What You Know About Recessions Could Be All Wrong

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2:24I'm Stephanie Flanders, Head of Government and Economics at Bloomberg. And this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next. We've spent much of the past couple of weeks thinking about the potential impacts of the crisis in Iran on the global economy for oil prices, on trade, for inflation. We talked through a lot of those and even some new ones like the threat to water and even food supplies in the Gulf in detail in last week's episode with two of my senior colleagues. But lurking beneath the surface of all of these conversations is often the fear that this shot will be enough to tip the whole economy into recession.

3:08But one reassuring lesson of a new study of recessions in the US and the UK over the past 250 years is, it takes a lot to do that. Dr. Tyler Goodspeed was acting chairman of the Council of Economic Advisors at the tail end of President Trump's first term, and since 2023 has been the chief economist at ExxonMobil. Somehow, despite doing that job, he has managed to write a book called Recession, The Real Reasons Economies Shrink and What to Do About It. He finds in that book, as Adam Smith once said, there is a lot of ruin in a nation. It takes a lot of overlapping shocks to tip an economic expansion into reverse.

3:48But pretty much everything else we thought we knew about recessions, he thinks, was wrong. Expansions don't die of old age. They don't get more likely the longer an expansion continues. They're not the inevitable punishment for an excessive boom. And they don't cleanse the economy either of the bad decisions taken in those booms or make it easier for businesses to undergo necessary restructuring. Perhaps most important, we haven't really got any better at avoiding or shortening recessions in the past 75 years or so. But, and this seems like an important, but the book does find that unexpected shocks can play a big role in stopping an economy, especially those involving food and energy.

4:32So all things considered, it seemed like a good time to talk to Dr. Goodspeed about his book. Tyler, thank you very much for joining me. You're in London, I'm in New York. I'm sorry about that, but we appreciate you coming in. It's great to be with you.

4:46There's a lot of economic history in this book. And conveniently for a sort of transatlantic podcast, it's drawing on the history of both the UK and the US economy. I can't help wondering how you even found time to do this while you were chief economist of a major global energy firm. Fortunately, before joining Exxon, I was back in academia after a few years in government. And so that was when I did most of the grunt work for the project. But that said, I'm very much looking forward to having my evenings and weekends back. Yeah, I'm sure. I sort of summarized some of the hard truths for economists who thought they understood the economy that are in your book.

5:26Just tell us briefly what you set out to do and for you, the more surprising conclusions, and then we can unpack some of that. So what I set out to do was to better understand economic contractions, having just lived through one of the sharpest economic contractions in U.S. and U.K. history with the 2020 pandemic recession. And when I started the project, I thought that was such a unique event, such a unique shock. But as I got further into the research, I realized that actually most recessions are about adverse shocks that we could neither fully anticipate nor effectively hedge against. One thing we often tell ourselves about recessions is that they're inherently cyclical phenomena, that there's a boom and then a bust, that there's some excess or malinvestment or error in an economic expansion to which recession is the inevitable and even necessary remedy.

6:27And there's a certain moralizing to that story, but it's just not true. Economic recessions, as Ben Bernanke put it, they're murdered. And over the past few centuries, one of the shocks that we're potentially living through right now, namely energy supply shocks, has been a serial killer or serial accomplice to the murder of otherwise healthy and innocent economic expansions. That point of the inevitable consequence of booms, we do tend to look back, I think, the 1920s or some of the financial manias that you read about from earlier centuries, or even the 2008 crisis. We tend to think that was a banking crisis caused by a lot of excess in lending in the financial sector.

7:11What piece of that is wrong or at least is not being properly described? When you look at the height or speed of an economic expansion as measured, for example, by the volume of bank lending or the increase in the volume of bank lending, then under the boom-bust hypothesis, the height or speed of the increase in bank lending during an economic expansion should predict the depth or speed or duration of the subsequent recession. And it simply doesn't. And the 1920s are actually a very interesting one, because first of all, that was actually a very short expansion that preceded the recession that began in the second half of 1929.

