Tyler Goodspeed on Challenging the Way Economists Look at Recessions

Tyler Goodspeed is the former chairman of the Council of Economic Advisors and is currently a chief economist in the private sector. In Tyler’s first appearance on the podcast he discusses his new book highlighting a different way of looking at recessions, the challenge of breaking away from the human inclination of ascribing patterns to random phenomena, whether recessions are more Dorian Gray or Peter Pan, what history and stories like Jay Cooke tell us about recessions, how to evaluate supply side shocks and the 2008 Financial Crisis, why Milton Friedman’s Plucking model might be the best we have at modeling recessions, and much more. 

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This episode was recorded on April 15th, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Tyler Goodspeed. Tyler is a former chairman of the Council of Economic Advisers and currently is a chief economist in the private sector. He has a new book out titled Recession, where he takes a look at what really causes recessions. Tyler, welcome to the podcast.

Tyler Goodspeed: Good to be with you, David.

Recessions

Beckworth: It’s great to have you on. This was a really fascinating read, and it’s going to challenge a lot of people’s priors, their view on what drives business cycles and how to think about business cycles. Before we get into it, tell us a little bit about yourself and how you ended up writing a book on what really causes recessions.

Goodspeed: In one respect, it was a continuation of my intellectual journey as an academic economist. I had been, for over a decade, researching, writing about not just historical economic shocks and historical economic recessions, but also the intellectual debates about those. Then secondly, when I started the project, we had all just lived through one of the sharpest economic contractions in US and, indeed, global history.

At the time, I thought of it as a very unique recession, whereas previous economic recessions followed unsustainable or otherwise error-prone economic expansions, to which the recession was, in some sense, the inevitable and even necessary remedy. The more I got into the research project, the more I realized that in a lot of respects, 2020 wasn’t as unique as I initially thought.

Beckworth: Give us the executive summary of the book, and then we’ll get into the details.

Goodspeed: The core thesis of the book is that recessions are not inherently cyclical phenomena. We tend to think of economic expansions as possessing some fundamental flaw, some error, some excess, to which economic recession is that inevitable, even necessary remedy. In reality, there is simply nothing in the height, the speed, the duration, or the composition of an economic expansion that can really explain anything about the depth, speed, duration, composition, or even probability of the subsequent recession.

Beckworth: That is a very different take than many observers would hold, even I would say mainstream professions. Think of a new Keynesian model most central banks use. There is this output gap. It can be positive, it can be negative. What you’re arguing for is something more like Milton Friedman’s plucking model where it’s easy to pull below potential, but you never really go above that. We’ll come back to that. That view is definitely not the majority view or the consensus view. Have you always held that view, or is it something you had to grow into?

Goodspeed: It’s something that I’ve grown into over time because I tended to think, as many economists think, that economic fluctuations are fundamentally about oscillations around a rising trend. When you just look visually at a plot of actual GDP, or pick your major aggregate macroeconomic time series, you have remarkable fidelity to a long-run trend. Pick your frequency filter with which you estimate that trend. Then you have these temporary negative deviations from trend.

Typically, the deeper and sharper the contraction, the steeper and sharper the subsequent rebound, which is consistent with the Milton Friedman plucking model. Whereas if you thought that economic fluctuations were fundamentally about oscillations around a rising trend, then you would expect to observe deeper or faster, or in some cases, perhaps longer recessions to follow higher, faster, or longer economic expansions. In fact, statistically, the effect of expansion height, expansion speed, expansion duration on recession depth, speed, or duration is zero.

Beckworth: You do a good job documenting that in the book—lots of charts, lots of data, not just an argument, but empirical evidence to support that. There’s been other research done as well on that front. Basically, you’re telling the story that recessions do not die of old age, or it’s not a morality tell. It’s not as if we had to have a cleansing of the soul of the economy to make up for past excesses. It happens sometimes due to a number of shocks coming together. We’ll talk about that too, a perfect storm of bad things happening. How do you see the profession in terms of accepting this view? I said it was not a majority view. Would you agree with that? I guess, how’s the reception of your book been as you’ve made this case?

Goodspeed: I’ve been really thrilled by the reception thus far, including from some colleagues and friends in the academy whom I have a lot of respect for. One interesting discussion I had was with a very, very eminent macroeconomist who agreed with the core thesis of the book. He said, “I don’t find it particularly surprising.” He said, “In 2009, when Queen Elizabeth II asked a group of economists, ‘How did no one see this coming?’” The answer he gave ex post was, “Because recessions are unpredictable.”

They’re unforecastable. We can simulate them. We can simulate what shocks look like, but we can’t anticipate them. My response was, “You say that, but evidently, you’re not taking your model seriously enough because what do you call the 2001 recession?” He said, “The dot-com recession.” 

I said, “What is the story you tell yourself, you tell other people, about the 2008 recession?” The answer was something like, “People who allegedly should never have been able to buy homes, bought homes, aided by reckless mortgage originators who were egged on by greedy bankers, and all of this was overseen by financial regulators who were lax or asleep at the wheel.” Implicit in that story is that someone could have and should have seen information in that expansion that would predict the probability of a subsequent recession.

Beckworth: I’m very sympathetic to that view that 2008 was not inevitable, that there were some things that happened, and it wasn’t a bunch of bad policy choices that led to a buildup in housing. In fact, you provide some evidence in your book that there wasn’t an excess of housing units built during that time. Kevin Erdman, who’s an affiliated fellow, he’s made this case as well here at the Mercatus Center. We’ll come back to that as well. This book holds some unconventional views, but a very convincing argument. Again, listeners, check it out. I’ll provide a link to it in the transcript. Let’s go to your first chapter. I learned a new word. You talked about epiphanies or apophanies. Am I saying that correctly?

