Bloomberg Audio Studios, podcasts, radio news.
The risk is duration.
If indeed this is a short conflict and normal traffic resumes through the Strait of Hormuz, then I think this will be a temporary setback, but not a recessionary shock. Whereas if this strait of hormones shut down does persist for a period of weeks or months, then it would be a supply shock greater than that observed in nineteen seventy three or nineteen seventy nine.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this is Trumpnomics, 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. But one reassuring lesson of a new study of recessions in the US and the UK over the past two hundred and fifty years is it takes
a lot to do that. Doctor Tyler Goodspeed was acting Chairman of the Council Economic Advisors at the tail end of President Trump's first term, and since twenty twenty three has been the chief economist at Exon Mobil. But somehow, despite doing that job, he has managed to write a book called Recession, The Real Reasons Economy 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. But 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 seventy five 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. So all things considered, it seemed like a good time to talk to doctor 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.
There'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. Just tell us briefly what you set out to do, and for you the more surprising conclusions, and then we can unpack some of them.
So what I set out to do was to better understand econo contractions, having just lived through one of the sharpest economic contractions in US and UK history with the twenty twenty 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 bus, That there's some excess or malinvestment or error in an economic expansion to which recession is
the inevitable and even necessary remedy. And 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, you know the nineteen twenties or some of the financial manias that you read about from earlier centuries, or even in the two thousand and eight crisis, we tend to think that was a banking crisis caused by a lot of excess in lending in the financial sector. What piece of that is is wrong, or at least it 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 bus 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 nineteen twenties 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 nineteen twenty nine.
When 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 One, the subsequent recession, the subsequent pandemic nineteen eighteen nineteen nineteen, nineteen twenty were very difficult postwar years, characterized by shortages in the continued shortages in the United Kingdom, by widespread strike activity in the
United States. So what you saw in the nineteen twenties was to a large extent catchup for the growth and increase in economic activity that didn't happen during that six year period from nineteen fourteen to nineteen twenty.
The other thing that was interesting to me was the thirties is the classic sort of caution tell especially if you're an economist and you read the Knes General theory and all that is all about something which you don't dispute, which is that policy makers can definitely make recessions worse. They can mismanage sort of the path into a recession. But the conceit was that policy makers post World War Two had got better at managing these things. Recessions were
less deep, was shorter. I guess we've already been questioning that a little bit over over recent years, but you find that's not even in the sort of post World War two data for the UK or the US.
That's right, and just one moment on the nineteen thirties, 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 nineteen twenty nine and nineteen
thirty three, 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 US that was succeeded by a plague of locusts of providential proportions that contributed to a wave of bank failures. You had a tiff shock. There was just a lot going on in the US
economy during that period. So yes, you were spot on to highlight the conceit of a lot of postwar policy makers. We saw this in the nineteen sixties again in the nineteen nineties 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 seventeen hundreds.
Recession duration has been remarkably constant over time, going all the way back to seventeen hundred. Most recessions are over in about a year, and the vast majority within two years. So what has changed is that expansions have had actually
gotten longer over time and recessions have actually become less frequent. However, that is a very long run trend that goes back to seventeen hundred 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 breakpoint. So this is a long run, smooth trend that goes back to the eighteenth century.
I promise we will get to some sort of positive conclusion the lesser 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. One 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 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 two hundred and fifty years than 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 eighteen twenty six 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 US 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. And 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 underdiversified 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 nineteen seventies of the nineteen eighties. Now, the second reason for greater UK resilience in the face of adverse recessionary shocks is that from nineteen twenty six to nineteen seventy two, the UK economy went without a single official coal strike, and during that period the United States experienced multiple recessions that were oil induced nineteen forty eight, nineteen fifty three, nineteen fifty, nineteen seventy 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's 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 this might be self evident to some people, despite having much more successfully avoiding recessions than the US, it has not been a more successful economy over this period. Quite a large gap in living standards opened up in the first part of the twentieth century and has got quite
a lot larger in the last few years. So, you know, the other great thing that policy makers tend to say is well that 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 policy maker endeavor to prevent recessions, it's inevitably going to be a vain attempt because recessions will continue to happen because history continues to happen. There has never been an immortal economic expansion. And as you note, the UK is about thirty percent poor per person.
