REVIEW --- Books: The Events That Cause Recessions

“Recession

 

By Tyler Goodspeed

 

Basic Venture, 320 pages, $30

 

Economists have long believed that economies expand and contract in predictable rhythms as expansions run out of steam due to monetary, fiscal and productivity constraints. Recessions follow booms the way hangovers follow parties.

 

As early as 1662, the physician and statistician William Petty asserted a cycle of "dearths and plenties" every seven years. In the 20th century, Nikolai Kondratiev had his "long waves." Simon Kuznets believed in "secondary secular movements" or "long swings" linked to population and capital formation. Joseph Schumpeter held that creative destruction, in response to new technology, created economic swings. And Friedrich Hayek suggested that recessions occur regularly, as maladjustments build up from misguided interest-rate policies.

 

The persuasive argument of Tyler Goodspeed's "Recession: The Real Reasons Economies Shrink and What to Do About It" is that historical evidence shows otherwise.

 

Recessions will come, but not in cycles.

 

"Recessions are fundamentally unforecastable," writes Mr. Goodspeed, a former acting chairman of the Council of Economic Advisers who is now ExxonMobil's chief economist. The author also contends that recessions don't cleanse or restructure economies, the way wildfires clear forests of their dead wood. When one examines statistical deviations from trend for output and employment, economies look similar before and after recessions, and he sees little support for the Schumpeterian creative-destruction hypothesis.

 

Recessions such as the Great Depression aren't punishment for the excess of the Roaring '20s, but interruptions.

 

Instead, the timing, cause and depth of recessions may be attributable to a series of unfortunate events, to borrow the title of Daniel Handler's Lemony Snicket books. "Our search for patterns can often lead us to connect data and events that appear related but are, in fact, unrelated," Mr. Goodspeed writes. "It is a common effect of our cognitive wiring known as apophenia."

 

Investigating four centuries of British and American data, Mr. Goodspeed concludes that the apparent business cycles that economists have spent careers documenting are "apophanies" rather than epiphanies: illusions of pattern imposed on noise.

 

 As he writes:

 

Absent a single shock of the magnitude of, for example, the 2020 pandemic or the 1926 UK strike, recessions are generally characterized by a confluence of overlapping and often interacting factors, as well as propagation mechanisms that can protract elevated unemployment well after the initial impulses have dissipated.

 

Economists shouldn't despair, but call for humility and a better understanding of history. "History simply offers a warning," Mr. Goodspeed writes, "that we cannot look to the state to arrest episodes of economic contraction ex post, let alone to prevent them ex ante, except in both instances by way of the Hippocratic advice to first do no harm."

 

The author organizes shocks into three categories that will resonate with readers who have watched the world economy convulse in the past year.

 

Acts of God are environmental: droughts, floods, locust plagues and the unusual winters that froze the Thames, contributing to recessions in 1710, 1739-40, 1762 and 1946-47. Acts of Church are government-caused disruptions, such as Fed Chairman's Paul Volcker's move to raise interest rates to almost 20% at the same time as the federal government imposed credit controls, causing the 1980 recession, or the Smoot-Hawley tariffs that raised average tariffs to 20% from 14% in 1930. Acts of Man are human-made but not policy-driven, including frauds such as Edwin Ludlow's misappropriation of funds from the Ohio Life Insurance and Trust Co. in 1857, or the savings-and-loan failures in the mid-1980s. Labor strikes or the destruction of offshore oil rigs in war are also examples of Acts of Man.

 

What makes "Recession" so vivid, and so unsettling, is that Mr. Goodspeed rarely finds recessions caused by a single one of these shocks, but by a series of adverse happenings over a short period.

 

Consider 1857. When Ohio Life closed its doors in August, a credit panic was triggered in New York. Late that summer the SS Central America sank off the Carolinas, carrying with it the modern equivalent of a billion dollars in gold that New York banks had been counting on to meet their note-redemption obligations. Then locusts destroyed grain harvests across the Great Plains. The resulting recession lasted 18 months and spread to Britain.

 

Or consider Britain in the winter of 1946-47. Pack ice blocked the English Channel; coal stockpiles froze; electricity was rationed to five hours a day; and newspapers reduced their size to conserve paper. The U.K.'s industrial production fell by a third, and a recession that had begun in 1943 was prolonged, then extended again when spring brought flooding.

