Ep. 255: Tyler Cowen Interview with Michael Covel on Trend Following Radio

This is Trend Following Radio, where great thinking comes alive. Nobel Prize winners, legendary traders, bestselling authors, and the pros that know what drive us irrational human beings. I am your host, Michael Covell. Not filtered, raw, honest. That's my passion. Today on the show, I have Tyler Cowen. He's an American economist, academic, and writer. He's the co-author of the popular economics blog Marginal Revolution, also the author of multiple books. Also, he happens to be at my alma mater, George Mason University. Today, in Rapid Fire, we cover a wide, wide selection of topics. I hope you enjoy. Hey Tyler, Mike Covell, how are you?

I'm fine, yourself?

Not too bad, not too bad, not too bad. So listen, I want to give you 3 recommendations before we start with the serious stuff.

This is the serious stuff.

3 food recommendations.

Very serious stuff.

Yeah, so 2 sushi places, 2 in— I'm in Asia right now, so 2 in Tokyo, uh, Matsukan, Matsukan, and Sushi Nakamura. I think they're both in Roppongi. Both great. If you're next time in Tokyo, must do. I'm in Saigon tonight, so a great banh mi place in Saigon called Banh Mi Huynh Hoa. Fabulous.

How do you spell the Huynh Hoa?

H-U-Y-N-H, second word, H-O-A.

H-O-A, got it.

Okay.

Fabulous. I will get to those sooner or later.

They're good. They're good stuff. I know you've got some food desires and, uh, and thoughts on food. So hey, here's where I want to jump in right out of the gate. So I, I thought this is a great comment that you put out there, and we can go to a lot of different directions today. I'm going to cover a lot of different pieces of territory in our 30 or 40 minutes here, but Sabermetrics and the idea, the idea that numbers every part of the economy. And I think the part that I liked about what you said about Sabermetrics is that everyone's going to have a number essentially a review. Now, as a guy who's been online showing people information for 15 years, I get that deep in my gut, but I think that's gonna be a new phenomenon for a lot of people, the idea that there's gonna be a number and they're judged by it.

It's already the case. A lot of people just don't recognize it, but people, when they work, they're graded more than they realize. They're ranked, and the more you work with software or online, the easier it is to measure what you do. Then there's your all-important credit score. Then your ratings. How many Facebook friends do you have? How many stars do your books get on Amazon? Whatever you do. How does your restaurant do on Yelp? It's a kind of brutal existence. People don't actually enjoy feedback.

You're used to it now.

If you blog, as you know, you get insulted so many times you develop a thick skin. I view it as one of the best investments I've made in this new world. Being used to being insulted, you know, grossly unfairly and sometimes with obscenity every day.

Do you think that though, this, this, uh, sabermetrics thinking, this numbers for all of us, do you think this is in various repositories? Is this being reduced to one number? I mean, is it all being kind of funneled into a channel and then it's coming up with this great big score for all of us?

Well, no, I think it's a number for each thing you do. How good a medical patient are you, for instance? That's a number. But it's not that you have one number for how good a person are you in general. So each aspect of your life, you'll have a number, or some cases you may have a complex of numbers. Like, you're a basketball player. How good's your offense? How good's your defense? You can turn it into one number, but it's actually probably more useful as two.

Let me get you to jump back in time a little bit. As a young man, so you have the good fortune, and most people including myself, don't have their arms wrapped around this completely, but you studied with, under Thomas Schelling, Nobel Prize in game theory. My audience is fairly astute and they got an idea what's going on, but I think when you start talking about Nobel Prizes in game theory and studying with a certain professor, that might start to go past them. For the generally wise audience, what kind of big picture lesson can you point back to, looking back in time, how did that affect you? How did this man affect you? Very smart man with a very wise understanding of game theory. What did that do to you as a young man?

Well, if any of you know the movie Dr. Strangelove by Stanley Kubrick, Thomas Schelling was an advisor to that movie. So the notion that you should think in terms of paradoxes, that you should wonder whether nuclear deterrence is in fact stable, because it relies on the notion that you are willing to obliterate the other side, The idea that the world in some ways is fundamentally fragile and that if you observe it being stable, you need to start asking more deep questions. Off the top of my head, those are some of the core things I learned from Thomas Schelling. And most of all, you know, his personal character, the idea that you should always be deeply inquisitive and never let up on that. And combine that with, you know, features of being a workaholic. I think he embodies at least as well as anyone else I've ever met.