I think that's actually it's quite a lot bigger now. I think I was looking at the day to other I think it's forty or fifty percent poor because of the last twenty years.
Yeah, 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 policy makers 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.
So let's sort of think more about the current moment. You obviously had a peer where you were sitting in the White House and the Council of Economic could 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 hormones, then I think this will be a temporary setback, but not a recessionary shock. But if this does persist for several weeks, then it does have a nineteen seventy three nineteen seventy nine 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 apply shock, physical barrels, physical cubic feet of gas that were removed from global markets. Twenty twenty two, there was a fear of that, but what ended up happening was a remarkable
reconfiguration of global liquid flows and global gas flows. There were some transition costs, but there wasn't much disruption to the actual supply, Whereas if this strait of Hormuz shut down does persist for a period of weeks or months, then it would be a supply shock greater than that observed in nineteen seventy three or nineteen seventy nine.
You're sitting in an oil company, but you know 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 nineteen seventies, 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 ten or twenty years time is going to be quite different just because of the approach to their energy supplies that different
economies are taking. Some countries may just be entirely reliant on renewables and not so susceptible to these kind of shocks in ten or twenty 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 that we actually make it publicly available, and it is our best projection of what we think the world looks like in twenty fifty, what the world's energy demand is, and how that composition changes by twenty
fifty from twenty twenty five. In response to this shock, following on the twenty twenty two shock, following on the pandemic shock, I suspect it will prompt both companies and countries to think more 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 and the numbers, expansions don't die of old age. So 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. Thinking about this work of your book, how concerned are you, What are the key things that you'll focus on, and what do you think the administration should be doing to help sustain the expansion or avoid that kind of unexpected shot.
So, in terms of the conventional subjects suspects that you hear a lot of in the financial press, an AI boom gone bus, 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 two thousand and one recession the dot com recession. The decline in Nasdaq stocks was just one of at least four shocks impacting the US economy in two thousand and one, and I argue is the least important.
The most important were the terrorist attacks of September eleventh, and in fact, all of the output decline during that two thousand and one recession was in the quarter that included those devastating attacks. When there was widespread fear, we grounded the entire US air fleet, we close US airspace. There was a sharp fall in consumer suspending because everyone
was afraid rightfully. So without the nine to eleven attacks, the US 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 US economy did expand by about point
six point seven 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 seventeen 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.
I 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 nineteen forty eight, almost observed the shock. It was the threat of the imposition in nineteen seventy and then in nineteen eighty President Carter did indeed invoke his authority to impose credit controls, and those were accomplices to the murder of the expansions that were then underway in all three instances.
So it'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 be you would have I think ninety five percent 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. You'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 that in the lower Angles Wilder books the book is that it 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,
a climate related shocks are becoming more frequent. If 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 eighteen fifty seven, eighteen seventy three, and nineteen thirty one during the Great Depression, locus plagues of providential proportions.
And everyone talked.
In eighteen seventy three about a railroad boom gone bus, but really that was a devastating plague of Locus. One swarm in eighteen seventy five was the was greater in size than the state of California.
If you look.
Historically, adverse winter weather events, particularly winter weather events but also drought, were major contributors to recessions on both sides of the Atlantic, particularly in the eighteenth century, but extending into the well into the nineteenth century and even the UK recession. One of their longest, actually their longest in history was a very protracted recession from nineteen forty three
to nineteen forty seven. It probably would have been a year shorter were it not for an extreme winter weather event in nineteen forty six forty seven. Coal was frozen at the pits, the trains couldn't move, and then comes spring the ground was still frozen. So then when there were torrential rains, you had widespread catastrophic flooding. The administration currently it is something that they are having to deal with because we just had severe winter weather events, multiple
severe winter weather events in the United States. I don't think that those will be of recessionary magnitude. But as you pointed out, the one thing that the book demonstrates is that sometimes economic expansions can die execution by a thousand cuts. So there will probably be will have been a material impact on employment and output in January and
February with those with winter weather events. I can't forecast the future frequency or severity of adverse winter weather events, but I can say historically they were contributors.
This is not about climate change, and I'm not particularly focused on it in this podcast, but it's it's a very striking lesson of your book. We forget often the role of climate and those kind of basic conditions for life in different economies, how that can feat sudden changes in that due to climate or weather can put economies on very bad trajectories, and it just sort of seems odd.
