rich at the expense of everyone else. 

Nick Hanauer: Yeah. 

Katie: And that it's not the government as savior, the government is not here to save you, but rather the idea that the government should adequately support working and middle-class Americans so they can benefit more fairly from the hard work they are already doing, as opposed to what it's doing right now, which is actively working against them. That is a brilliant distinction to make. How does middle-out economics work? Can you give us some examples of middle-out economic policies? 

Nick Hanauer: Sure. But I wanna zoom out just a tiny bit and cover some stuff that you said that I thought was really important, and one of them is, again, that markets are really efficient, perfectly efficient, and basically reward everybody in proportion to what they contribute, right? So if you're rich, you deserve to be rich, and if you're poor, you deserve to be poor. And it's not complete nonsense, because of course there are lots of examples of people who are rich who are extraordinarily talented and insanely hard-working. Obviously, merit has something to do with this. But one of the most profound mistakes of the conventional economics is this idea that path-dependence, luck, and compounding don't have anything to do with where we're at in society. And that is super, super, super, super false. The game of life is not like checkers, where sort of everybody starts out the same. And if you're good at checkers you win. And if you're bad at checkers, you lose. It's like Monopoly, where the only outcome that is possible is one person will win all the money and everyone else will go bankrupt, in the absence of countermeasures.

Katie: Jeff Bezos has entered the chat. 

Nick Hanauer: Yeah, yeah, yeah, exactly. You know like that, that's the thing about a market economy, is that inevitably it compounds both advantages and disadvantages over time. And what that means is that the middle classes are always deliberate artificial constructions. They don't happen; they are not the happy byproduct of economic growth. They must be the objective of policy. There's a reason that there's been this $50 trillion transfer of wealth from the bottom 90% to the top 1%. That's not because the bottom 90% slacked off over the last 40 years. It's because we allowed policies to concentrate advantages and disadvantages, and we didn't used to do that. And so middle-out economics takes that into account and basically is a deliberate effort to generate prosperity by ensuring that every citizen is robustly included in the economy as a consumer, as an innovator, as a citizen, so on and so forth. Because that is what makes the economy go. The economy is people. It's not money. 

Katie: You don't say.

Nick Hanauer: Yeah. And the more people we robustly include in the economy, the better it will work. Full stop. That is just the golden rule of economics. Inclusion is not this thing, this sort of liberal nicety that we should do if and when we have economic growth. Including people is the cause of economic progress in market economies. And so middle-out economics is all about getting everyone in the country to be able to robustly participate in as many ways as possible, whether as consumers with rising incomes or as highly trained workers or innovators, making cool new things to solve human problems. And it's effectively the opposite of the trickle-down approach, which was simply if you just give enough tax cuts to rich people, somehow it will all work out for everybody, which is always a con job and nonsense. You could go on and on and on about what the policies of middle-out economics are. They include things like making sure that every single person who works for a company, particularly a big company, earns enough to live a dignified and secure life without the assistance of other taxpayers. If a company cannot afford to pay its people enough to get by without food stamps, it's not really a company, it's a parasite. So it should go away or figure out a way to pay people enough to live, like, decently.

And so, you know, there's a billion things you would do, but all of them are aimed at making sure that every citizen gets to participate. And you know, when you do that, everything works. The rate of economic progress increases, the amount of polarization in the society massively decreases. Katie, this is something we should really talk about, is that, you know, like most people think about inequality as this economic inconvenience for the people at the bottom, which is true, but it's much, much worse than that, because, you know, as you pointed out in the beginning of the interview, from an anthropological perspective, which is a true perspective, humans are social creatures and status is incredibly important to us, probably more important than any other thing. And when you make a society super unequal, you effectively shred the reciprocity norms that make social cohesion and democracy possible. It's worse than just, like, people can't afford to buy stuff. 

Katie: Yeah. 

Nick Hanauer: Right? It makes people insanely angry and irrational. 

Katie: There's an interesting kind of piece of this that I was reflecting on over the weekend while thinking about this interview, that the absolute, I guess, level of egregiousness of the inequality that we have is the biggest threat to the democracy that we have. Because to your point, it makes everybody angry at one another. And I think there's no better example of this than the response publicly to student loan forgiveness. And I just had this sense the entire time that was all unfolding, and the wrath and the fury and the rage that I'm seeing on social media from people that don't agree with this. I'm like, guys, we are all down here fighting with one another over who's getting what table scraps. Like, it's not left versus right. Look up. Like, look up at the people…they are having a 10-course meal up there, and we are fighting with each other over $10 grand? I'm like, give me a break. Like it just…but it totally makes sense, because everyone so acutely feels like, “Oh my god, it's this zero sum game, if I don't get mine now, I'm never going to. And if they have more, that means I have less.” But it's like… 

Nick Hanauer: That's right. 