That's a great compliment to him. I was looking at that. My first thought was like, "Gosh, I mean, what a—" I mean, you must have realized as a young man that was a fairly fortunate experience. Oh, sure.

Absolutely.

Let me keep shifting around on you because we can touch on a lot of different topics. One of the titles, one of the books that you've had come out in the last couple of years is called Average Is Over! and I think you make an interesting point and I want you to explain this from start to finish, your thought process. Obviously, we don't have all day, but you can give a big picture overview. Tyler Cowen, right now, there's great debates about equality or inequality in America. To me, often, they become somewhat tiresome and I'm not one of these billionaires yet, but you see it going from 1% to 15%. Why don't you explain that? You really perceive that it's going to be a 15% that really has interesting opportunity, nice life, good access to wealth, but the 85% is gonna have a little bit of trouble.

That's right. So if you look at Singapore today, which is a knowledge economy, in many ways more advanced than our own, it's already the case that in Singapore about 14% of the population is classified as millionaire. And that's not counting the value of their homes. If you look at data on the US economy, who has reaped most of the gains of growth over the last 20 years? There's pretty clear evidence. You know, people talk about the top 1%, but almost all of it's gone to the top 20%. So I think the data that's coming in, it's showing the people who have the knowledge, the skills, the drive to really do well in a much more competitive, much more globalized world, it's something like that top 10 to 20%. And as the world becomes more competitive, and as we measure value more precisely and hand out all of these numbers,— to me it seems pretty clear those are the people who will be the winners. And those are the people basically who in some way can master machine technology or work with it or turn it to their advantage rather than having to compete with it. That's the key distinction. And that's not everyone and it's not a majority of us, but it's certainly way more than the top 1%.

Technology and computers driving what people might call this inequality today. And into the future.

That's right. Keep in mind that top, say, 15%, it's also comprised of people who are the very best service suppliers to the very wealthy. So let's say, you know, you're one of the best nannies in the country or in your state or in your city. Maybe you don't know anything about computers, but you're a great nanny. As we can measure your value more precisely, you'll actually earn a great deal of money. You'll be the nanny, say, to the children of a billionaire or a multimillionaire. You're going to find more and more people creeping into that top tier who don't have what we typically think of as high-prestige jobs and maybe have zero computer skills, but nonetheless, because of their people skills, will still end up as top earners.

Not to brag in any way, shape, or form, but you mentioned Singapore. I probably shared this in my podcast before. I've written several trading books, trading the markets. The only place in the world where I was in the back of a taxi on a Saturday morning looking like warmed-over death, and the taxi driver looked in the rearview mirror and said, "I know you, I have your book," and named my name. Nowhere else in the world, right?

It's awesome how much people know there. It's like a modern version of ancient Athens, except instead of philosophy being the thing, or drama, It's the modern social sciences, economics, engineering, the biosciences, and you just have this citizenry working at such an elevated level so broadly. I think it's one of the most phenomenal aspects of the modern world and hardly anyone is noticing it.

For people, for first-timers to land at Singapore's airport, you just know something's different.

You're just like, "Okay, something's different here." I sometimes like to say that Singapore and Israel are the two parts of the world where average is over has come first. In good and bad ways.

As you say that, let me follow up. What do you think is the negative aspect to Singapore at this moment in time?

Well, look, it's one of the best places in the world, so I don't want to be critical, but they do have a few problems. One of them is simply their own birth rate. That life there is so good and also so good for women. Women have so many career opportunities that, say, for ethnic Chinese, the total fertility rate is just about at 1.0.. And that's not stable in the long run. That's a problem they need to solve. The other issue they have, this relates to their population problem, they keep the population up by bringing in immigrants, you know, which is good. I agree with that policy. But the people who come in are not really equipped to compete with the native-born Singaporeans. And it's become this very split society, which is no longer entirely cohesive. And that too is a problem.

Yeah, yeah, there was some strife there in the last couple months over a small issue, but you can see and feel that when you're there, but it is an amazing place. Like you, I don't want to even begin to outline any criticism because what they've done is just flat-out amazing. That's right. Yeah. You know, listen, you are known for a guy who finds markets in everything, but I want you to talk for a moment about free markets. Markets. And I think sometimes free markets— I'm not talking about crony capitalism and, you know, stuff like bailing out Goldman Sachs— but the idea of pure free markets, from your perspective, this changes culture in a better way because it gives people what they want, doesn't it?

