The Real Reason for Recessions | A Nation of Taxpayers

Hinzugefügt: 2026-05-22

[00:00:00]Here is the danger in the hubris of policy makers who presume that they can foresee and they can prevent. And it is this that you risk sedating or otherwise medicating economic expansions that fundamentally die healthy.

[00:00:16]Because if recessions are about shocks, they're not about some error or excess or imbalance that is generated by the process of growth itself, then recession is is not something that can be prevented by just sedating that pace or duration of an economic expansion. Welcome to another episode of a nation of taxpayers. It is the podcast from the TaxPayers' Alliance. I'm your host Duncan Boggs. As always, thank you for watching, thank you for listening, and a little bit of housekeeping. If you're watching on YouTube, uh please hit the subscribe button. That'll be absolutely fantastic. And if you want to leave any comments regarding what you're about to hear and see, use the comment section below. We have got a cracking guest on this week's episode. We're going to talk about recession. We're going to talk to a gentleman who's released a book, which is this book here, which you can see. Um and not just an author, but a man who's been at the very heart of American politics and knows a thing or two about recessions and what causes them. And we're going to chew it over inside the next 30 minutes.

[00:01:12]I'm talking about Tyler Goodspeed, uh top economist, uh economic historian.

[00:01:17]You've been chair of the Council of Economic Advisers under Donald Trump. I mean, the list is pretty much endless.

[00:01:23]Welcome to the United Kingdom. Thank you, Duncan. And thank you for joining us on the podcast. And from the TaxPayers' Alliance, chief executive John O'Connell. Hello, John. Hello, good to see you, Duncan. Good to see you, too. There's so much stuff to talk about here. Before we get into the nitty-gritty of um your your work and the contents of your current book, which is genuinely fascinating, um I've got to ask you about this, and our listeners and viewers would love to know what it was like working under Donald Trump.

[00:01:50]It was a lot of fun.

[00:01:52]The debates around the Resolute Desk in the Oval Office would be rigorous and vigorous. Yep. And the president relished that. He enjoyed a good debate so that he could hear all sides of the argument and from trade to pandemics to digital services taxation and the US response there too, we we really dug into it. So cuz I think there is a a kind of view um and from what you've just said there, it's not it's not clearly the correct view that Trump doesn't like dissent. He doesn't like people disagreeing with him. But from your experience, he loves hearing different points of views and he's happy to have the debate.

[00:02:30]He does enjoy different views and he does enjoy a vigorous debate. You just think about the trade team in the first administration and you had some pretty avowed free traders on that team and you also had some pretty avowed proponents of tariffs and sometimes the the pro pro free trade folks would win out and sometimes the pro tariff folks would win out.

[00:02:48]>> And how would you describe uh the US president's current approach to financial fiscal management?

[00:02:56]I think it's by and large a continuation of of Trump term one.

[00:03:01]>> Yeah. And and uh yeah, we're 2 years in. 2 years as it were. And and just for some context for our viewers and listeners, your role as chair of the Council of Economic Advisers, what what does that actually what did it entail?

[00:03:14]So the Council of Economic Advisers was established by Congress in the 1940s to advise the administration on economic policy to promote maximum sustainable employment, purchasing power and we are an advisory body. We're sort of the in-house think tank for the administration.

[00:03:34]>> Yeah. And so in any interagency process, the Council of Economic Advisers is involved to advise other parts of the government on what is what is appropriate and best economic policy.

[00:03:45]I bet you got a story or two to tell.

[00:03:48]We I do have a few.

[00:03:50]All right, let's let's move on to your book and this the the main focus of this particular podcast this week. The whole area of recession, what causes recessions?

[00:04:01]John and I were talking earlier, you know, what do you do if you've got a country recession? Do you spend a shedload of government money? What do you do? Let's just break it down a little bit and talk about whether or not I think it's fair to ask the question, can you actually predict a recession coming?

[00:04:17]Are there alarm bells? Are there flashing lights on the dashboard that make you go, yeah, this is the direction of travel?

[00:04:24]Well, many people think that they're predictable. Yeah. Many think people economic commentators think that they have a crystal ball, whether it's the yield curve, the salmon indicator, dynamic factor models with Markov switching, or simply some information in the contours of an economic expansion, its age, its height in terms of cumulative increase in GDP, its speed.