7:49When you look at a lot of measures of economic activity, including building activity, including investment, there were some large increases. But it's in the context of a severe negative deviation from trend during World War I, the subsequent recession, the subsequent pandemic. 1918, 1919, 1920 were very difficult post-war years characterized by shortages, continued shortages in the United Kingdom, by widespread strike activity in the United States. So what you saw in the 1920s was, to a large extent, catch up for the growth and increase in economic activity that didn't happen during that six-year period from 1914 to 1920.

8:34The other thing that was interesting to me was the 30s is the classic sort of cautionary tale, especially if you're an economist and you read the Keynes general theory. And that is all about something which you don't dispute, which is the policymakers can definitely make recessions worse. They can mismanage sort of the path into a recession. But the conceit was that policymakers post-World War II had got better at managing these things. Recessions were less deep, were shorter. I guess we've already been questioning that a little bit over recent years. But you find that's not even in the sort of post-World War II data for the UK or the US.

9:11That's right. And just one moment on the 1930s, I think it's really important to remember just the volume of severe shocks that hit the US economy, not so much the UK economy between 1929 and 1933. A massive increase in business taxation. You had four distinct banking crises, three of which were actually highly regional in nature, one of which, at least one of which, had to do with a once-in-a-generation drought throughout much of the U.S. that was succeeded by a plague of locusts of providential proportions that contributed to a wave of bank failures. You had a tariff shock. There was just a lot going on in the U.S.

9:51economy during that period. So, yes, you were spot on to highlight the conceit of a lot of post-war policymakers. We saw this in the 1960s, again in the 1990s, that they thought that because of the rollout of automatic stabilizers, a greater role for the state in the economy, that recessions would become more rare and shallower. The reality is that recession depth has been remarkably constant over time, going all the way back to the 1700s. Recession duration has been remarkably constant over time, going all the way back to 1700. Most recessions are over in about a year and the vast majority within two years.

10:34So what has changed is that expansions have actually gotten longer over time and recessions have actually become less frequent. However, that is a very long run trend that goes back to 1700 and probably before. And you can statistically test was there a particular point in time when economic expansions transition to greater length, greater duration. and statistically there's no clear break point. So this is a long run smooth trend that goes back to the 18th century. I promise we will get to some sort of positive conclusions in the latter part of this conversation. But if you're sort of thinking, oh, that you can learn about economics and get better at doing things, it's not entirely encouraging reading your book.

11:20One thing that you do highlight, and you've already mentioned actually some of the differences between the UK and the US. I was sort of surprised to see such a big difference between the two economies in terms of the number of recessions? Having grown up in the UK, we tend to think of it as rather crisis prone and rather unsuccessful. And as you point out, it has been quite unsuccessful, but it has been successful at one thing, which is relative to America, avoiding recessions. What is the difference in terms of the likelihood of having a recession between the UK and the US? You're right. One of the fascinating findings in the book is just how much more recession prone the United States has been over the past 250 years.

12:00than the United Kingdom or how much less recession-prone the United Kingdom has been. And there are fundamentally two reasons for that. One is that from 1826 onward, the United Kingdom had a nationwide system of branch banking. So you could operate multiple branches across the national economy. And if you think about a large diversified economy, it's kind of like a well-diversified portfolio. So shocks in one area, one sector or one region can be offset by resilience in another. In contrast, in the United States, for most of U.S. history, for domestic political economy reasons, not only could a bank not operate across state lines, they could only operate one location within a state.

12:47And what that meant was you had tens of literally tens of thousands of small undercapitalized financial institutions that were insufficiently diversified, not only on the asset side. So they're very exposed to local shocks, but also their capital base was under diversified because all the shareholders, all the partners in the bank were also exposed to the local economy. And that really only started to change in the 1970s and the 1980s. Now, the second reason for greater UK resilience in the face of adverse recessionary shocks is that from 1926 to 1972, the UK economy went without a single official coal strike.