Well, I don't think it's always a good idea to give people what they want, so, uh, I would challenge that premise. I think a lot of what markets do is give people things they want but maybe aren't good for them. Now I'm not convinced that regulators are going to do a better job, but my view is we're always comparing highly imperfect markets to highly imperfect regulators, and we need to make that choice. And overall, we tend to forget about the imperfections on each side. I also don't think there's such a thing as pure markets. So markets require a legal order. They also require underlying cultural presuppositions. So if you go to Utah, where say the rate of people being Mormons is quite high, In a lot of ways, markets work better there because there's this ethic. Same in Singapore. High levels of honesty, low levels of corruption, markets work better. So when people talk about pure markets, that makes me nervous. I want to start thinking, you know, what other preconditions and complements can we have working there so that markets perform better rather than worse.

Let me shift again on you. Regulation. So in the last 5 or 6 years, specifically when it comes to financial markets, all kinds of calls and new regulations. And I've seen you make the point, which is really common sense thought, but you never hear it in the general press for the decision makers. But if there's going to be new calls for regulation, shouldn't we be talking about why the past regulation failed?

Sure, most past regulations have failed. I think we need to recognize that. Uh, my view is the US economy overall has far too much regulation. It's like putting down a small number of pebbles, like any one of which is not a problem, but you put them all there, they divert the attention of creators and make the economy less innovative. I think there are a small number of important areas where we need more regulation, not really a greater number of individual regulations, but just tougher regulation. I would say that's climate change and finance, and those are important. We just need to be tougher, not more complicated, just more to the point. But most other areas, I'd like to see a lot more deregulation. What is a good example in your mind?

When we talk about regulation, sometimes even for an astute audience, it can sound somewhat abstract. What's a good example right now, for example, if we're going to compare a particular area that's being regulated in Singapore, more hands-off, versus America where there's too much hands-on, and then where we can see the benefit of being a little more hands-off in Singapore, for example? Did anything come to the top of your head off that?

Well, I look at it this way. Singapore actually has a lot of regulations. You wouldn't call it an unregulated place. Even things like chewing gum are regulated. But I think actually regulation in Singapore is much more responsive to the desires of citizens and that sounds counterintuitive. For a place which is less democratic than the United States, but it's true. It's as if in Singapore, government knows it is not automatically legitimate because it was elected in the traditional way. They need to be in some ways more responsive. Our regulatory apparatus is further removed from the people. It's very hard to get rid of old regulations. It's too large. It's not really overseen by anybody, and these regulations just keep on piling up. Without end and the process has never really improved. So I think that's the difference. A lot of it has to do with size and accountability and the regulatory side of our government to me is pretty much out of control in the US.

You know, you mentioned perhaps the need for greater financial regulations but I thought your explanation of the crisis and I perhaps am shortening this but you said— your explanation for the crisis We thought we were richer than we were. I thought that was a pretty good summation. That's right.

You know, there are all these particular explanations of what went wrong with subprime and derivatives and CEO compensation, 30 other things, you know, which may well be true. But the bottom line is we were almost all caught extended. We were far too out there on that limb. And we thought we were growing at 3% when in fact we were maybe lucky to be doing 1%., and that caught up with us, and that's what I think it was all about. Banks were the messenger, subprime was the messenger, but to focus only on that I think is to miss the point.

Got a couple more issues I want to run by with you. We're pretty rapid-fire today, so we're covering a lot of territory. The idea about how computers change us, and I saw you give a great example about dating, and that with computers we can narrow down the field or more closely perhaps find good matches. And you made the point that perhaps that can make us more daring. And so we might not even think about how technology, computers are actually changing us, but they sure are, aren't they?

If you're willing to listen to them. So say you're doing dating, your default is that you have some notion of like what's good for you. The person should be of a certain height, certain religion, certain class background. Maybe look a certain way, and that's what you go for. And you get in certain kinds of ruts. Whereas the computer, which is doing something closer to pure measurement, is able to look at things in a way that you can't. And if you're willing to defer to the computer more and just say, you know, look, maybe I should try dating this person from a different background or different age than I thought was appropriate for me. I think you can make a lot of progress. It's like the computers are not hampered by your personal intuitions, which are by no means completely trustworthy.

Yeah, it's interesting because I think we don't want to trust— we don't want to trust the technology at that moment in time. We still want to think that we have this instinct or this intuition that's better, but the machine is probably— is taking in more data and perhaps giving a better probability than our gut. Exactly.

You see this in chess. There are all these chess moves that the human grandmasters, they sort of look good. They look intuitive. Put an important piece on the center of the board. But the computer can more easily find moves that look ugly but are in fact brilliant.

