In the early 18th century, the American colonies suffered a depression-level economic contraction. There was no war. No financial panic. No obvious villain—except, as it turns out, Blackbeard. Atlantic piracy had reached its peak, blockading the port of Charleston and choking off trade routes from the Caribbean to Long Island. Trade collapsed. The money supply collapsed. The economy followed.
It’s the kind of cause-and-effect that doesn’t fit neatly into any business-cycle theory. And according to Tyler Goodspeed, that’s precisely the point.
Goodspeed, the chief economist of ExxonMobil and a former acting chair of the Council of Economic Advisers, spent years combing through four centuries of economic data—from 17th-century colonial trade collapses to the 2008 financial crisis—and arrived at a conclusion that is either deeply clarifying or deeply unsettling, depending on your disposition. Recessions, he argues in his new book Recession: The Real Reasons Economies Shrink and What to Do About It, are not cycles. They are random. And they will keep happening, forever, because history will keep happening.
Goodspeed completed the book largely before joining Exxon and wrote it in his private capacity, he told me, not as a representative of the company.
“The reality is that recessions will continue to happen because history will continue to happen,” Goodspeed said in a recent interview with McKinsey’s Author Talks.
“The idiosyncratic nature of recessions rebels against evolved human logic,” he told me over email. “We are pattern-seeking mammals; patterns are how we relate observed stimuli to subsequent negative experiences.” Humans naturally try to link trauma to some precipitating action in hopes of correcting it next time, he said. History just doesn’t work that way.
“I’m sure there will be participants in the market for economic prognostications who will continue to insist that they possess a crystal ball.” Deep down, he sees superstition at work. “Like the non-astrologists among us, we still have a habit of taking a peek at our horoscope every now and then. We all yearn to know the future.” Even the most sophisticated dynamic factor models, he concluded, “tend to be more of an exercise in curve fitting after the fact rather than an advance- or even real-time prediction tool.”
The cycle that isn’t
The idea that economies expand and contract in predictable waves is one of the most durable frameworks in economics. Three-year cycles, seven-year cycles, Kondratiev’s waves, 60-year “super cycles”—theorists have proposed them all. Goodspeed tested them all. None survived statistical scrutiny.
His analysis found no relationship between the height or length of an expansion and the depth or timing of the subsequent recession. A long boom does not predict a hard bust. A short one does not predict a mild correction. The data, he concludes, looks far more like a sequence of unpredictable shocks than a recurring rhythm.
Many early business cycle theorists, Goodspeed noted, were trained as physicians, and the vocabulary stuck: crisis, malady, remedy. Because there are vastly more economic records—stock prices, home prices, building heights—than there are actual recessions, it’s trivially easy to find some asset that peaked before any given downturn. It is rarely the causation that it seems to be.
There have been many more record high stock prices, home prices, and building heights than there have been recessions, Goodspeed told me. It isn’t hard, then, to find a local maximum that subsequently declined and to relate it causally to a proximate downturn. Since “humans are storytellers,” he said, “we embed those patterns” into the essential ingredients of a great story—usually with a Wall Street setting, heroes and villains, conflict and resolution. And because every recession has eventually given way to renewed expansion, “the stories we tell about recessions also have theme, a moral lesson to avoid some perceived prior error so that we may live better and freer from harm, and guilt.”
In other words: dream on.
War, oil, and Blackbeard
So what actually causes recessions? Goodspeed’s answer is disarmingly direct: massive shocks, primarily to energy and from war—two forces whose outputs are almost impossible to replace on short notice.
Energy underpins everything: power generation, fertilizer, steel, transportation. When supply is disrupted, economies can’t easily route around it. And one shock dwarfs the rest. “In the course of writing this book, I found that the single worst shock that can be inflicted on an economy is war.”
His historical range is wide and sometimes startling. The colonial-era pirate depression is one example. “There was a complete collapse in trade and in the money supply, as well as other indications of a really struggling economy,” Goodspeed said. “Yet there was no war. With the exception of a lot of writing about pirates, there were no other contemporary reports of economic dislocation. It turns out that this was the peak of the so-called golden age of Atlantic piracy.”
Goodspeed also reframes more recent crises in ways that run counter to conventional wisdom. The 2008 recession, he contends, was not primarily a story of exotic financial instruments and lax regulation. It was triggered, in his telling, by the record oil price spike of June 2008, which forced ordinary households to absorb more than $2,000 in additional energy costs on top of adjustable-rate mortgage resets that were already squeezing them. The finance story was real, he argues, but it was the energy shock that broke the consumer—a sharp departure from the dominant narrative of the past 17 years.
The “dot-com recession” of 2001, he argues, isn’t even accurately named. The Nasdaq crash was the least consequential of that year’s shocks. “All of the output decline during that 2001 recession occurred during the quarter in which the attack occurred,” Goodspeed told McKinsey. “So the dot-com recession is actually a misnomer. That should be known as the 9/11 recession.”
The most misunderstood recession of all, he told me, is the Great Depression, which he attributes to a proliferation of shocks, from contractionary fiscal and monetary policy to literal locust plagues, rather than any single causal villain. The 1873 U.S. recession comes in close behind, which he sees as “the consequence of a providential locust plague rather than a vaguely defined railroad ‘boom.'”
On the present moment—and the ongoing conflict in the Middle East and its energy implications—Goodspeed declined to comment beyond the largely backward-looking analysis in his book.
Creative destruction is a myth
If recessions are unavoidable, at least they clear out the deadwood—right? Goodspeed dismisses that idea as well. The “creative destruction” argument holds that downturns purge inefficient firms and reallocate resources toward more productive uses. The data doesn’t support it.
This was the finding that surprised him most. “As I got deeper into the research, the more I learned that economic expansions don’t—and never have—died of old age and that busts don’t follow booms,” he told me. He was also struck by the fact that there isn’t any “salutary, cleansing function” to recessions. “Like many, I suppose I wanted to believe that, despite the pain, at least they may be enhancing potential growth. Sadly, that is not the case.”
Recessions, he found, systematically harm younger firms and marginal workers while protecting entrenched incumbents. They are, as he put it, “rampant age discriminators”—penalizing younger firms relative to older ones, and younger, more marginal workers relative to older, more job-secure ones. Research and development moves procyclically (a word Goodspeed says he doesn’t much like), contracting sharply during downturns precisely when firms might be expected to invest in new approaches.
When a recession ends, the composition of the economy looks “remarkably similar” to how it would have looked had the downturn never occurred. There is no cleansing, no renewal—just the same economy, emerging from damage.
First, do no harm
Goodspeed’s policy prescriptions follow logically from his diagnosis. If recessions are episodic and random, then contractionary fiscal or monetary policy during a downturn — the kind of austerity attempted in Britain’s 1847 financial crisis and catastrophically misapplied during the Great Depression—is almost certain to make things worse.
For business leaders and owners, mitigating adverse impacts is always prudent, he said. Recessionary shocks may be fundamentally unforecastable, but history offers some sense of the kinds of shocks that have caused them in the past, and businesses can benefit from thinking “in insurance-like terms.”
Goodspeed is equally skeptical of the notion that governments can juice expansions to offset future downturns. You can’t stimulus-proof an economy against a random shock.
The upshot, channeling the Hippocratic tradition, is this: when recession hits, the first obligation of policymakers is to do no harm. After that, history is inexorable.