Katie: We are all fighting over the little remnant of the pie that is left. And it would be much more effective to say, “Wait a second, but where did the rest of the pie go?” 

Nick Hanauer: Yeah. So, A), one of the things going on, of course, is that nobody can afford to pay these loans back, so they weren't gonna get paid back anyway. Right? And B, even if you assume that people could pay these loans back, you know, over 10 years, $250 billion, something like that. But…sound like a lot of money? Not really, because for perspective, American corporations this year alone will spend $1.2 trillion, six times that amount, on stock buybacks alone. $1.2 trillion on a straight-up scam. So people getting mad that we're spending a tiny bit of money on middle-class people within the context of what is truly going on at the top…it's so detached from the reality of what is really going on in our economy that it's super sad. 

Katie: You guys stay mad about that down there, and we'll continue doing stock buybacks up here.

Nick Hanauer: Absolutely. Absolutely. If it had been me, I would've wiped out all the debt. Been like, “No, it's all gone.” 

Katie: Hanauer 2024.

Nick Hanauer: You know, the Republicans passed like a one and half trillion dollar tax cut in 2017, 85% of which went to the top 1%. If that's okay, why isn’t wiping out $1,000,000 of college debt for middle-class people okay? Spending the same amount of money, it's just who you're spending it on that changes. 

Katie: Who's it benefiting? 

Nick Hanauer: Yeah. Right. 

Katie: Yeah. Let's talk about that. Let's talk about taxes on the rich. So you said, I wanna read you back a quote that I thought was so powerful. You said, “Raise taxes on the rich and almost anything the federal government does with the revenue will pump more money through the economy than what the wealthy are doing with our hoarded cash today. Tax the rich to put money back in the hands of the American people through middle-class tax cuts, and corporations will expand production and payroll to meet the resulting spike in consumer demand. Tax the rich to invest in roads, transit, bridges, healthcare, schools, and to transition to a green energy economy. And we will create millions of good-paying jobs while building the physical and human infrastructure on which our collective prosperity relies.” 

Mic fucking drop. Why do modern economists have it wrong? You talked a little bit about this pareto principle of equilibrium. Like what is wrong with the way rich people treat their millions and billions? Why does taxing the rich create more jobs, and how can we as regular voters ensure that that happens? 

Nick Hanauer: Yes. Quite unbelievable. All of this comes back to economics, and you know, just how dumb it got. You know, for most economists, taxes are this dead weight loss. It decreases efficiency or something like that. It's just, it's absolutely nuts. Your laziest government bureaucrat is still some restaurant's best customer. Like if you stipulate that some bureaucrat out there that, you know, kind of the canonical government worker that the government haters can point at as useless and blah, blah, blah, blah, blah. They're still going to the grocery store, they're still getting haircuts, they're still going to restaurants, and you know, some hedge fund dude spending $150 million on a painting and sticking it on their wall is not a productive use of funds. Right? Like it just isn't. Every dollar that we take from the truly rich and spend really in any other way is gonna be economically more productive than, trust me, what we're doing with it. I resemble that remark. 

Katie: You’re like, I would know.

Nick Hanauer: I know. I do know. And I'm not gonna share with you how egregious my life is, but trust me, it is, and you know, it's indefensible. And not everything that you're gonna do with that money is gonna be stupid. A ton of it is gonna be incredibly useful to the broader economy. And so, you know, of course rich people should pay more tax. And I have this crazy idea. What I would do is raise the minimum wage back to sort of former high watermark of about $24, $25 an hour. And then I would tie the minimum wage to the wages of the top 1%. So you go, Ken Griffin, and make, you know, $3 billion. Everybody else comes along for the ride. Yep. You know, like great, good on you. So the richer the rich get, the richer everybody gets. Basically tie the bottom and the top together, so that you basically legislate that everyone will share in the benefits of economic progress. To me, if I ran the zoo, that's what I’d do. 

Katie: It's funny, sometimes when I talk about taxing the rich in, you know, the personal finance content niche that I have, I'll get people that are like, “Well, the rich are rich because they deserve it, and I don't wanna be taxed more.” I'm like, “Honey, you're not who we're talking about. You make $200,000 a year. You're middle-class like the rest of us; this isn't gonna impact you at all.” 

Nick Hanauer: Correct. 

Katie: And I do think that there's this misconception…I don't think people realize how rich the rich really are. Wasn't there some study they did where they looked at, they asked average Americans, “How bad do you think income or wealth inequality is in the US?” And the numbers that most Americans thought was actually more reflective of Norway's wealth inequality, where the Gini index is like, I don't know, 22 or something, you know, to our 40… 

Nick Hanauer: Correct. 

Katie: I just think people don't actually understand… 

Nick Hanauer: They were off by a factor of 10.