Everything that you said is quite consistent with what the administration is doing, except for that piece of actually giving up on any effort really to slow the pace of climate change, and if anything accelerating, you know, by sort
of doubling down on fossil fuels. I like, except that you are in your chief eclovist of EXOM, do you feel at all uncomfortable about that, having done your having done your study, that we're just deciding it's all going to be an act of God rather than something that we could potentially at least slow the pace of energy.
Companies, as I said, are making investments for the long run, and so in our latest global outlook, we still have wind and solar growing the fastest in US power jen empower gen globally and also in US Powergen. So if you look at the global energy stack, twenty twenty five was a nice round number year for us to look back on how we did forecasting back in twenty fifteen, and when you think about everything that happened to global energy markets since twenty fifteen. We had the Climate Accords
and then subsequent regional climate initiatives. We had major technological improvements as certain technologies came down their cost curves. We had a pandemic, We had the Russian invasion of Ukraine, and yet if you look at that global energy stack, it shows remarkable fidelity to trend. People often don't understand just how massive the energy system is. It moves slowly and it adheres to long run trend pretty faithfully.
So whatever the trend that we saw of greater diversification, you think in general you'd expect that to continue and not be subject to short term changes in individual countries' policies. So I'm just trying to understand what you were saying.
The global energy mix will look more diversified in twenty fifty than in twenty twenty five. It will have a greater role for a variable renewable energy. What's interesting in terms of the long sweep of history is I would actually a symbol some of these shocks in a broader
environmental bucket. So you mentioned the providential plague of locusts several of them, but there are also shocks like one we just went through, which is a pandemic, which was a contributor to recessions on both sides of the Atlantic in nineteen eighteen. And I would add one more shock that was a contributor to recessions on both sides of the Atlantic in eighteen fifteen sixteen, and then again in the eighteen eighties, namely the eruption of Mount Tambora and
the eruption of Mount Krakta. Both of those resulted in pretty devastating weather effects across the globe. Eighteen sixteen was known as the year without a Summer because it's so devastated crop yields and in terms of tail risk events. One thing that was on my mind after writing this book was, it's been a while since we've had one of those eruptions.
But hang on, does that say you're going to have to do another book about whether or not there are inevitable cycles in those kind of events. Having established that there aren't inevitable cycles in recessions, do you think maybe we should be looking for patterns on the in earthquakes and volcanoes.
You'd have to consult a geologist whether they occur with a periodicity. But it just was something that struck me, is that those were major global recessionary events. We've had Pinatubo, we've had the Icelandic volcano, but nothing on the scale of an eighteen fifteen Mountain Bora or eighteen eighties Krakatoa.
Okay, so I'm not sure if we should be reassured by this conversation or not. As long as this particular energy crisis doesn't last too long, we shouldn't be too worried about whether that's going to cause by itself recession, And we shouldn't worry, according to you, about the AI boom inevitably sowing the seeds of its destruction. But there's still wide range of pandemics, volcanoes, earthquakes, and other shocking events that we could think about and could happen at any time.
I would conclude on an after nat note that as I observed, we have gradually steadily over time gotten better at absorbing the kinds of shocks that historically would have resulted in recession. Harvest failures were perennial contributors to economic recession in the eighteenth century of the nineteenth century. Now we have my more diversified global supplies, so we've been learning how to better deal with recessionary shocks, and expansions
have been getting longer. So I would end on an optimistic note and also again remind folks that what ultimately matters more for long term prosperity is raising that pace of growth during economic expansions.
Doctor Tyler Goodspeed, that's a great note on which to end. Thank you very much, Thank you, thanks for listening to Trumpnomics from Bloomberg. It was hosted by me Stephanie Flanders, and I was joined by the economist and author Dr Tyler Goodspeed. Trump Pnomics was produced by Samasadi Moses and with help this week from Amy Keane and kle Brooks. Sound design was by Blake Maples. To help others find the show, please rate and review us highly wherever you
listen to podcasts. I was looking on Apple podcasts the other day and really there's a lot fewer people who've given reviews than listen to this show. So I would encourage you to rock up and give us a nice five star