The Prof G Pod with Scott Galloway - Talent Acquisition, the Recession, and Inflation — with Tyler Cowen

Episode Date: August 4, 2022

Tyler Cowen, an economist and professor at George Mason University, discusses his latest book, “Talent: How to Identify Energizers, Creatives, and Winners Around the World.” Tyler also shares his thoughts on macroeconomic trends including whether the US is heading for a recession and controlling inflation. Follow Tyler on Twitter, @tylercowen. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Welcome to the 183rd episode of the Prop G Pod. The dog is officially on vacation for the month of August. What a thrill. Why do I take August off? Because I can. And also, time is flying by, and I spend most of my 20s and 30s, and I'd say kind of the better part of my 40s doing nothing but working, as I am very focused on economic security.

And it's cost me a lot. I don't know if it was a good thing. Actually, I think it was mostly a good thing. But I have decided to try and catch up. And I'm spending a lot of time vacationing or a lot of time for me, relatively. I don't know why I'm so defensive about taking August off. Anyway, it's the European in me. When I take August off, it means I'm only doing, you know, I'm only working 30 hours a week. Anyways, it means we won't be breaking down the business news of the week, but you'll still receive a conversation with a blue flame thinker. In today's episode, we speak with Tyler Cowen, a professor of economics at George Mason and a Bloomberg opinion columnist. He's also the author of several books, including his latest, Talent, How to Identify Energizers, Creatives, and Winners Around in the world, which is co-authored with Daniel Gross. We discussed with Tyler the research from his latest book, including what to look for in potential job candidates, building a hard versus soft network, hard versus soft network, that's interesting, and conflating luck with talent. Tyler also gets into macroeconomics, including

stagflation, the recession, and the impact politics is having on our view of the economy. So here we are, our conversation with Tyler Cowen. Professor, where does this podcast find you? I am in Northern Virginia, Fairfax County. Oh, nice. So let's bust right into it. Talent. When it comes to potential people you want to work with or hire, what are you looking for? What traits are under and overvalued? The first way to think about talent is not just as you searching for them, but you want to get them searching for you. So most institutions underinvest in their soft networks that allows people to know who they are and have the talent

problem in essence reversed. But that said, when people show up, I think a very common mistake is that smart talent evaluators overestimate the value of intelligence, that once people are above a certain level of intelligence, the correlation between intelligence and job performance is actually relatively weak. So the smart people tend to overestimate smarts. If you're thinking about male talent evaluators, they tend to underestimate the intelligence of very smart women, and they tend to overestimate how much their personalities matter. So I would say the answer of what to look for depends on context, but the key is that you have a broader framework that will help you think through different contexts when you encounter them. It's funny what you said about kind of intelligence sort of flatlines in terms of correlation with job success. I think the same is true of wealth, isn't it?

That wealthy people, generally speaking, you want to be above a certain intelligence level, but then it's more a function of grit, I think, than actual intelligence. And durability and drive, willingness to work with people, your charisma as a leader, how carefully you understand the expectations

of other people. All those factors can matter more than extra intelligence or even extra willingness to put in hours of hard work. In your book, you focus on what you call talent with a creative spark. In order to find it and foster it, you suggest that hiring managers need to think past the bureaucracy. Say more about why bureaucracy specifically can be so deadly for this kind of talent. There are plenty of hiring endeavors where you have a lot of bureaucracy, whether you like it or not. You need to hire large numbers of people to do relatively homogenized jobs. You're going to have structured interviews with common questions. Maybe that's not ideal, but there's no way around it. What I see happening is that in more and more jobs, the bureaucratic approach has encroached

upon what I would call more of a venture capital approach. Be willing to take more chances. Engage with people conversationally. Try to figure out how they actually view the world. Don't just ask everyone the same tired questions like, tell us about a mistake you made on your previous job. That's just testing for prep. It's not testing for their actual level of talent.

So I'm encouraging people at the margin to be less bureaucratic. And one of the things that struck me in your book was I've always believed that one of the keys to a better economy or providing more people with more on-ramps to a middle-class lifestyle is that corporations need to break this fetishization of elite universities. And you write in your book that one of the worst parts of a bureaucratic approach to hiring is excess credentialism. Say more. We are now in an economy where to attain so many jobs, you need an undergraduate degree, you need a master's degree.