[00:04:46]The reality is that recessions are fundamentally un- forecastable. Right.

[00:04:51]>> cyclical phenomena, cuz we also often think of recessions as in some sense the remedy to some prior excess or error.

[00:04:58]The reality is that economic recessions are about adverse shocks. Right.

[00:05:05]>> Shocks that we can neither, as we as households, as businesses can neither fully anticipate nor effectively hedge against. So, you can't predict them.

[00:05:12]However, presumably you can have a strategy or a plan in place to cushion those shocks. Would that be fair?

[00:05:19]Depends on who you mean by you.

[00:05:21]>> Okay. So, if by you you mean households and businesses, >> Yes. then yes, there are sensible things that you can do to protect yourself in the event of a recession. I mean, it's I'm not a certified financial advisor, but some of that classic advice for households in terms of maintaining liquidity buffers equal to 6 months or more uh of expenditures, in terms of having a broadly diversified portfolio that declines in riskiness as as you as you age. That's sensible advice. And for businesses, effectively ensuring against supply unavailability because a lot of a lot of recessions relate to supply shocks. Uh and just diversifying your supply chains. I think those are common sense things that households and businesses can do. And what can governments do?

[00:06:08]If anything? There is a hubris on the part of policy makers to presume that they can attenuate the depth or duration of economic recessions. But the reality is that when you look back over the past three and a half centuries, as I do in the book, Yeah.

[00:06:26]the the depth and duration of recessions has been constant across time. Right. If anything, they've actually gotten slightly longer in the United Kingdom since 1945.

[00:06:36]>> Okay. So, there is no trend with the rise of a more interventionist or muscular state. There's no trend towards shallower or shorter recessions. John is is nodding quite vigorously there. Well, again, reading the book, I found it interesting because there there is always this sense that, you know, we've cracked it, you know, if if a recession comes along, we know what to do. Get out the fiscal fire hose and and and we'll sort everything out, but the book looks back over hundreds of years in both the UK and the US and really um interesting to show that it kind of doesn't matter what the intervention is.

[00:07:11]These things happen and I think the best bit about the book are the um the stories about individuals or, you know, locusts. Locusts came up and and you know, you think about recessions as these deeply complex uh integrated financial systems falling apart or whatever and could be a plague of locusts in the Midwest, right? You know, sometimes it's just about these acts of God.

[00:07:33]>> Yeah.

[00:07:34]So, a lot of commentators in 2026 were already writing the obituary of the current economic expansion at the hands of an of an anticipated AI bubble.

[00:07:44]And I have been saying all along that I actually suspect an AI AI investments are more likely to be a casualty of a recessionary shock elsewhere than a cause thereof. And you mentioned a really interesting example from history, which is this 1870s recession in the United States. It was a very severe recession. It is conventionally, like many US and British recessions of the 19th century, attributed to an AI bubble, a speculative speculative mania gone bust.

[00:08:12]The reality is you had a whole succession of shocks, including a a fraudster, including scandal at a major railroad, including war that disrupted capital flows in coming from Europe, and also what ultimately killed that economic expansion was a locust plague of providential proportions.

[00:08:34]Yeah. I'm well I that that they're the they're the things that politicians can't control, right?

[00:08:38]>> Right. Um at the end of the day. So, it again the the sort of more complex and integrated economies have become over the years, that I I guess the more that politicians feel that they can do something about it, but that's not the case in many cases. An element, Tyler, of of why recessions happen happen is So, we have a phrase in this country where our prime minister called Harold Macmillan, who was won 1957 to 1963, I think. And he had this phrase, which was events, dear boy, events, which certain things happen that you simply can't predict. You you know, you did don't see them coming, and they they might be related to geopolitics, it might be something domestically, or whatever. Um and that can have an impact on your economy. So, you've got to have a degree of sympathy for politicians of any political party, that actually you can only prepare so much, right? Because you can't you can't foresee everything that might be coming down the tracks.

[00:09:30]Yes, and here is the danger in the hubris of policy makers who presume that they can foresee and they can prevent.