Epiphanies or Apophanies

Goodspeed: You are, yes.

Beckworth: We all know what epiphanies is. A light bulb comes on, we make a causal connection between two ideas. Often when we’re doing research, we’re like, “Oh, I see it now. Let’s go test it empirically, I believe, and maybe we can prove it causally.” What does apophanies mean?

Goodspeed: It’s a term I learned in the course of writing this book because I realized that we identify a lot of patterns to recessions and to economic fluctuations, but a lot of those are false patterns, or they’re the assignment of pattern where none exists. It’s randomness. I was looking up what is the opposite of an epiphany when you’re correctly identifying a genuine pattern in the data. The answer to that is an apophany, which is the assignment of a false pattern, or the identification of a false pattern.

The stories we tell ourselves about recessions abound in apophanies, that there’s some established frequency to economic recessions, as you pointed out, that the longer an economic expansion has been ongoing, the more fragilities and imbalances and excesses accumulate, rendering a recession more probable. 

Just that there’s something in the contours of an economic expansion. Maybe the height is measured by GDP or the physical height of an expansion. There’s a skyscraper index that some allege can predict major economic recessions, but the reality is that when you test these, they all turn out to be apophanies. Our mammalian brains, our pattern-seeking brains assigning patterns to what are fundamentally random processes.

Beckworth: This was a very interesting chapter because you go through and you show that a lot of these claims about these regular cycles really don’t exist in the data. There’s a list of people who have made the claims. Before we get to them, I just want to maybe step back and talk about a business cycle or a recession. You note there are different measures of that.

One, I want to highlight this because it comes up often, is how you measure the business cycle. There’s the NBER, which is the standard bearer for the US. If you look at it, it looks like business cycles have become far less pronounced post-World War II, 20th century. Really, it’s a bit of an illusion because there’s other better work done by Christie Romer, Joseph Davis, and you mentioned this in your book. Tell us about that, why it’s actually important to not just take for granted what the NBER tells us.

Goodspeed: There have been some really, really serious scholars. You mentioned two of them, Joe Davis and Christie Romer, who have looked at the historical record, looked at the historical data. They have identified some measurement issues with the pre-1927 official NBER recession chronology. When you correct for some of those measurement issues, it turns out that pre-1927, US recessions were not quite as frequent, and in particular, not quite as long as the official historical chronology would have you believe.

There’s also been some excellent work on the United Kingdom by a former Oxford colleague of mine, Steve Broadberry, and that’s the basis for my work on the United Kingdom’s recession history. When you account for this on the US side, it turns out that, yes, economic expansions have been living longer on both sides of the Atlantic over time. They’ve been living longer over time.

It turns out that that is a very long-run structural trend for which there are no clear breakpoints. Statistically, there are no breakpoints toward longer-lived expansions. You can’t look at history and say, “Oh, there was a breakpoint toward longer-lived expansions in 1913 with the establishment of the Federal Reserve, or in the 1930s with the New Deal, or in 1946 in the United Kingdom with the Beveridge reforms.” The only possible breakpoint toward longer-lived expansions was in the United States in 1785.

Beckworth: Wow.

Goodspeed: When you think about what might have changed then, you leave behind the colonial wars of the 18th century. You leave behind the American Revolution, which was really a depression-magnitude recession in the 1700s.

Beckworth: The science of macroeconomics really hasn’t made that much of a difference in terms of affecting the business cycle.

Goodspeed: That was one of the biggest surprises to me in the book was that long-run nature of the trend toward longer-lived expansions. The other thing that really surprised me was that if you look across four centuries going back to 1700 on both sides of the Atlantic, the depth and duration of recessions has been pretty constant over time. In fact, statistically, it’s no different pre-1945 versus post-1945 on either side of the Atlantic.

Beckworth: That is remarkable. Just one more example from this discussion that I think is important. You often hear people say the long depression of the 1870s through the 1890s, which is in the NBER’s dating for that period, but Christie Romer, Joe Davis, they show actually it ended much sooner than that. There are some other recessions then, but not this massive 10-, 15-, 20-year period.

Let’s talk about attempts to find regularity in the business cycle. Some of these I had heard before, but some of them are new. I’m just going to go through a list here that you have in your book. William Petty came up with that Petty cycle, seven-year cycle. It was agricultural-based. This was way back when agriculture was a big part of the economy. That makes sense. Clément Juglar, am I saying—

Goodspeed: Juglar, yes.

Beckworth: Juglar, thank you. He has the Juglar cycles, five to 10 years based on investments. Joseph Kitchin had the Kitchin cycles, inventory fluctuations. Later in the book, you also mentioned the Elliott waves, which was tied much more to the financial cycles. Going even farther out, we have the Kondratiev waves?

Goodspeed: Yes.

Beckworth: Nikolai Kondratiev, a Russian, a Soviet economist, of all people, 45 to 60 years. Probably of all the ones on that list that I’m asked about the most by just people I know in my world who aren’t economists is the Kondratiev wave. “David, it’s time, man. We’re 60 years out. It’s time, man. It’s time, right, David?” I’m like, “Actually, I’m not so sure.” Is that a good summary of all these attempts here to measure regularity in the business cycle?

Goodspeed: For regularity, yes, and there are lots of them. There’s also the Kuznet swings of 15 to 20 years or 15 to 25 years. You can very easily empirically test whether these exist by simply regressing—sorry to be technical—but regressing the probability of a recession today or this year on there having been a recession three to five years ago or 60 years ago. Statistically, there is just no explanatory power there. I liken it in the book to the Texas sharpshooter fallacy. I’m now a resident of the state of Texas. There’s a fallacy about the Texas sharpshooter who fires a bunch of shots at a wall and then goes around and draws a bull’s-eye around the densest cluster of shots.