13:31And during that period, the United States experienced multiple recessions that were oil induced, 1948, 1953, 1957, 1970. and during that time instead the UK economy was just much more reliant on coal. The UK economy had an abundant supply of coal and it was their primary source of energy. So it was partly that and I guess we can't really congratulate ourselves on having been more efficient at avoiding recessions. One thing that was striking to me was despite having, and this might be self-evident to some people, despite having much more successfully avoided recessions than the US, it has not been a more successful economy over this period.

14:10Quite a large gap in living standards opened up in the first part of the 20th century and has got quite a lot larger in the last few years. So, you know, the other great thing that policymakers tend to say is, well, one of the most important things you can do is avoid. You should try and keep the economy running stably, even if it's growing a bit more slowly, because it's avoiding recessions that really helps you maintain living standards. That doesn't seem to be borne out either by your comparison between the two countries. Not at all. In terms of the policymaker endeavor to prevent recessions, it's inevitably going to be a vain attempt because recessions will continue to happen because history continues to happen.

14:52There has never been an immortal economic expansion. And as you note, the UK is about 30 % poorer per person. I think that's actually, it's quite a lot bigger now. I think I was looking at the data the other day, I think it's 40 or 50 % poorer because of the last 20 years. And has long been substantially poorer than the United States. So I think that's an important lesson that the majority of years in which an economy expands matter much more than the minority of years in which it contracts. And so what policymakers should be focusing on if they want to increase human prosperity and flourishing is focusing on increasing the pace of growth during the periods of expansion.

15:30So let's sort of think more about the current moment. You obviously had a period where you were sitting in the White House and the Council of Economic Advisors. Just looking at the time that you were running the council was as COVID hit the economy. So I guess, as you say, that was kind of a searing experience that made you want to think more about the causes of recessions. But if you were there now, how would you be thinking about the risks from this crisis in the Middle East and indeed the other potential risks on the horizon? So I think the risk is duration. If indeed this is a short conflict and it is contained and normal traffic resumes through the Strait of Hormuz, then I think this will be a temporary setback, but not a recessionary shock.

16:17But if this does persist for several weeks, then it does have a 1973, 1979 feel to it where actual physical barrels are removed from global supply. A lot of traders on trading floors today probably don't have a memory of episodes of energy supply shocks where there was actually a supply shock, physical barrels, physical cubic feet of gas that were removed from global markets. 2022, there was a fear of that, but what ended up happening was a remarkable reconfiguration of global liquids flows and global gas flows. There were some transition costs, but there wasn't much disruption to the actual supply.

16:58Whereas if this Strait of Hormuz shutdown does persist for a period of weeks or months, then it would be a supply shock greater than that observed in 1973 or 1979.

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19:27You're sitting in an oil company, but there has been a big shift in the administration's approach to energy transition, alternative sources of energy. and that could potentially set the US in terms of its kind of energy model for its economy on quite a different path from the rest of the world. How do you think about that in terms of, obviously, the US has a lot of its own supply now that it didn't have in the 1970s. And we've talked in the last week, we were talking about how that makes the US less vulnerable in many ways. But do you think the sort of impact of this kind of crisis in 10 or 20 years time is going to be quite different just because of the approach to the energy supplies that different economies are taking.

20:15Some countries may just be entirely reliant on renewables and not so susceptible to these kind of shocks in 10 or 20 years time. Whereas the US will have its own supplies, but will be reliant on kind of fixed supplies or fossil fuels, at least if we continue on this path. That's a great question. The thing about the energy industry is that it is an industry with a very long investment horizon. So the company I work for, we every year produce a long run global economic outlook. We actually make it publicly available. And it is our best projection of what we think the world looks like in 2050, what the world's energy demand is, and how that composition changes by 2050 from 2025.

21:01In response to this shock, following on the 2022 shock, following on the pandemic shock, I suspect it will prompt both companies and countries to think a bit more in terms of insurance. what is the probability that supply is unavailable what is the cost to me in the event of that supply unavailability and how does the dot products of those two numbers compare to the premium i would have to pay to effectively ensure against that loss so for some countries for some companies that might mean investing in energy sources that would not become unavailable in the event of a geopolitical shock. One of the big lessons that comes out of your book is that, as you point out and show very clearly in the numbers, expansions don't die of old age.