[00:09:38]Yeah. And it is this that you risk sedating or otherwise medicating economic expansions that fundamentally die healthy. Because if recessions are about shocks, they're not about some error or excess or imbalance that is generated by the process of growth itself, >> Yeah. then recession is is not something that could be prevented by just sedating that the pace or duration of an economic expansion. But we do that after recessions. We think that that we can identify, oh, this was something that was wrong that needed to be remedied.

[00:10:10]>> But that's part of human nature though, isn't it? Because you look at something that's occurred, an event that's taken place, and you pick over it and try and work out what might have caused it. So, I can understand that. But are you concluding that actually, ultimately, you can never really predict what causes a recession?

[00:10:25]Correct. And it's a it's a feature of our cognitive wiring known as an apopheny, right? The opposite of an epiphany that we identify what we think is pattern in data that is fundamentally random. And the way we as humans embed those patterns is in story.

[00:10:43]And recessions have all the essential ingredients of a great story. They have setting, often the city of London or or Wall Street. They have plot. They have characters, antagonists like greedy bankers and protagonists, you know, the Secretary of the Treasury, the Federal Reserve Chairman Ben Bernanke. They describe themselves as firefighters.

[00:11:03]Uh they have resolution. After all, every recession is ultimately ended in renewed economic expansion.

[00:11:11]Yeah. Um front cover of the book, Recession: The Real Reasons Economy Shrink and What to Do About It. Um let let's just pick over, and we want people to read the book cuz it's a good book.

[00:11:21]But what are the real reasons why economies shrink? What what what can you reveal?

[00:11:26]So, there are two basic types of shocks.

[00:11:29]>> Right. There are your big macroeconomic shocks that affect all sectors of the economy roughly equally, roughly contemporaneously. So, we just had one in 2020 with the COVID pandemic.

[00:11:43]>> Yeah. And major wars can be another example of that.

[00:11:47]But there's another category of shock that maybe only affects a couple of sectors, but those sectors are very highly linked to the rest of the economy and over any near-term time horizon, say 12 months, which is about the duration of your median and modal recession, it's just very difficult for households and businesses to find substitutes. So, one of the most frequent killers or accomplices to the murder of economic expansions on both sides of the Atlantic over the past four centuries have been energy supply shocks. Yeah.

[00:12:19]Oil shocks post-World War II, but before that it was coal strikes, before that it was harvest failures that impacted animal feed and and and turf. Yeah.

[00:12:28]But also, you have examples in history of relatively mild 1960 recession in the United States that was a consequence in part of of industrial action steel.

[00:12:38]Yeah. You go back to 1927, there was a major shutdown of Ford Motor Company to retool for production of the Model A instead of the Model T. Okay. Yeah. You go back farther in time on both sides of the Atlantic, cotton was a perennial contributor to to recessions on both sides of the Atlantic for slightly different reasons. Yeah.

[00:12:57]And in terms of what what to do about it, what what what what should politicians or policy makers be thinking?

[00:13:04]As I say in the book, I think the the record of four centuries of economic history is that policy makers should first and foremost adhere to some form of the Hippocratic oath.

[00:13:16]First, do no harm. Okay. Because while they may be unable through fiscal policy or monetary policy, they may be unable to attenuate the depth or duration of recessions, major contractionary fiscal and monetary policy in the middle of a recession can make them much worse. So, we saw that in the most devastating extent during the Great Depression in the United States.

[00:13:37]Yeah, but also similarly in the 1840s in the United Kingdom, there was contractionary fiscal and monetary policy that arguably exacerbated what was going on across the Irish Sea at the time, namely the Great Famine.

[00:13:49]Um, can I jump in here?

[00:13:51]>> Yeah, please. Yeah, no. Well, I was just talking about the Great Depression.

[00:13:53]There's you know, the the big stock market crash of 1929. There's there's always this sense that it's through capitalistic cess. Yeah, and and you know, the re-crash followed.

[00:14:06]And maybe to some extent that's true. I don't know. But you go into great detail about subsequent policy failures that really turned it from a crash into a depression. Um, so while there might have been you know, some excess or whatever, it was really the policy failures afterwards.

[00:14:22]Yeah, that's right. And and just in terms of the crash, we tend to think in terms of yeah, oh there was this excess in the stock market to which the crash and subsequent depression was in some sense a remedy. I ask in the book a lot of times, what is the deviation from trend?