Beckworth: That was a great analogy. Now, in this chapter, you also talk about this cottage industry of newsletters and writers, of pundits, and particularly one you mentioned, Nouriel Roubini. There’s a lot like him who they make a lot of money selling newsletters predicting doom and gloom. Now, we know a broken clock is right twice a day. He called the 2008 recession, you mentioned, or he sort of did. At first, he was calling a dollar crisis, then housing, back to dollar, back and forth. That’s something I remember well about that period, early to mid-2000s.

There were many people, not just Nouriel, but a lot of people saying, “Oh, our current account deficit is unsustainable. We’re going to have a major dollar crisis.” Larry Summers, there were others. We ended up having something that no one was really calling. Maybe a few people were. I want to say housing, but you just corrected me earlier. It’s not even clear that was the source of it. The recession that we had, the Great Recession, was not what people saw at the time and not what these pundits were doing. You highlight there’s a business, they sell this narrative, and it’s easier to sell that than to sell the other narrative, right?

Goodspeed: Just look at Irving Fisher versus Roger Babson. Irving Fisher, one of the most brilliant economists of the 20th century. Roger Babson was the founder of Babson College, a very respected economic prognosticator. Irving Fisher is forever tarred with the remark made on the eve of the 1929 stock market crash that, in his estimation, stocks had reached something like a permanently high plateau. 

What people don’t realize is that he was responding in that remark to remarks made earlier in the day by Roger Babson, in which Babson reissued a warning he had issued the prior year and the year before that, at the same conference, in which he said that sooner or later, a crash is coming. It may be spectacular. Sooner or later, stocks will decline, and now is the time to start trimming your sales. It was a very different reason that he had given the previous year. The previous year, the warning he gave was because he thought that a defeat of Herbert Hoover in the 1928 election and the election of Al Smith would cause a depression. Babson is forever remembered for that correct call, but it was very vague and oracular.

Beckworth: That’s the case with many of the doom newsletters we hear. Buy gold, do something, protect yourself, it’s coming. I guess it’s a cognitive bias. We latch onto these scary scenarios. If you get one bad call in terms of a positive outlook, you’re tarred, you’re feathered, and you’re not respected, I guess.

Goodspeed: There’s definitely an asymmetry there. Yes, as you said, a broken clock. Look, in any given year over the past 80 years, there’s about a 15% chance that the US economy enters recession. If you reissue the same warning in three years, then you already have a nearly even chance of getting right in the next year. Your mention of 2008 is, I think, an important one because we tend to think that great historical events like major recessions require great or grand historical causes, but the reality can be much more prosaic and often is much more prosaic.

As I talk about in the book, what we forget is that, to date, the highest real inflation-adjusted price of oil or a gallon of gasoline or energy overall was not in 1973 after the Arab oil embargo. It wasn’t in 1979 after the Iranian revolution. It wasn’t in 1990 after the Iraqi invasion of Kuwait. It was in summer 2008, June 2008 specifically. Because of a confluence of simultaneous shocks to both energy supply and energy demand, particularly on the demand side, the spectacular growth of China, in summer 2008, American households were having to spend a record amount on energy goods and services.

It’s really hard to economize on things like commuting to work, dropping your kids off, heating or cooling your home, putting food on the table because food is a very energy-intensive good. In summer 2008, the average American household was spending over $2,000 more per year on energy goods and services at the same time that their mortgage interest payments were resetting higher by on average $800 per year. Faced with that financially unsustainable situation—because remember, the median American household, have no savings after taxes. Something had to give. What gave in summer of 2008 was about 5% of American homeowners were seriously delinquent on their mortgage interest payments.

Beckworth: Since we’re talking about 2008, let’s stay there for a few more minutes. I want to bring up my former colleague, Scott Sumner. He has a unique view of 2008 that I’m sympathetic to. He argues you take that shock, the oil price shock, which was a real cost on households, as you mentioned, but it also affected the Fed’s thinking. Now, one can argue, look, the Fed cut rates. It was down to 2%, I believe, by the summer, and they stayed there. Ben Bernanke regrets not cutting, I believe, in September 2008. He says this in his memoir.

The Fed was also worried about high inflation. Between the summer, and I believe August, September, they were talking up rate hikes, second half of 2008. If you look at forecasts of interest rates, it’s going up. If you look at forecasts of inflation from break-even inflation, it’s actually dropping. Scott Sumner says monetary policy was effectively tight. Even though the nominal rate was relatively low, you can think of the neutral rate actually falling through the floor, and the Fed’s talking up, and that added all this extra weight that further deteriorated the economy during that time. The Fed actually compounded the real shock. What do you think about that interpretation of events?

Goodspeed: This is why in the book I have a chapter called “Firefighters and Arsonists,” because we tend to think about institutions like the Federal Reserve coming to the rescue, putting out fires, but they can also be, and over the past century have been, serial accomplices to the murder of otherwise healthy economic expansions. I say accomplices because I don’t typically see them as the primary cause, but as you note, it’s an additional shock impacting on an economy that’s dealing with a primary shock elsewhere. This is something that Ben Bernanke wrote about in terms of one of the channels through which energy supply shocks, energy price shocks, can impact the economy is actually through the central bank.

Beckworth: Do you think oil price shocks are becoming less consequential? I know you have a whole chapter we can get to in a bit, but something I kept wondering, how important do you see them now? I think you touched on this. We’re better able to handle these shocks. Assuming the Fed doesn’t compound the cost, what do you think about our ability, our resiliency with regard to these shocks?

