Review: Recession by Tyler Beck Goodspeed

How a grasshopper caused the 1873 panic, and why recessions are usually just bad luck.

What explains recessions? Are they the product of boom-bust cycles? Do they follow cyclical or semi-cyclical patterns? Or are they best viewed by policymakers as being due to surprises changes in the global economy, which economists call ‘shocks’. These are the questions addressed in Tyler Goodspeed’s Recession: The Real Reasons Economies Shrink and What to Do About It.<br>Economists usually communicate new arguments and data in journal articles. In contrast, Recession is published by Basic Books, an imprint of Hachette, the third-largest publisher in the world. The book is rich with both historical anecdotes and biographical sketches of key players such as Irving Fisher and FA Hayek. Despite this, Goodspeed’s book is a serious, data-rich work.

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At first glance, Goodspeed’s target is the popular understanding of a boom-and-bust cycle. Consider his vivid account of the crisis of 1873. Both popular and scholarly histories have attributed this recession to railway mania and the collapse of the Northern Pacific Railroad. Goodspeed instead points out the devastating role of a surprise that had nothing to do with economics or economic policy: the great grasshopper plagues of 1873-1876, during which a single locust swarm covered an area larger than California and devastated the very regions the railroad was supposed to open to European settlers.

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Goodspeed’s first message is that macroeconomic events are not morality plays, nor always under policymaker control or influence. Jay Cooke’s vision of a railway connecting the Pacific northwest was not inherently flawed or hubristic. Nor were other nineteenth-century business busts such as the 1857 New York banking crisis associated with the collapse of Ohio Life. Instead these panics were, like that of 1873, each associated with an idiosyncratic confluence of factors.<br>The intuitive account of recessions: payback for good times<br>Goodspeed is not just interested in confronting the kinds of explanations for mania, crashes, and panics seen either in history books or in journalist accounts. He wants to see if the data supports theoretical accounts of recessions that locate the cause of the downturn in the preceding expansion. His antagonists are two celebrated Austrians: first Friedrich Hayek, introduced early in the book as a prospective restaurant dishwasher as a young man in New York and whose prominent account of business cycles rivaled Keynes’s in the 1930s; and second, Joseph Schumpeter, who saw in recessions the opportunity to sort out the mistakes and misallocations of the boom. Goodspeed’s main goal in the 200 or so pages of the book is to ask whether the data supports these theories, or their modern variants, or whether it is consistent with a much simpler story.<br>The short answer is no, and this is Goodspeed’s second main message. The spine of the book is data on quarterly output for the UK and US. The UK data comes from the work of Steve Broadberry and coauthors. The US data stems from the National Bureau of Economic Research but Goodspeed has extended it back to 1700 and applied a consistent methodology to provide a continuous business cycle series for both countries.<br>Goodspeed shows that British and American expansions do not resemble Dorian Gray, looking beautiful but hiding an inevitable accumulation of malinvestments (objectively bad investments that are destined to fail) and distorted decisions (mistaken economic decisions taken on the basis of bad regulation or flawed prices) that make a correction inevitable. If they did so, he argues, one would expect that as expansions get longer they get more and more likely to end. In his data, however, the relationship between the age of an expansion and the probability of death is essentially zero. Nor do measures of increased investment during the boom correlate with the severity of a downturn. Nor do longer expansions have longer recessions after them.<br>This is why recessions remain essentially unpredictable. Any perceived regularity is likely to be a statistical illusion. Goodspeed shows that attempts to forecast recessions such as inversions of the yield curve (where long-dated government bonds have lower interest rates than short-dated ones) or the Sahm rule (which says a recession is likely underway if the unemployment rate spikes high above its recent lows for three months) are overfitted to US data and don’t work for the UK. The same proved to be true of the Phillips Curve, a strong correlation between unemployment and inflation that existed in British data between 1860 and 1960, which broke down after governments attempted to target it and fine tune the economy in the 1960s.

On top of all this, he finds no evidence that recessions are corrective. Reallocations tend to...