[00:14:39]And it turns out that the 1920s were not a positive deviation from trend. It was catching up to from the negative deviation from trend during World War I, during the subsequent pandemic, during the subsequent There was a very severe recession in 1919-1920 with a wave of industrial action in part because of wartime inflation. So, the 1920s, the story of the 1920s was really about catching up to where the economy should have been. And then we're we're at the Taxpayers Alliance right now. One of the policy shocks of the 1930s, one of the many adverse policy shocks in the United States, was that we raised marginal tax rates from 25% to 63%.

[00:15:19]We also raised the corporate income tax from 12% to 13.75%.

[00:15:24]Sounds pretty modest, but that was accompanied by the elimination of a prior exemption from corporate income taxation applying to firms earning what was then the equivalent of of less than half a million dollars a year. So, that was a major shock impacting the US economy. Yeah, first you know, home mate. And and do you mind if I take out the button?

[00:15:46]The one of the interesting things, you know, you you working in political campaigns and and roughly in the field of economics, you always hear about creative destruction, right? The idea that recessions can be quite good for an economy in a sense because it roots out sort of companies that aren't performing particularly well. Um creates that space for young innovative firms to to enter um into the to wider economy.

[00:16:12]You challenge that assumption a bit, um which I found really interesting. Um in fact, young firms often get clubbered during recessions.

[00:16:21]That's right. And this was one of the the many conclusions findings of the book that went against my prior so to say.

[00:16:27]So, it turns out yes, there is unambiguous empirical evidence that creative destruction, the migration of people and capital from less efficient to more efficient enterprises is essential for long long-run growth.

[00:16:41]The question I ask in the book or a question I ask in the book is whether that process is enhanced or impaired by recessions.

[00:16:50]And the record is pretty unambiguous that it is on net impaired because as you said, recessions are rampant age discriminators against younger workers, against younger more dynamic firms. It also collapses this whole ladder jobs ladder by which firms by which workers quit less efficient poorer quality matches and move to more efficient enterprises, better quality matches.

[00:17:16]And then also you can ask okay, does the composition does the allocation in the economy look fundamentally different several years after a recession relative to how it would have looked had it continued uninterrupted along long run trends? And the answer is typically several years on from a recession economy looks pretty similar to how it would have looked otherwise.

[00:17:38]Can we talk about 2008 as a recession because I think a lot of our viewers and listeners will have been impacted by it.

[00:17:44]As most people were. I certainly I was part of a media business that that launched at the end of 2007 and really wasn't in existence by 2010 because they never recovered from the recession. What can we what can we take away? What can we learn from the 2008 recession?

[00:18:01]So, if I asked you to name when the price inflation-adjusted price of a barrel of oil reached its all-time high you might guess 1973 during the Arab oil embargo or you know, 1979 after the Iranian Revolution or maybe 1990 during the Iraqi invasion of Kuwait.

[00:18:20]The correct answer is June 2008. Really?

[00:18:25]The price of energy generally and the price of oil specifically has never been higher than in the summer of 2008 when the average American household was having to spend $2,000 more than just a few years prior. And it was a it was a confluence of shocks about the supply and demand for for energy.

[00:18:45]But faced with that shock and their mortgages resetting higher by about $800 on average. And remember, half of American households typically have no savings after after tax.

[00:18:57]Faced with that situation about 5% of American homeowners were delinquent on their mortgages. Yeah. And we know the rest as they say is is history. Yeah. But this I think speaks to two of your prior points. One about events dear boy, yeah.

[00:19:12]Uh cuz we we don't talk about 2008 as the energy crisis, the 2008 energy crisis. Always call it the housing bubble or the housing crisis.

[00:19:20]>> Yeah, yeah. Because we are again, we are pattern-seeking mammals. So, it's it's not hard there've been many more records record home prices, record stock prices every year just about the economy sets a new record for GDP. So, it's not hard to find some peak that subsequently declined and to relate that causally to approximate recession. And that fits with patterns we observe elsewhere, namely that the higher something goes, the harder and faster it hits the ground when it falls. Wow.

[00:19:52]And I I wouldn't normally ask this question, but I think I can ask it of you as someone who details, you know, goes back over almost four centuries of recessions. This is going to sound like a slightly weird question. Do you have What has there been a recession that you find particularly fascinating? What's your favorite recession?

