In 1973, OPEC proclaimed an oil embargo on the U.S. for its decision to resupply the Israeli military during the Yom Kippur war. The embargo lasted until March 1974, and during this time oil prices quadrupled. To control supply, the federal government under Nixon rationed oil, by state, to 1972 levels. By February 1974, it was estimated by the American Automobile Association that 20% of gas stations had no fuel to sell. The decade’s second energy crisis was in 1979, in the wake of the Iranian Revolution.
Photo: AP
The U.S. economy has been remarkably resilient lately, confounding forecasters who have insisted we’re due for a bust after nearly six years of expansion since the body blow from Covid. So when will the wheels finally come off?
There’s no way to know, former top White House economist Tyler Goodspeed said in a new book that will likely confound the legion of professional forecasters who regularly predict impending doom.
“Recessions are fundamentally unforecastable,” Goodspeed said in an interview about the book, “Recession: The Real Reasons Economies Shrink and What to Do About It,” which comes out Tuesday. He was acting chair of the White House Council of Economic Advisers in the first Trump administration.
Goodspeed’s thinking is highly relevant to the war in Iran, but for now he’s asking readers to draw their own conclusions about it. Since leaving government, he has gone to work as chief economist for ExxonMobil. Given the sensitive nature of the conflict, CNBC agreed to not ask Goodspeed directly about the war.
Energy nonetheless features prominently in Goodspeed’s analysis of when and why the U.S. has hit an economic wall over the decades. The transcript of his conversation has been edited for length and clarity.
CNBC: You say recessions are unforecastable. What does that mean? There are a lot of people who try to predict them.
Tyler Goodspeed: In a nutshell, it means recessions are about shocks, and they are shocks we can neither fully anticipate nor effectively hedge against.
We have tools to predict recessions, like the yield curve. But when you actually test these tools on the historical record, there are a lot of false positives and false negatives.
I’ll admit, I still look at the yield curve just to take a look. I’m not a believer in astrology, but I still take a peek at my horoscope now and then.
Tyler Goodspeed
Courtesy: Tyler Goodspeed
You’re only human. So, recessions are about shocks. What does a recession-causing shock looks like?
There are many types. One is your sort of big aggregate, macro shocks, like a pandemic, that affect all sectors of the economy roughly evenly and and simultaneously. There’s another category of shock that affects maybe only one or two sectors directly, but those sectors have very high linkages to the rest of the economy.
If you look back over not just the past 80 years, but indeed over the last three and a half centuries, energy is one of those sectors that has generated, or has been subject to, a lot of shocks that then permeate the rest of the economy. It’s not hard to see why, because energy is an input into a lot of other sectors, and it is very difficult over a 12-month or even 24-month time horizon to find substitutes for fuels, for heating, for the materials that use petroleum products.
But it’s not just energy. The relatively mild 1960 recession was in part a result of a large-scale steel strike at the end of 1959 that created a lot of inventory shortages in 1960. You can think about all the downstream impacts of steel shortages. The 1927 US recession, the primary contributor to that was that Ford Motor Company shut down all production for quite a few months as they retooled the factories to produce the Model A instead of the Model T. Again, you think about all the upstream and downstream linkages of automotive production, and that combined with a coal strike and a boll weevil infestation in the Carolinas, don’t be surprised that you get a recession.
The point is that energy is not the sole cause of shocks, but it has been involved in a number of them, and in interesting ways.
You write in the book that high energy prices contributed substantially to the depth of the recession around the 2008 financial crisis, even though there wasn’t a war, an embargo, or some other kind of big, obvious force hitting the energy market. What happened?
To be honest, it was one of the most surprising things for me. We are all familiar with the standard narrative about the 2008-2009 recession. We forget that the highest price since 1945 of energy overall, and for oil and gasoline in particular, was not in 1973 during the Arab oil embargo. It wasn’t during 1979 in the aftermath of the Iranian revolution. It wasn’t in 1990 during the first Gulf War. It was in June 2008 [when prices for Brent crude neared $150 a barrel].
By summer 2008, the average American household was having to spend about $2,000 more per year on energy, goods and services than they had just a few years prior. Now, at the same time, their mortgage payments were resetting higher, they were paying about $800 more per year, on mortgage interest payments.
You tell me is that, is that an energy price shock or a mortgage shock?
Sounds like both. But can we stop recessions? Should we be doing things like spending on stimulus?
Despite the rise of a more muscular and involved state, the duration and depth of recessions have been remarkably constant over time, and statistically are no different after 1945 than before. So it doesn’t seem to be the case that the state can end recessions.
However, there is abundant historical evidence that contractionary fiscal and monetary policy during a recession can make things much worse. The most glaring examples of that would be the Great Depression in the U. S. and a recession in the U.K. in the 1840s that actually coincided with the Great Famine in Ireland. There’s a lesson there to first do no harm.
Even though I find that economies in the aggregate recover from recessions, that doesn’t mean that every individual or every household does. There is at the very least an enormous case for the provision of relief, and maybe probably even enhanced relief relative to your normal unemployment insurance, targeted to where that relief is needed during economic recessions.
There is a tendency to think during economic expansions that we can medicate or otherwise sedate an economy to avoid recession. But the reality is that recessions will continue to happen, because history continues to happen. There has never been an immortal economic expansion.
What else do you want people to know about recessions?
Whatever happens in the next year or two, the long-run, structural trend has been toward longer-lived expansions. We have been getting better at absorbing the kinds of shocks that historically would have would have generated recession.
Thanks, Tyler.