21:54So we shouldn't just inevitably expect them just because an expansion is of a certain age. And specifically, they stop because of an unanticipated stopping of key supports for the expansion. We've talked about energy as one source of that. We've also had quite a lot of shocks to global trade over the last year from the president's announcement of tariffs, and then some of them have gone in place, some of them have not been in place. Now the Supreme Court has ruled a whole chunk of them to be unconstitutional, but they're going to be recreated in different ways. If you're looking at the sort of broad range of shocks facing the economy, we're also looking at a very hard to predict potential revolution in business practices thanks to AI.

22:43Thinking about this work of your book, how concerned are you? What are the key things that you're focused on? And what do you think the administration should be doing to help sustain the expansion or avoid that kind of unexpected shock? So in terms of the conventional suspects that you hear a lot of in the financial press, an AI boom gone bust. I think that on the basis of history, that an AI expansion is more likely to be a casualty of a recessionary shock than a cause thereof. Everyone calls the 2001 recession, the dot-com recession. The decline in NASDAQ stocks was just one of at least four shocks impacting the US economy in 2001.

23:25And I argue is the least important, the most important were the terrorist attacks of September 11th. And in fact, all of the output decline during that 2001 recession was in the quarter that included those devastating attacks. When there was widespread fear, we grounded the entire U.S. air fleet. We closed U.S. airspace. There was a sharp fall in consumer spending because everyone was afraid, rightfully so. Without the 9-11 attacks, the U.S. economy probably would have continued to, almost certainly would have continued to expand during that roughly eight-month, two-quarter recession. And in fact, over the whole of that recession, the U.S.

24:03economy did expand by about 0.6.7 percentage points. In terms of today's environment, one of the things that you learn studying historic recessions is that oftentimes a shock to a specific sector is more important than big macro shocks because some sectors have very high linkages to the rest of the economy. And it's very difficult for producers and households to find substitutes for that product. So energy is, of course, the one we've talked a lot about. But another one today would probably be rare earth elements, those 17 elements on your periodic table. China last year threatened to impose strict export restrictions on their exports of rare earth elements that is currently suspended until November.

24:48I think if something like that were to be imposed and really enforced, that would potentially be a recessionary shock. Another one is there's currently a bill in Congress. I think it has a very low probability of passage, but it would impose an interest rate cap on credit cards. What would probably happen in that event would be that credit card companies would cancel accounts and massively curtail the extension of credit to consumers. We observed just such a shock in 1948, almost observed the shock. It was the threat of the imposition in 1970. And then in 1980, President Carter did indeed invoke his authority to impose credit controls.

25:31And those were accomplices to the murder of the expansions that were then underway in all three instances. So that's interesting because that bill obviously is inspired by the president focusing on that as an aspect of the affordability crisis. So you would have been sitting in the White House saying this is really not, and you would have, I think, 95 % of economists on your side in saying this is not a good idea. The things that you've listed, you say we should be worried about. I think you're quite right. And we are now all much more focused on our reliance on these quite obscure rare earths and how that could feed into any number of bits of the global supply chain.

26:10You've also highlighted how a terrorist attack is obviously by definition can be an unexpected and widespread shock to the economy. The other one that comes through very strongly in your book, the frequent references to locusts, is climate shocks and particularly food shocks, which we've obviously seen a lot of in the last few years. And actually, you do remind me, I mean, in the Laura Ingalls Wilder books, the book that features the locusts just descending onto their crop. It's heartbreaking, but I recommend that to anyone because it just feels very real. Those kind of climate shocks, climate-related shocks, are becoming more frequent.

26:51If you looked at the world today, it does seem like all three of those things, shocks to unexpected commodities, potential for terrorist attacks even on US soil, and a rising number of extreme weather climate shocks. Do you think the administration is, do you think this second Trump administration is doing their best to reduce the risk of those things or prepare for them for that matter? Something that really surprised me in the course of the research, which is the number of occasions on which the eighth plague of Egypt really disrupted the American economy. So 1857, 1873, and 1931 during the Great Depression, locust plagues of providential proportions.