[00:20:09]>> You've got it. You I mean, I was struggling whether or not I should actually ask that question. Do you have a favorite recession?

[00:20:14]I don't have a favorite because the thing about recessions is that recessions are traumatic experiences.

[00:20:20]They hurt a lot of >> That's why I used the word fascinating, but but John, being you turned it out. I really I want to know which one you find you most interested The most fascinating >> Yeah.

[00:20:29]was a depression magnitude event in the 18th century in what was then the North American colonies. And the farther back in time the less confidence you have in identifying recessions because the data becomes more scarce, it becomes less reliable.

[00:20:48]But I was looking at the available data, particularly trade statistics, but also money supply. You also have data on exchange rates. And you piece it together and you observe what looks like, as I said, a depression magnitude recession in the United in the the colonies.

[00:21:05]>> Yeah. And that endured for 3 years, which is tied for longest on record.

[00:21:11]When you then go to the qualitative evidence, the source of that recession is unambiguous and kind of surprising, and it's pirates.

[00:21:20]Pirates.

[00:21:22]This was the peak Yeah. of the so-called golden age of North North Atlantic piracy. Because you'd had the end of the War of Spanish Succession, during which the the British government had paid sailors to engage in privateering. So, with the end of the war, all these sailors are unemployed, and they turned to turned to predating upon commerce.

[00:21:42]So, you have some of the most legendary pirate names. I mean, Blackbeard uh blockaded the port of Charleston, South Carolina. You had raiding going on from the the the the Caribbean right up to Newfoundland, intercepting ships bound from the Caribbean to Salem, Massachusetts off off Long Island. You had raiders going up the Chesapeake Bay.

[00:22:02]So, you just had this complete collapse of colonial trade. And I thought that this was a uh an interesting but not particularly relevant recessionary example from history. Uh and then we've had Iran shut down the the Strait of Hormuz and threaten threaten to charge tolls. So, perhaps not a Yeah. Uh not a completely uh historical No, well, let let's talk about where we are now, because I think again our viewers and listeners would would like to hear your views on where you think we are um as a nation, the United Kingdom geopolitically. And and I suppose the the wider landscape. I mean, there will be people and we've we've had commentators and pundits. We've had them on this podcast over the last few few months talking about um Britain might be heading into a recession again. It's like it has a feeling of the 1970s, where nothing worked, all over again.

[00:22:54]What's your take on where Britain finds itself at the moment?

[00:22:58]So, one of the interesting findings of the book was that historically the United Kingdom was consistently much less recession prone than the United States.

[00:23:10]There were two main reasons for that.

[00:23:12]The first was that from 1826 on the United Kingdom had a nationwide system of branch banking, so you could operate banks across the country. And if you think of a big national economy is like a broadly diversified portfolio, then weakness in one sector region can be offset by strength in in others. And in contrast in the United States for domestic political reasons, we didn't allow banks to branch across state lines or even within a state. So you had tens of thousands of tiny undercapitalized, under-diversified financial institutions that would fail in massive waves when there was regional or sectoral shock.

[00:23:45]The second reason for the United Kingdom being less recession prone than the United States is that from 1926 to 1972 the United Kingdom went without a single official coal strike.

[00:23:59]And during that period, the UK economy was overwhelmingly reliant on coal.

[00:24:05]And so if you think about a lot of the recessions that occurred during that period, 1948, 53, 57, 70, those were all oil related recessions in the United States. And those oil shocks just had a much smaller impact on the more coal intensive UK economy. And you do say in the book when the previous or prior to that when there was um a general coal strike, the the recession was pretty severe, right? So yeah, it was sort of pandemic style offer goods.

[00:24:33]Yeah, that's right. So the 1926 UK coal strike in terms of depth and speed that rivaled the the the pandemic. Uh and then it was followed by a very rapid rebound when when the industrial action was over.

[00:24:45]Um in terms of today, uh I I it does look like the United Kingdom is not as as resilient toward recessionary shocks as as historically. Um and that's in large part because of policy choices.

[00:25:00]Yeah. So, if you were to advise our current administration on what they should be thinking about maybe to to I I I suppose try as best they can given maybe the the limited ability of doing so to to to cushion this country if there were going to be a recession, what should they be thinking of?