 

Mr. Goodspeed's comparisons between the economies of the U.K. and the U.S. are instructive and show that the frequency of recessions doesn't determine the fate of an economy. Since 1945, Britain has had a 6% annual probability of entering recession, while the U.S. has had a 15% annual probability. Yet Britain's gross domestic product per capita, which was 70% of that of the U.S. in 1970, has now declined to less than 60%.

 

Mr. Goodspeed traces part of America's economic vulnerability to its banking system, in an analysis that will be familiar to readers of Charles Calomiris and Stephen Haber's landmark 2014 book, "Fragile by Design: The Political Origins of Banking Crises and Scarce Credit." In 1914 America had 27,000 banks, 95% of them with only a single location. Interstate banking was not substantially allowed in the U.S. until the 1990s. This inability to spread risk made U.S. banks, and the economy they served, inherently fragile, with a financial infrastructure prone to amplifying shocks rather than absorbing them. But even stable banking systems cannot insulate economies from ships sinking, harvests failing or strikes closing mines. The 1926 British coal strike (an Act of Man) produced a deep recession in the U.K. similar to the Covid-19 recession.

 

Mr. Goodspeed's 200 pages of text are dense, and they are followed by substantial notes and a data appendix. The author's historical range is formidable, with details giving what might have been a dry revisionist argument the texture of lively narrative history. He moves from the peat bogs of 18th-century Ireland to the dot-com bust with equal authority. He describes two-cent taxes on bank checks that contracted the money supply by 12% during the Great Depression; waterlogged turf that helped tip Britain into recession in 1879; and how the 1988 explosion of the North Sea oil rig Piper Alpha combined with Iraq's invasion of Kuwait to tip the U.K. and U.S. into recession in 1990.

 

One fascinating thread follows energy-fertilizer-food transmission chains throughout history, concluding that what people thought was a financial shock in 2008 was also linked to energy and fertilizer. "As the cost of energy soared, so too did the price of highly energy-intensive fertilizer," he writes. "By the time Lehman Brothers failed in September 2008, nitrogenous fertilizer prices had jumped by an unprecedented 86 percent year over year." This caused ammonia prices to double, and food inflation exceeded 6% in the fall of 2008.

 

Mr. Goodspeed doesn't discuss artificial intelligence, but his framework raises another question for today: If recessions are caused by clusters of identifiable shocks rather than predictable cyclical forces, could AI detect signals of those patterns before they compound? Mr. Goodspeed's historical record is, in effect, a training data set, with droughts, strikes, shipping disruptions, credit contractions and policy errors, each tagged by type, geography and sequence.

 

A good test of Mr. Goodspeed's framework is how it could be used to analyze a cluster of current events that occurred after the book went to press. The actions of America and Israel and response of Iran have halted transit through the Strait of Hormuz, sending energy prices soaring throughout the world. Prices faced by both producers and consumers are uncertain due to a seesaw of tariffs first imposed by President Trump and then rolled back by the courts. These Acts of Church and Man are having effects on fertilizer supply chains, which could leave farmers susceptible to something approaching an Act of God in agricultural consequences.

 

America, as an energy exporter, profits from the oil-price surge, but it is also one of the world's largest urea importers, and U.S. farmers are being hammered by fertilizer-price spikes triggered by the same actions. Some 30% of globally traded urea passes through a closed chokepoint, and that closure coincides with the Northern Hemisphere's planting season. Mr. Goodspeed's framework teaches us to look for the next "unexpected event" of the type that models weren't calibrated to anticipate.

 

Many economists who propounded the inevitability of business cycles, including Kuznets, Hayek, Paul Samuelson and James Tobin, have won Nobel Prizes. Those laureates may have built careers on an orthodoxy that wasn't there. Mr. Goodspeed presents a compelling argument that recessions are not fated, and that they are becoming shorter and less frequent. Perhaps, with new technologies and methods of analysis, they can become even rarer, enabling economics to shed the image of a dismal science.

 

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Ms. Furchtgott-Roth, a former acting assistant secretary for economic policy at the Treasury Department, is a distinguished fellow at the Energy Policy Research Foundation.” [1]

 

1. REVIEW --- Books: The Events That Cause Recessions. Furchtgott-Roth, Diana.  Wall Street Journal, Eastern edition; New York, N.Y.. 06 June 2026: C7.