Goodspeed: It’s an ongoing debate in the empirical literature. There was a Brookings paper a few years ago that suggested that for the United States, energy price shocks and oil price shocks specifically, have become less impactful on the US economy as a dollar of output has become less energy intensive generally, and less oil intensive specifically, and also as increased investment in structures, particularly mining structures in the United States, offset some of the decline in discretionary spending by consumers.

There’s other research that suggests that though economies have become less energy intensive, and in particular, the GDP has become less responsive to energy price shocks, energy prices have become more responsive to supply shocks. You can think about what’s going on with the slope of the demand curve over time. Generally speaking, diversification is good insurance policy. We have seen increased diversification, not only in terms of energy mix, but also in terms of source.

Beckworth: Better to be alive today than, say, 1970s when you had oil price shocks.

Goodspeed: Yes.

Beckworth: Back to the business cycle chapter where you go and you establish that there’s not this regularity and you respond to these wave theories. In that chapter, you also talk about some of the metrics that we’ve come up with that supposedly are leading indicators. There’s leading business cycle indicators. You say, “Hey, these really don’t work.” Readers, go check out the book. That one is easy to convince me.

The other one that was interesting, maybe more challenging, is the yield curve as a predictor of recessions. An inverted yield curve, which is the Treasury yield curve, short versus long, but inverts so that short rates are higher than long rates. The argument has been that’s a great leading indicator, but you actually make the case, actually, folks, hold on, it’s not what you think it is.

Goodspeed: This is one of the great reasons for looking at two countries that have broadly similar economies, similar institutions, have long been deeply financially and economically integrated, and yet have very different recessionary experiences. With the UK, their history abounds with false positives and false negatives from yield curve inversions. With the United States, if you go farther back in time, yield curve inversions were something of a banality under the gold standard era where inflation expectations were largely anchored.

Even in the period since, say, 1950, there are a few false positives. We had one in the past five years. Also, there were probably, I would contend, false positives in 2000 and in 2019 when the yield curve inverted, and I would say was correct for random reasons.

Beckworth: We got lucky.

Goodspeed: I don’t want to say lucky because of the shocks that came after, but the inversions were fortuitous in predicting the subsequent recessions. The 2001 recession, I argue in the book, should not be called the dot-com recession, but should be called the 9/11 recession. Then, of course, the 2020 recession was the pandemic recession. I don’t think that bond investors in summer 2000 or summer 2019 were anticipating what happened in September 2001 or in February, March 2020.

Beckworth: It’s a stretch to say the yield curve predicted that recession in 2020, but it just happens to line up. If you blindly put in Treasury yield curve spread and recession indicators, you might find a good fit. Open the hood. Look inside. You’re like, “I’m not sure.” Bottom line is this, you can’t really trust the yield curve spread. What was great about it when we did believe in it was that it actually was a leading indicator. It actually could show recession coming before it happened. What you’re saying is it’s time to lose our religion in it.

Goodspeed: It is. Even there, usually the leading indication period is 24 months. Already, before you get into false positives, false negatives, it already has a built-in 30% chance of being correct, just unconditionally. Now, all that said, I’ve just written a book in which I demonstrate that all these conventional tools for predicting or indicating recessions, whether it’s the yield curve or the SOM indicator or leading economic indicators and index thereof, they don’t actually predict recessions. That said, I don’t believe in astrology, but I’ll still take a peek at my horoscope every now and then.

Beckworth: Sure. It might be useful to check in.

Goodspeed: Just to see.

Beckworth: If you’re getting paid to manage money or you’re on Wall Street, it might be a useful cross-check on how you’re managing portfolios.

Goodspeed: Or just analogous to checking your horoscope. You just want to take a peek.

Beckworth: All right. Go with a big grain of salt knowing that this may not be the best way to—

Goodspeed: Correct.

Peter Pan vs. Dorian Gray

Beckworth: —evaluate what you’re doing. Let’s go on to the book. In the next chapter, you have a clever title, “Peter Pan versus Dorian Gray.” Explain that title.

Goodspeed: A lot of people think that recessions are rather like the picture of Dorian Gray. You have the subject ostensibly healthy, ostensibly exquisitely youthful, and yet all the while, the portrait bears every blemish and disfigurement from each hedonistic excess until the entire rotten portrait to be restored to exquisite youth and beauty must be destroyed, and destroyed by the very instrument of its hedonistic excess. A lot of people think of expansions that way, that it might look superficially healthy and young, but in reality, all these disfigurements and imbalances and blemishes are accumulating until it has to be destroyed so that it can be reborn in exquisite youth again.

I demonstrate in the book that economic expansions are rather like Peter Pan. They never grow old. Though they never grow old, though they never age, they can be killed. If Peter Pan were to lose a battle with Captain Hook, he would die. Economic expansions are similar. I highlight in the book some of the types of shocks that historically have been serial killers of economic expansions. That’s the basis for the economic analogs to Peter Pan and Dorian Gray.

Beckworth: In the book, you have several chapters that touch on this theme that recessions are not a morality play. They’re not something that’s due for past excesses, but yet there’s been a number of prominent economists. Even today, I’d say many economists still hold this view in some form. Let me just go through a list that you mentioned here that I have been exposed to. Maybe not all of our audience will have been exposed to, but I think both of us have been exposed to it because both of us have come up through a free market community, and these names come out a lot.

Frederick Hayek, Lionel Robbins, Dennis Robertson, Ralph Hawtrey. Now, a lot of those guys I got from George Selgin. They’re people who he introduced me to them. Now, Knut Wicksell. A lot of people know Wicksell, the neutral rate. Gustav Cassel and Alvin Hansen. Alvin Hansen, of course, secular stagnation. These are very prominent economists pre-World War II, and they all made this argument. You also note even someone like Charlie Kindleberger, from a different perspective, financial excesses, imbalances. They’re all telling the story that something’s coming due. Why do they have this vision? What’s behind it?