But we've ended up with a world where so many people tending need an undergraduate degree. You need a master's degree. But we've ended up with a world where so many people tending bar or driving an Uber, in fact, have a master's degree. That's crazy. Recently, the state of Maryland decided that for a lot of core jobs in the state of Maryland, you don't need a college degree. That is a step in the right direction, requiring a college degree. It's a disadvantage for minorities, for women who maybe left're in the business of credentialing. Our admissions departments are just HR screening tools for corporations who pay a premium because we've already done a lot of screening.

How do we get around that? How do we move to more of a skills-based assessment? I think the first step is simply being willing to do it. So in our common field, academia, John Maynard Keynes did not have a traditional PhD in economics. One of the greatest philosophers of the 20th century, Derek Parfit, he taught at your school, NYU. He did not have a PhD in philosophy. My former colleague, Gordon Tullock, was a lawyer, not an economist, but he was a brilliant economist in practice. So none of this was so long ago.

You know, Parford and Tulloch, that's all less than 10 years ago. So the sheer determination on the part of departments or hiring departments or HR departments just to be willing to take chances with people and look at merit, it is not some hypothetical utopian world. It's the world we lived in until quite recently. So, but when you talk about merit, are there specific assessment tasks? So let me, I'll back up. I've always thought interviews are almost worthless, that I've had amazing interviews

and I thought this person is going to be incredible and they haven't worked out. And then I've had what I thought were abominable interviews. And someone I know and trust has called me and said, this person is great. I take a chance on them. And they have been great. Can you assess people in the standard format of a one-hour interview? I would say this. If it's an important job or if you're funding a startup or hiring a CEO,

you should be giving that person much more attention than an hour interview. I also would say that when it's a choice between track record and how the person did in the interview, almost 100% of the time, you should go with the track record. But there are so many instances where the interview nonetheless is critical. It could be a very young person applying for a fellowship where there is no track record, or maybe it's a talented person. You know they're talented, but you're not sure they're the right match for you or for your team.

Then you have to go to the interview because there's not really anyone you can ask, is this person a right match for our team? The evidence does indicate that interviewing has positive value. You simply have to do it well. And first advice I have for interviews is just talk to a person about the substance of the task at hand. So basically describe the job and get their reaction to it? To give an example from economics, the most common question in an economics academic interview is, would you please tell us about your job market paper? That's okay. You get a canned recited speech that has been practiced 15 times. You don't really learn much from it. You learn what the person works on. But just to sit down with

the person and ask them a question about economics, what do you think is a country that's going to do well in the next 10 years and why? People aren't prepared for that exact question, but you learn how they actually think about the world. So when I say engage with the substance, don't just trot through the routines of the usual questions. Ask them something about the actual material. See how they respond. And you referenced the term soft network versus hard networks. Is that things like referral fees or getting people in the company to try and reach out to friends and find potential candidates? What do you mean by a soft network? It's not usually referral fees. It could be, but just people who know what is your company, what is your nonprofit, what is it you do? Maybe they follow you on Twitter. Maybe

they heard one of your podcasts once and they have some sense of who you are. They will recommend other people to you. They might work for you themselves. To have a strong, soft network of contacts, ex-ante, is the single most important thing that most institutions can do for good hiring. Now, a company like Facebook, everyone wakes up in the morning already knowing what Facebook is, but most places don't have that advantage. So let's talk about post-hiring. The person is, you've made the hire, the person shows up. Are there any critical success factors around ensuring this person has a kind of a good landing or gets off to the right start if you're the manager? When a person arrives at a new firm or institution, very often they just want to know, how do things really work? And they sense somewhat correctly that the interview probably never quite far, of their smarts, you might have that coming in, but how well they will work with your people.

And those first three to six months when you really figure out and learn if someone is doing the job properly, that's typically the main thing I look for. It's interesting. You're an economist, and yet most professors who write books on this topic come out of the management department. What got you interested in human capital? Doing many projects in my life and seeing that more often than not, the binding constraint was talent, not dollars per se. But keep in mind, this book is co-authored with a very active venture capitalist, Daniel Gross. I myself direct a nonprofit that has over 200 employees.