Katie: Yes, exactly. And I think that's where there's some, like, it's almost just an awareness and education thing of like, no, no, no. We're not saying if you make a million dollars, we're talking about people who make $500 million a year, a hundred million dollars a year. Like there's almost no…you can't even conceive of how wealthy some of these people are. And not to say the economy is a zero sum game, but to some degree it kind of is. Like corporate profits are finite. Like there is only…if somebody is getting paid a billion dollars, that's money that probably could have been better spent on other things. 

Nick Hanauer: That's absolutely right. And you know, the thing is that coming back to neoliberalism and that way of thinking about economic cause and effect, how many times have you heard in your life that if you raise wages for working people, it will kill jobs? 

Katie: Oh yeah. The Big Mac is gonna cost $20. 

Nick Hanauer: Yeah. And there have literally been thousands of studies now on the effect…I mean, there's just giant amounts of economic research on how many jobs…turns out, zero. The answer is zero. It didn't kill any jobs, but how much this issue has been studied. But to my knowledge, not one economist in the entire world has ever run a study analyzing how many jobs Wall Street bonuses killed. 'Cause here's the thing. If you take, I mean, just add up the incremental compensation at the tippy top. Hundreds of billions of dollars. And then say, instead of that, we spread that through the economy in $50,000 per year chunks, which is how much the average, the median full-time worker in America makes. You know, it's tens of millions of jobs. 

This is what neoliberalism is. The evil part is not believing that when the rich get richer, that's good for the economy. The evil part is believing that when the poor get richer, that's bad for the economy. And the fact that infinite profits, infinite bonuses in this viewpoint and in the media are this unalloyed good. Like, well, okay, you know, they earned a lot of money. That must be okay. Nobody ever says, Well, maybe if you took some of that money and paid working people a little bit more, that would be better. Anyway, this is the world we live in and what we're fighting against. 

Katie: Well, I can't thank you enough for doing this work, and for being here today. I really appreciate it. I've been shouting your message at Civic Ventures far and wide, so thank you for joining me and spending this time having this conversation. 

Nick Hanauer: You are so kind. Thank you for having me. 

Katie: Welcome back to Rich Girl Roundup. As a reminder, we will take listener questions every month. I'll put out a call for questions on Instagram, so follow Money with Katie and we will pick one that feels interesting and widely applicable. As my standard disclaimer, this is simply “What would Katie do in your situation?” I'm not a licensed financial professional and this is not financial advice. Paid non-client of Betterment. Views may not be representative. See more reviews at the App Store and Google Play Store. Learn more about this relationship at This segment is brought to you by Betterment, the online investing platform that gives you the tools, inspiration, and support that can help you become a better investor. 

This week's question is from Teresa. She says, “I recently retired, March 2022. Where is the best place to park the next one to two years of living expenses while the market is all over the place?” 

Katie: Oh, I am so sorry to hear about the timing of your retirement amidst all the craziness of this current market, but congratulations nonetheless. I also think it's worth pointing out that we really don't know how long the market's going to be crazy. It could turn around next year or take 10 years to return to normalcy. And as an aside, saying “normalcy” because the market spends more time up than down. But I'm also probably showing my recency bias here since most of my investing life occurred during a historic bull run. That said, my answer might be more simple than you'd think: cash. I would probably be keeping my living expenses in cash. Now, depending on how much this is, you could consider putting $10,000 of it or $20,000 if you're married into something like I bonds. But that will lock things up for at least a year and may not be worth the trouble. I have an episode all about this that I'll share. Same deal with CDs. If we're just talking about a year's timeframe, maybe more squeeze than the juice we're gonna get, right? So to me, if you already have the money in cash, this is probably the simplest and safest route for the next one to two years of living expenses. That's probably what I would do personally, and just toss it in a high-yield savings account if it's not there already.

But if your money is in the market right now and you would be selling to get the cash out for one to two years of living expenses, that's more a bit of a gamble, because sure, the market could be lower than it is right now in 18 months from now, but it's also possible that it won't be, so by selling right now and pulling out the next one to two years of living expenses all at once, you are realizing losses in some cases and locking in current prices. When we think about Bill Bengen's 4% rule research and some of the follow-up case studies by writers like Nick Maggiulli about optimal withdrawal strategies, we find that it's often better to sell slowly, aka dollar cost average out the way you would dollar cost average in, rather than pulling out 24 months all at once at their current lows. Maggiulli's findings would suggest that nearly two thirds of the time, you would be better off selling and withdrawing in three-month increments, rather than in 12- or 24-month increments. This is because generally speaking, over the long term, the longer your money stays invested, the higher the chances that you will recoup losses. Of course, as Maggiulli points out, this is just an average. In the other one third of instances, you would've been better off pulling out an entire year at once. It is just simply a game of odds, and it's very difficult to time tops and bottoms. So I would consider those things when making this decision.

All right, y'all, that is all for this week. I will see you next week, same time, same place, on The Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from the talented Nick Torres. Sarah Singer is our VP of multimedia, and additional fact checking comes from the lovely Kate Brandt.