Interesting. Hey, as we talk about technology, Professor, and teaching online, teaching to students online through Marginal Revolution, As you think about globalization, and I've been a guy for 15 years who's been using technology to reach people. And most of my— I mean, all of my career has been as an entrepreneur online. And it's completely normal and natural to me, which means I can live anywhere. That's really my situation right now. But that's normal to me. It's not very normal to people, though, yet, at least a wide swath of the population. As you talk about globalization to students, to followers, to readers, what are some of the big picture points that you like to make about globalization, where things are headed, and what perhaps people should be prepared for or at least adjusting toward?

Well, I think so many people, you know, have been and will be looking for cheap land and the English language. So more and more people can live anywhere, as you do, and And you have to ask, you know, what is it that you need? Well, you need a good web connection, which is coming to most but not all places. Linguistically, you want to be able to function. So I think a country like Malaysia, which is not typically viewed as like a big winner, will actually do a lot better because it has the English language. And it's also fairly cheap. So Texas has done a lot better because of this. They have, you know, a version of English there. They have really good cheap food. And they have pretty good web connections. And also a lot of cheap labor. So I think it's gonna overturn a lot of assumptions about which places will do well and which places will do poorly. And somewhere like China, this worries me. They're pretty good on broadband, but they have too much censorship. It's a big pain to do web work there for a bunch of reasons you're probably familiar with. Mm-hmm. I mean, in absolute terms, a lot of Chinese speak good English. But in terms of functioning there in English, it's hard and the place can be corrupt. And what I'm seeing is young budding entrepreneurs who are not Chinese are tending to leave China and look for other parts of Asia to live in.

Yeah, interesting. You know, Malaysia was a surprise for me last year because so few Malaysians really have had interaction with Americans. Americans just aren't going to Malaysia. But you are right that you get there and you come out of the airport. You're going down a highway that looks better than American highways in many instances. And you're like, "Wow, this place is— they've got it together." And they really do.

Yeah, so your web work is only pulling in for you to start, you know, 30K a year. You can't live in Hong Kong. You can't manage in Singapore. You know, Vietnam, it's hard to cross the street. Natural choice is going to be Malaysia.

I'm going to have to disagree with you about having— being hard crossing the street. That's just because you're not experienced yet in crossing the street. And if all of those women wearing their short skirts on motorbikes can make it through and cross the street in heels and whatnot, you too can, Tyler.

Let's just say there's a learning curve which is steep.

Oh, it's not that steep. Hey, listen, I have one more question for you. I thought it was an interesting, an interesting issue, and I want you to explain it for the audience, uh, what it means terminology-wise and then what it means effectively. Zero marginal product workers. What are they?

Those are individuals who do not contribute positively to the workplace. And in most cases, it's not because they're not smart enough. It's because they wreck teamwork, because they wreck morale. You would rather not have them around. We've all interviewed people like this. Maybe they're smart or they speak well, but at some point you realize, I don't want this person in my office. I don't want to have to deal with this person. And the better we measure value, one of my fears is These people will be identified and they just won't be able to get work. This will make the rest of us more productive, but it will become— it's already a kind of social problem.

And so what does that mean? They'll go online and express anger and do crazy posts and be trolls, or what? What are we looking at?

Some of them will do that, but others of them simply will, you know, sit and collect benefits and not have productive lives and be a drain on the public treasury and be bad for their families. And be a nagging social problem. You see in the US now a persistently higher rate of long-term unemployed, and by no means are those people all or even mostly stupid. It's not about IQ here. It's about a kind of cooperativeness and conscientiousness.

What percentage of the population are we looking at?

I don't think we know for sure because we do not yet measure value perfectly, but I think it's at least 1%. That there's 1%, maybe 2% of people who over time will simply become unemployable because we can measure their value more precisely and end up seeing they're really just not worth it.

Tyler, that's all I have for you today. I have a question for you though. Did I get a fairly wide swath of your world in today in 20 or 30 minutes? Well, I don't know what wide means.

It's been fun, but there's always more, I think is the key point.

So someday we'll do another chat. Hey, listen, uh, best place for people to go, uh, your website, Marginal Revolution. Is that the best place to go?

Correct. Dot com. Okay.

Hey, Tyler, listen, I appreciate you coming on, and thank you for your wisdom and sharing some cool insights. Okay, take care. Take care. I see a time when those awake will understand how to make money in up, down, and price markets. Whether new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately, send me an email: michael@kovel.com. I will send you the right trend following steps to take along with my free video. But if you want to buy and hold, trust the government, and trust Wall Street, this is absolutely not for you.