I run a philanthropic program with well over 200 award receivers. It's called Emergent Ventures. I've done a lot of hiring. So much of my life, I have been a practitioner of the quest for talent. We'll be right back. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers

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So I can't resist. As an economist, there's just some questions I want to get your thoughts on. The morning we're recording this, the Commerce Department released data showing our economy contracted two quarters in a row. And my understanding is by conventional definition, that would mean we're technically in a recession. What do you think is going on here? Recession, stagflation, what role does inflation play? What's the state of play right now? I suspect we are very likely on the verge of entering a recession. I don't actually think we're in a recession at this moment. I think those numbers will be revised, as GDP figures typically are. They're often revised quite a bit, and they'll be shown to have been premature.

But I think with the Fed tightening, again, a recession is likely. But if you look at the job market, if you look at investment, a lot of other indicators are still pretty positive. So I don't think we're quite there yet when it comes to recession. We've never had a recession with full employment. And if one says there is a recession today, I just don't quite believe it. But what do you, I mean, this really is a random walk because, you know, history is a series of unprecedented events. And it feels like I'm trying to, has there been another point in economic history where we've had full employment, an inverted yield curve, and interest rates rising this fast? Has that happened before? And if it has, what does this tell us about what might happen here? I have never seen this configuration of numbers and variables in economic history ever.

And it is unique. And I think we are poorly positioned to make very dogmatic predictions for that reason. And a pandemic like this, we haven't had in contemporary or modern times. HIV-AIDS killed a lot of people, but it didn't have the same kind of economic impact across the board. So I think we are flying blind and hoping for the best. So I agree with that. And if you were advising Jerome Powell or the president, what advice would you have around economic and fiscal policy? I think the rate of inflation is too high. Voters hate inflation.

It has to come down. The longer you wait, the more painful it becomes. I think Powell is on the right track, but he has acted much too slowly. And we will get there, but we'll have a lot more pain than was necessary. But coming out of a pandemic probably is never going to be pleasant.

But I think we screwed it up. We were asleep at the wheel and didn't realize how much inflation was coming and just kept on, you know, pumping out the money supply and spending through government. So if you think of inflation as too many dollars chasing too few products, you have the demand and the supply side. So we can, or the government can go after a tag demand through higher interest rates. How do we address the supply side, or can we address the supply side and get things moving again? The major obstacle on the supply side, as I think you know, is high energy prices. The Biden administration spent about two years discouraging fracking, exploration of more gas. There was this schizophrenic attitude toward fossil fuels. Now, I do see climate change as a big problem,

but it's as if we got the worst of both worlds. We didn't do that much to combat climate change through government, but at the same time, we got these super high prices for fossil fuels, and that has made inflation much higher in many areas. So what we should have had is a more aggressive program to do exploration and have greater domestic control over our own supply of energy, and we didn't. We did the opposite. It strikes me, you live in Northern Virginia. I'm in Manhattan, and my boys are staying with me, and I just can't get over, the first time I've ever seen this, at probably a dozen stores as we were walking around Soho, there was a line to get in and spend money. And you keep hearing about recession fears, and yet there's an hour-long wait to get into the on-running shoe store.

Do you have any thoughts on, am I just in a part of the world that has excess demand? New York can be special in many ways, but I think the general mistake is we're trying to apply traditional categories, such as recession, to a state of affairs that is unprecedented. And what we have is an economy that is super dynamic along some dimensions and super stagnant and negative along others. And it's much more of a mixed bag. Usually everything goes up, everything goes down together. But both when we had the pandemic and as we came out of it, the way that the goods sectors moved and the way the service sectors moved were opposite. So people bought a lot of goods.

They bought their Pelotons, but they wouldn't go out and see movies. Usually those things move together. And now they're at cross purposes. So I think that's one reason why we have all these mixed conflicting feelings about how things are going. So I look at inflation, I look at interest rates, and relative to where interest rates were six months ago, they feel high. But historically, they're still pretty low. Unless you adjust for inflation, they're incredibly low, right? Yeah, that's exactly right. So that also makes more sense. I've never seen real interest rates adjusted for inflation so low in America ever in all

of our history. And this is after what people think is unprecedented increases, which leads into my question, unless we see a dramatic decline in inflation, aren't we going to have to continue dramatically increasing interest rates? That is quite possibly true, but I'm reluctant to make very firm pronouncements about that, precisely because the situation is so new and unprecedented. Raising interest rates is not a super effective way of limiting inflation. It helps somewhat. But at the end of the day, a lot of people will borrow money even at the higher interest rates. And if you raise rates too high, you can wreck your economy. So a lot of what we need to do is reset expectations, have forward guidance,