Goodspeed: Fundamentally, I think it comes down to our pattern-seeking nature. The patterns are how we process incoming stimuli and relate subsequent experiences, and in particular, traumatic experiences, to those incoming stimuli. Recessions are, at the end of the day, traumatic experiences. It’s not hard to look around during an economic recession and identify proximate records. Record stock prices, record home prices, record building heights, because there have been many more records than there have been recessions. It’s relatively easy to identify, ex post, some peak, some record that subsequently declined during recession, and to draw causal links.

It also has a lot of the essential elements of a good story that you have setting off in the city of London or Wall Street. You have plot. You have characters, not just protagonists like Hank Paulson and Ben Bernanke and Tim Geithner, who described themselves as firefighters, but also antagonists, often Wall Street bankers. You have conflicts and you have resolution because ultimately, every recession has ended in renewed economic expansion. There’s never been an immortal economic recession.

Most importantly, these stories of boom and bust, whether it’s the mania, panic, or crash view of Charlie Kindleberger, or the imbalance view of Friedrich Hayek, or more recently, there’s a forest fire theory of economic recessions. It embeds our understanding, our stories of recessions with theme and a moral theme, that there’s a way that we could live better and freer from harm and freer from guilt. That appeals to us on a very human level.

Beckworth: It’s a compelling story. On the individual level, it makes sense, but at the national economic level, it doesn’t hold empirically. Again, you provide great evidence for that in the book. I would point to another country that had 30 years with no recession, and that was Australia. Now, your book covered the UK and the US. I would dare say it’s still ongoing. I don’t think you count COVID as a typical recession. No pandemic, Australia would still be running 30-plus years. That’s remarkable—30 years, no recession. Now, you could argue with some luck, maybe they got some policy things right, but point is, it’s possible. That’s a long expansion.

Goodspeed: It is, and that’s a great point. I should caveat that, of course, there’s never been an immortal recession, nor has there ever been an immortal expansion. Recessions will continue to happen because history will continue to happen. Yes, there was also a 26-year-old economic expansion in the United Kingdom from 1947 to 1973. There was a 16-year economic expansion in the United Kingdom in the 19th century.

By Joe Davis’s alternative recession chronology, there was an expansion in the United States longer than a decade in the 19th century. We just had one that ended in 2020 that was 10-and-a-half years old. To your point, if there was no COVID, that expansion would be 17 years old right now. If it weren’t for the terrorist attacks of September 11th, then the expansion that ended in 2008 or at the end of 2007 would have been 17 years old. That is a pretty remarkable feat, I think, how long economic expansions can live.

Beckworth: Now, to be fair, there will always be these exogenous, unforeseen shocks like a terrorist attack, a pandemic. The point being is, I think you can fairly put those aside in terms of making the case in terms of imbalances building or having something come due. Terrorist attacks is not payment for past sins. People are typically talking about like a 2008 story, but we’ve argued that that’s not the case.

Let’s do one more concrete example to make this very clear that what might appear as imbalances or excesses was actually just a number of bad shocks coming together, bad luck. That is the panic of 1873. It’s the story of Jay Cooke and the railroad. Tell us that story.

Jay Cooke and the Railroad

Goodspeed: This is one of my favorite stories in the book that I had not previously been familiar with. Jay Cooke was a spectacularly successful financier. He single-handedly financed about a quarter of the Union’s war effort in terms of issuing debt. After the war, he took an interest in this Transcontinental Railroad project to build a railroad from the Great Lakes in the East to Puget Sound on the Pacific in the West. He saw vast potential here because you have incredibly fertile plains, you have rich mineral resources, you have tourism potential in the Yellowstone Valley, which he was one of the early people to recognize. You have the Great Lakes in the East, a natural harbor in the West on the Pacific.

The Northern Pacific Railway was the project that would tie all this together. He embarked on financing that project entirely with private money. Started off strong in terms of raising money, breaking ground, building connector railroads. Then things started to go awry. You could say off the rails a little bit. No pun intended. For one thing, surveyors and the railway increasingly trespassed upon traditional indigenous hunting grounds.

Also, you had a scandal at another Transcontinental Railroad. It had nothing to do with the Northern Pacific, but it cast a pall on all railroad securities. You had a fake Scottish lord that nearly bilked both the Northern Pacific and several other railroads out of quite a lot of money. You had also, in 1873, the descent of a locust plague of providential proportions. One swarm was actually greater in area than the size of the state of California. The pioneer children’s writer Laura Ingalls Wilder actually wrote about it.

Beckworth: Hard to imagine something so big.

Goodspeed: Exactly. This not only devastated crops in the area and contributed to bank failures, it also crucially led to a collapse in migration. That had been the key sales pitch for Jay Cooke to particularly European investors. By September 1873, he could not raise more money and the bank failed. That triggered a wave of other bank failures. Immediately, the consensus view was, this is what happens when you attempt to build a railroad from nowhere, through no man’s land, to no place. The railroad was eventually completed. It’s still in existence today. Can you guess who owns it today?

Beckworth: I read the book.

Goodspeed: It is owned in its entirety by Berkshire Hathaway, which means that this bridge from nowhere, through no man’s land, to no place, is today owned by the most successful value investor of all time, Warren Buffett.

Beckworth: It must be a good investment.

Goodspeed: I think history bears that out.

Beckworth: Right. Great story. Again, it’s Jay Cooke. I knew him from the Civil War. A little bit about this railroad as well. In fact, probably, if I heard anything about him, it was this crisis. He went bankrupt. What you show is it was just the confluence of a number of bad developments all at once. Moreover, you go on and tell the rest of the story, which I hadn’t heard. He actually has a great recovery. He loses everything.