[00:25:19]Well, I would go back to my Hippocratic oath Yeah. observation because one of the things that we observed after 2008-2009 was that on both sides of the Atlantic policymakers rushed to constrain what banks could do.

[00:25:35]And basically to effectively mandate that banks lend substitute lending to the public sector for lending to the private sector.

[00:25:42]And though both policy makers on both sides of the Atlantic did that, that had a much bigger impact in the United Kingdom because historically you're much more your businesses were much more reliant on banks Yeah. bank lending for external finance.

[00:25:56]And you also had fewer and on average bigger banks. So, they were more likely to be treated by the post-2008 regulatory regime.

[00:26:05]And you can see it in the the lending data. I mean, there are both supply and demand factors going on, but real in real terms bank lending to the private sector private business sector in the United Kingdom has not recovered to 2007 levels. Okay.

[00:26:17]John, your thoughts on where we might be heading?

[00:26:20]Uh well, yeah, even the comparisons with the 1970s always interesting because um people say that we're not quite as bad off now as we were then. Taxes were even higher back then, you know, you had marginal rates that went above 100%. Um but the other hard truth about now is that our debt-to-GDP ratio is much higher um than it was back then. We've obviously a large percentage of that relative to other countries um is uh prone to changes in interest. So, you know, um I think it's about 25% uh um index-linked which makes the situation a bit more difficult.

[00:26:56]But, um, you know, I go back to first do no harm. We spend too much money, and therefore taxes are too high. You know, it wouldn't solve everything. It doesn't stop recessions or anything like that, but if we get the basics right, um, we get the framework right for low, simple, stable taxation, um, you know, that finances, again, sustainable, you know, public spending.

[00:27:19]Um, mortgage towards uh, defense and and capital investment and and geared away from the shocking rise in, say, welfare, transfers, um, then you put yourself in a much more um, yeah, a reasonable position to withstand external shocks. Yeah, I think that's right. And Tyler, I mean, I'd be interested, and our viewers and listeners would be, on your assessment of today's politicians, on either side of the Atlantic, actually. I mean, obviously, this is a UK-based, um, podcast, but you you'll have you'll have an insight in into the psychology. Do you think today's politicians, apart from obviously reading this book, because I learned something from it, do you think they they actually understand the impact of recessions and maybe some of the limited things they could do to cushion the impact?

[00:28:05]I wish they understood, yeah.

[00:28:08]But, I'm skeptical that they do. There is always the the hubris that they can identify the the underlying causes, and they will usually identify the underlying causes as being generated by the market process itself, rather than the external shocks, uh, some of which I recounted. And secondly, they presume that they can medicate or otherwise sedate the ex- the expansion, so that they can prevent a future recession, and that's fundamentally misunderstanding the what causes recessions. I mean, is that across the board in terms of the political spectrum, or do you see that misunderstanding maybe more on the left of the political spectrum than the right? Or is it just, you know, politicians really just need to learn a lesson. They need to read this book.

[00:28:49]The latter.

[00:28:50]Uh that's always a good idea.

[00:28:52]It's been genuinely a fascinating conversation and thank you for finding the time today to join us in our TaxPayers' Alliance podcast studio. Uh the book is called Recession: The Real Reasons Economies Shrink and What to Do About It. You've had a a little bit of a sense of some of the reasons from pirates to locusts. Uh buy the book.

[00:29:09]It's a genuinely fascinating read. John O'Connell, thank you for joining us on this episode and Tyler Goodspeed, thank you as well. A absolute pleasure to meet you. Uh this has been a nation of taxpayers. It is the podcast from the TaxPayers' Alliance. watching on YouTube, please hit the subscribe button. Really important you do that.

[00:29:26]And also any comments about what you've heard over the last 30 minutes, please uh leave them below. They're always read, so your comments are most welcome.

[00:29:33]And of course, uh if you are listening to this on Apple Podcasts or Spotify as well, uh thank you for taking the time to listen. And you can help us out regardless of the platform uh that you're listening or watching us all by rating, reviewing, and sharing, and subscribing. That'll be fantastic. I've been your host Duncan Barcs. Until next time, thank you for watching. Thank you for listening.