be credible about getting inflation under control. But that's hard to do once you've pushed it up to 9%, right? Do we, it strikes, I'm curious what you think about Governor Newsom had this inflation relief act and where he's basically giving any household in California with a household income of half a million dollars or less a check to deal with inflation. That strikes me as absolutely, for lack of a better term, oxymoronic, that you don't give people more money to try and help with inflation. When we talk about trying to figure out how to loosen up supply, other than kissing and making up with Venezuela or going to the Kingdom of Saudi Arabia and getting

them to give us more oil, what are the long-term ways of increasing supplies and making workers more productive through vocational programming? Is it education? Is it investments in infrastructure? How do we solve for this problem or decrease the likelihood of massive inflation in the future? We have to do all of those things, right? And it's a bits and pieces kind of fight. But the main determinant of inflation typically is the demand side, not the supply side. The better your supply side, the more defenses you have. But if you simply have a Fed committed to reasonable price stability and you keep the fiscal spigot under control, you won't have very high inflation.

So let's talk about the political realities here. We have a midterm election, we have a presidential election in, gosh, about 26 months, I guess. I'm worried, or isn't there going to be huge pressure if we do go into sort of an economic malaise for the administration to begin printing money again? We already see the market is expecting the Fed to start easing in about a year's time. And the political pressure may be never to fully follow through on the disinflation to begin with. So I do very much have this fear. Absolutely. And when you look at Governor Newsom handing people out money to help them deal with inflation, you mentioned that before. That is a counterproductive policy. It's more fuel on the fire, but voters like it. I used to work full-time at NYU. I always thought it was such an interesting HR challenge because you have very few carrots and very few sticks.

And a lot of individuals who are kind of grow up professionally as individuals, there's a lot of lone wolves in academia, people who love research. Any thoughts on how you effectively manage a nonprofit or a company that doesn't have a profit motive? If it's an academic department, I think often the key is some ability to raise outside money to help people accomplish their goals and also to build in more incentives than academia alone will have. The American nonprofit sector I think of is generally poorly managed and poorly

incentivized and excessively conformist. And large parts of it to me seem at least as inefficient as our government. So there are some great nonprofits, but very often the way to help the world is to make a good investment and not just to give away your money. Well, speaking of that, so what advice would you have for young entrepreneurs and investors? When you look at the market, if someone's coming into their income earning years, what general advice do you have for them in terms of career selection or asset classes that they may want to invest in? Again, it depends what investments you have access to. But if mainly what you have access to is the public markets, the simple strategy of

diversify, buy and hold, and don't think you're smarter than you are is correct for at least 98% of people. That said, I do think some people can beat the market, and obviously that is not good advice for them. They need to figure out what it is they really understand better than other people and specialize in it. That's going to be 1% of the country. But for general advice, the long-term return on equities is fairly positive. It's 5% to 7% in real terms. And you just need to be patient. And that's what most people should do.

Do you see a change in your students today from 20 years ago? Oh, I think they're very different. Absolutely. I think the biggest difference is a higher number of mental health problems, but also they're better informed and maybe more curious. So it's a mixed bag. Better informed and increased mental illness. I don't know if they're causally related. Maybe they are. Yeah. Some of the mental health issues, I think, have stemmed from the pandemic. And that's a kind of accident when that happened. But I think the toll of the turmoil, the risk of lockdowns, of no school, I think that's been higher than a lot of people have recognized.

Do you think social media has played a role in adolescent mental illness? I believe social media on net have made things worse for girls in the age range of 12 to 14. But I think for most people on average, social media makes things a bit better. It gives them more and better friends, peers they feel more connected to. They don't feel so alone in the world. If they are in some way different, they'll be in touch with a community of similar others. So I'm not net negative on social media, but I've certainly seen plenty of cases where I think it's harmed people. Well, that's a good note to end on, that it's a net positive. Tyler Cowen is the director of the Mercado Center at George Mason University. He's the co-author of the economics blog, Marginal Revolution,

and co-founder of the online educational platform, Marginal Revolution University. Tyler is also a Bloomberg opinion columnist and the author of several bestselling books. His latest book, Talent, How to Identify Energizers, Creatives, and Winners Around the World, is available now.

He joins us from his home in Northern Virginia. Professor Cowan, we appreciate your time. My pleasure. Thank you. Hey, it's Scott Galloway. And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. So what is enterprise software anyway? What is productivity software? How will AI affect both?

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