Goodspeed: He loses everything.

Beckworth: Man, what a riches to rags to riches story. Thank you for adding those details. I was glad to hear him end in a peaceful bliss at, I think, age 83, you mentioned. A wonderful story. It highlights what appears to look like on the surface as it’s due. It’s morality play. In fact, it was just really a number of bad things coming together at once.

Goodspeed: Yes. One thing that really interested me in the book was the work that I cite by Eugen Slutsky, who was a Soviet economist. Even as all the interwar economic theorists that you mentioned in the West were developing theories of the endogenous or self-generating business cycle, that the economic contraction is a product of the capitalist expansion that proceeded. It was actually a Soviet economist in Moscow who took old Russian lottery tickets and constructed moving sums of those numbers, and that completely random time series mapped almost perfectly onto an index of British business conditions. What it illustrates is that the summation of fundamentally random causes or chance causes can resemble the sorts of cyclical fluctuations that we associate with business cycles, but the reality is the underlying process is random.

Beckworth: Yes. Again, we’re pattern-finding creatures, and we want to find meaning in patterns even if the underlying source is random, which is what he found. Of course, I remember him from grad school. Maybe we call them Slutsky equations. Not the proper pronunciation, but that’s what we called them.

Goodspeed: I had to look it up myself for the audio version. Apparently, it would be Slutsky.

Models of Recessions

Beckworth: Slutsky. Slutsky equations. We had to learn those in grad school. Now, good stuff. Let’s talk about this model behind this thinking. Again, we touched on it earlier, but the plucking model of Milton Friedman versus maybe the standard model is that there’s potential real GDP, and you can go above it or below it. If you’re going above, the economy’s overheated. Below, it’s underheated, or there’s slack. It’s a job of macroeconomic policy, both monetary policy, fiscal policy, to minimize the deviations. In fact, the Fed’s mandate is full employment, which means stay as close as you can to full potential.

That is the standard story. I hate to say I taught this for many years at a university, but the plucking model makes a great alternative interpretation. Tell us about it.

Goodspeed: Yes. Milton Friedman likened economic fluctuations to a taut string along a horizontal board. The horizontal board can be thought of as potential GDP. The string has random plucks along that board. The amplitude of the contraction is going to predict the amplitude of the subsequent rebound, but the amplitude of the contraction is going to have nothing to do with the amplitude of the proceeding increase or expansion.

When you just look visually and then also test it statistically, it turns out that economic fluctuations do generally tend to be characterized by economies that are growing at something close to their potential. Then you get adverse shocks. The economy temporarily deviates from that potential and then rebounds back to potential.

Beckworth: That’s why it’s often common to hear people say this. Even people who believe in the standard view of business cycles, that, you know what, the Fed can do a whole lot of damage. It can cause a recession, but it really has a hard time generating sustained economic growth above some potential. We often will say this casually, but I think maybe our instinct, because we’ve been trained this way, is to think, oh, there’s overheating.

I’ve been challenged on this before. Before I read your book, a good friend, David Andolfatto, goes, “David, what does it mean to be overheated?” Come on. He pushed back on this notion. It’s easy to see a contraction, a great recession, great depression, but it is hard to think, what does it mean? Factories, everyone in the US economy is working extra hard, and they break down. What’s the most charitable way to think about this? I’m struggling.

Goodspeed: I think the most charitable way to think about this is that you might have periods during which there is just not much slack in the economy. We saw that in 2021, 2022, when supply wasn’t fully recovered from the pandemic recession, and there was a lot of demand in the economy. If you look at various measures of slack in the economy, those were several standard deviations tighter than historic norms. We then had a cooling in that slack and the normalization, in part because of Federal Reserve policy.

I think that’s the best illustration of just people working extra hours, people working multiple jobs if they want to, and it’s just a tight economy. Then we had a gradual normalization—

Beckworth: Without a recession.

Goodspeed: —without a recession. I think that, again, speaks to what I found in the book, and what surprised me in the book, because I tended to think about fiscal and monetary policy shocks being primary contributors to economic recessions rather than secondary or tertiary contributors. The reality is when you look at recessions, they are about big shocks and often shocks that are specific to certain sectors.

Beckworth: That is such a good example. We did not go into recession in ’23. There were many calls, as you remember, ’23 is going to be a recession year. In fact, I think the yield curve was even calling for one, if I recall correctly. People were like, “Oh, this is it. This is it.” For many reasons, yield curve, but also the Fed was tightening, so we’re definitely going to go. We had a soft landing. Governor Chris Waller was like, “No, actually, guys, we can land this plane and have a soft landing.”

We did. What you’re saying, I think what I’m hearing is you can’t overheat the economy to the extent that people work a little extra harder, but mainly it’s going to be manifested in higher inflation. An overheated economy is going to be primarily seen with just basically higher prices, but there’s not going to be this big oversized malinvestment that’s going to go bust. We don’t have to have that happen.

In fact, going back to Australia, I think this is a very pivotal comparison. People will point to the US and say, “Look, all this excess investment in housing, the bill came due.” Well, if you go to Australia, they had the same household debt to GDP that we had. They had the same financial imbalances that we had in the US, and yet they did not have that correction. Just because there is an asset buildup or debt that appears to be excessive does not necessarily mean you have to have a deep recession afterwards.

Goodspeed: That’s right. You mentioned earlier the supply of housing, the construction of housing in the 2000s in the United States. If you asked a millennial today who just bought their first home or is aspiring to buy their first home, hopefully, eventually, someday, I think they would push back on the notion that there was too much investment in residential real estate in the 2000s in the United States. If anything, they would probably contend that there was too little because the cost of buying a home in the United States—as a multiple of median household income—has never been higher than it was in the past five years. If anything, there was too little building.

Beckworth: Let me ask a pointed question. Is it harder to find a millennial Austrian economist because of that? Maybe I’m stretching here, but Austrians would push hard against what you argue in this book, right? Have you had any exchanges with Austrians about your book, any pushback from that crowd?

Goodspeed: Not yet, but I do anticipate it. I would say here again, you mentioned the duration of past economic expansions. There was a 26-year British expansion that ended in 1973 with the 1973 Arab oil embargo. At the time, many people, and still today, some economists will say, “Oh, well, that recession was due to a Barber boom,” named after the British chancellor, the exchequer under former Prime Minister Ted Heath, that there was some stimulus, and it created some inflation, particularly in housing prices, and the 1973 recession was a consequence of that. No. The 1973 recession in the United Kingdom was the consequence of the Arab oil embargo and subsequent spike in energy prices.

Beckworth: Yes. Let’s come back to the supply shocks, the oil shocks, in just a minute. I want to come back to the Milton Friedman plucking model that you outline in your book. It seems to make a lot of sense, but let’s say now you’re appointed to the Fed, Tyler. How do you incorporate that model into your thinking as a Fed official? How do you do monetary policy with a plucking model?

Goodspeed: I think a plucking model would advise you to first do no harm during an economic contraction. While I do find that policy has had little effect over time in terms of attenuating the depth or duration of economic recessions, which have been remarkably constant over time, they can make recessions much worse. Contractionary monetary or fiscal policy historically has made recessions worse, in some cases much worse. The Great Depression would be a perfect example of that.

The second thought I would have was just look back on history and fairly recent history—2022, you noted, was a soft landing. That’s the nature of monetary policy is that it can be spread across sectors unevenly and across time unevenly. It’s not the same coincident shock that’s affecting all sectors of the economy contemporaneously and equally, or affecting one sector of the economy very, very hard that has very high linkages to the rest of the economy, and for which in the near term it’s difficult for households and businesses to find substitutes.

The main exception would probably be residential real estate, housing. I think that’s why when you look back to the recession of the early ’80s, you had two shocks hitting the US economy simultaneously. There was a tight monetary policy shock and also yet another energy price shock following the Iranian revolution and then the Iraqi invasion of Iran.

Supply Shocks

Beckworth: Let’s talk about supply shocks because that’s the one thing that’s really beyond macroeconomic policy’s controls. You get a confluence of them coming together. In your book, you talk about oil shocks. Of course, that’s probably the best-known one, but locusts. You mentioned this biblical proportion. You mentioned locusts the size of California. That just still blows my mind. You also mentioned in Ireland, there’s this fungus. There’s a number of droughts, weather, and I imagine in more emerging economies, those things matter more. As you mentioned, some would argue we’re becoming more resilient to these shocks. How does this play into the story you’re telling in the book?

Goodspeed: I think the primary way in which it plays into the story of the book is that, again, recessions are not about cyclical oscillations. They’re about adverse shocks. You mentioned the locust plague of the 1870s. There was actually another, an earlier one in the 1850s, that contributed to the 1857 recession. Again, in 1931, it was the worst locust plague since that of the 1870s. That contributed to a wave of bank failures in the affected regions that then spilled over into the regional reserve cities, because then you would have these internal reserve drains from the city correspondent banks.

That’s how a supply shock in one region could have macroeconomic implications outside the region because of these propagation mechanisms. For example, bank failures and internal reserve drains. You also observe historically, a lot of shocks to specific sectors. They’re only directly affecting specific sectors, but those sectors have very high linkages to the rest of the economy. 

Over a near-term time horizon, say about 12 months, which incidentally is the duration of the median and modal recession, it’s just very difficult for households and businesses to find substitutes. I’ve mentioned energy, which is the most common, but you also see steel, automobiles, and if you go farther back in time, cotton was a perennial contributor to economic recessions on both sides of the Atlantic, but actually for different reasons.

Recessions in Different Places

Beckworth: Let’s focus on recessions as they occur in different places. You have the UK, you have the US, and you have a chapter called “The Patriotic Recession.” Why don’t countries all have recessions at the same time?

Goodspeed: It’s a really good question because if the manias, panics, and crashes view of economic fluctuations, or the boom-bust view of economic fluctuations were true, then we would expect to observe recessions as roughly evenly distributed across time and across space. We’ve just discussed how actually recessions have become rarer over time, less frequent over time. Their frequency has also differed drastically between the United States and the United Kingdom.

The United Kingdom has historically been much less recession-prone than the United States. That was fundamentally for two reasons. It’s not that Brits are, or historically were, less prone to mania and panic than Americans. It’s rather that from 1826 onward in the United Kingdom, you had a nationwide system of branch banking. If you think about a national economy, a large national economy is something like a large diversified portfolio, then weakness in one region or one sector can be offset by strength in another sector or other regions.

Whereas in the United States, for domestic political reasons, for most of US history right up until the 1970s and ’80s, not only could you not operate a bank across state lines, you couldn’t even operate more than one branch within a state. We had literally tens of thousands of small, under-capitalized, under-diversified financial institutions that would amplify adverse shocks when they would occur.

The second reason for the greater resilience of the British economy historically to economic recession was that from 1926 to 1972, the United Kingdom went without a single official coal strike, and the UK economy was overwhelmingly reliant on coal for primary energy supply. If you think about a lot of the US recessions during that period—1948, 1953, 1957, 1970—those were all oil-related recessions that had a smaller impact on the more coal-intensive UK economy. Again, we see more prosaic reasons for recessions rather than grand theories of mania and panic.

Beckworth: Or some great evil villain. It’s literally like the structures of the economy are different. One country, the UK, has a better diversified banking system, better financial stability, but also has a different energy source, coal, and it just happened that no strikes happened. Those things matter. You’ve done work on that. I should mention to our listeners and watchers of the video that you have both a PhD in history and a PhD in economics. You’re a glutton for punishment, number one. Number two, you’ve written on this. You’ve written on the fact how there’s different banking systems and the resiliency matters.

The US had all these problems. Canada, of course, did not have the problems because they had that diversified banking system. Let me use that to segue into that there is a literature called this global financial cycle. You’re probably familiar with it, Hélène Rey. You make a great point. If you cross-sectional panel data, basically, there’s not an even distribution of recessions, which undermines the story. There is a story told that because of the reach of the dollar, 2008 would be a good example.

Their story is it started in the US, it spread to Europe, spread to other places, and the common linkages are the global dollar market. That would just be a financial story. It’s not an excesses or buildings story. It’s just simply there’s some financial instability built in or maybe propagated by a common medium of exchange.

Goodspeed: One thing about 2008 is that the United Kingdom shared that energy shock, whereas they didn’t share a lot of the energy shocks of the 1948 to 1972 period. The other reason for that propagation—and I should note that while historically I find that recessions have often been very patriotic in the sense that they halt at the border, they have become less patriotic, more globalist over time, as economies have become more deeply integrated.

What’s interesting about 2008 is that what really turned that into a financial crisis was a British error. It was a British error that actually resembled a lot of past American policy responses. September 2008, you have Barclays, which was a very healthy, very well-run bank that was looking to acquire Lehman Brothers. Prime Minister Brown and then Chancellor Alistair Darling basically blinked, and they blocked a waiver that would have permitted a speedy acquisition of Lehman Brothers by Barclays.

The result of that decision was that Lehman Brothers filed for bankruptcy the next day. Lehman International in London, therefore, had to go into administration, which meant all their assets, all their liabilities, including funds that had been deposited with them by hedge funds that they had then rehypothecated, was all frozen. That was then the trigger for this stampede by institutional investors to get their funds out of banks on both sides of the Atlantic. That was a fundamentally American method of dealing with financial crises or moments of financial stress, which is, “Okay, well, we’re not going to bail out some financial institutions, then we’re going to bail out others.”

What they left on the table, what the UK left on the table, was actually the classic British response to moments of financial stress, which was to adhere to something like the Bagehot Rule, which is you lend liberally and early against good collateral at a penalty rate, and you allow and facilitate the acquisition of weaker banks by stronger banks. That was textbook British policy for dealing with moments of financial stress from 1826 on. In 2008, they behaved in a much more American way, and they blinked.

Beckworth: This is so interesting, and this provides a nice counterfactual, I think, to help flesh out the ideas in your book. If they hadn’t blinked, if they had gone in, you think then the world would have been very different, right? The outcome, we wouldn’t have this massive run on wholesale money markets. Maybe I would throw into this counterfactual, let’s say the Fed also wasn’t so worried about inflation in the second half of 2008. Put those together, we have a very different world. Maybe this is the garden variety recession, ordinary recession. Is that fair, you think?

Goodspeed: I think that is a highly probable counterfactual that you would have had a garden variety, sort of post-war energy-related recession, and what really turned that into a financial crisis, which then amplified those mortgage delinquencies, was the financial crisis that resulted from Barclays not being able to acquire Lehman Brothers. I should add, in that counterfactual state of the world, Barclays would have acquired Lehman at less of a bargain than they ultimately acquired them for, because they ultimately acquired Lehman in what has subsequently been described as the deal or steal of the century.

Beckworth: Had that happened, we would have had a much milder recession, and we wouldn’t be talking about the imbalances of the housing boom. I guess that’s the interesting counterfactual here, if you play this out. Whereas today, the people who tell this story like, ah, we had to pay the price, lax regulations, excessive borrowing, all these problems that led to the crisis. Just a few different decisions, and they couldn’t be telling that story.

Let’s end on this, Tyler, because the title of your book, it’s more than just recessions. Your book title is Recession: The Real Reasons Economies Shrink and What to Do About It. We’ve touched that first part, why they shrink, but what should we do about it? Now that we’ve defined what really does cause recessions, what are the policy implications?

Goodspeed: I think the policy implications are that policymakers should first and foremost adhere to some form of the Hippocratic oath, and that first, do no harm. I talked about how while the evidence would suggest that policy might not be able to attenuate the duration or depth of recessions, they can make recessions worse. I mentioned the Great Depression as an example of that. There was also a severe recession in the United Kingdom in the 1840s that coincided with the Great Famine in Ireland, and you had contractionary fiscal and monetary policy that actually created a real human catastrophe.

I think the book also cautions against hubris, the notion that policymakers can somehow medicate or sedate economic expansions that otherwise die healthy and innocent in the mistaken belief that doing so will prevent recession. Because as I say, recessions will continue to happen because history will continue to happen, shocks will continue to happen. Now that said, while economies in the aggregate may recover from economic recessions in the manner of Milton Friedman’s plucking model, that isn’t to say that every individual or every household does.

I think there’s a strong normative case for the provision of relief where it is most needed, and that tends to be where the income loss and employment loss is greatest. Today, we do have the infrastructure in place, although as we saw in 2020, in some states, the infrastructure is quite creaking. They’re still running on COBOL, but the infrastructure is in place through the unemployment insurance system to provide income replacement where there has been employment loss.

Beckworth: Okay. With that, our time is up. Our guest today has been Tyler Goodspeed. His book is Recession. Be sure to get your copy. Tyler, thank you for coming on the podcast.

Goodspeed: Great to be with you, David.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.