WEBVTT - What You Know About Recessions Could Be All Wrong 0:00:02.720 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.320 --> 0:00:09.840 The risk is duration. 0:00:10.360 --> 0:00:15.160 If indeed this is a short conflict and normal traffic 0:00:15.920 --> 0:00:19.280 resumes through the Strait of Hormuz, then I think this 0:00:19.320 --> 0:00:22.960 will be a temporary setback, but not a recessionary shock. 0:00:23.480 --> 0:00:27.560 Whereas if this strait of hormones shut down does persist 0:00:27.840 --> 0:00:31.600 for a period of weeks or months, then it would 0:00:31.640 --> 0:00:35.159 be a supply shock greater than that observed in nineteen 0:00:35.200 --> 0:00:45.280 seventy three or nineteen seventy nine. 0:00:46.040 --> 0:00:49.000 I'm Stephanie Flanders, head of Government and Economics at Bloomberg, 0:00:49.280 --> 0:00:51.600 and this is Trumpnomics, the podcast that looks at the 0:00:51.640 --> 0:00:54.920 economic world of Donald Trump, how he's already shaped the 0:00:54.920 --> 0:00:57.960 global economy, and what on earth is going to happen next. 0:01:00.200 --> 0:01:03.160 We've spent much of the past couple of weeks thinking 0:01:03.200 --> 0:01:06.200 about the potential impacts of the crisis in Iran on 0:01:06.240 --> 0:01:10.119 the global economy, for oil prices, on trade, for inflation. 0:01:10.800 --> 0:01:13.160 We talked through a lot of those and even some 0:01:13.360 --> 0:01:15.880 new ones, like the threat to water and even food 0:01:15.920 --> 0:01:19.479 supplies in the Gulf, in detail in last week's episode 0:01:19.680 --> 0:01:22.959 with two of my senior colleagues. But lurking beneath the 0:01:23.040 --> 0:01:25.679 surface of all of these conversations is often the fear 0:01:25.720 --> 0:01:27.959 that this shot will be enough to tip the whole 0:01:28.000 --> 0:01:32.280 economy into recession. But one reassuring lesson of a new 0:01:32.400 --> 0:01:34.920 study of recessions in the US and the UK over 0:01:34.959 --> 0:01:37.560 the past two hundred and fifty years is it takes 0:01:37.560 --> 0:01:40.520 a lot to do that. Doctor Tyler Goodspeed was acting 0:01:40.600 --> 0:01:43.560 Chairman of the Council Economic Advisors at the tail end 0:01:43.600 --> 0:01:47.280 of President Trump's first term, and since twenty twenty three 0:01:47.400 --> 0:01:50.600 has been the chief economist at Exon Mobil. But somehow, 0:01:50.640 --> 0:01:53.040 despite doing that job, he has managed to write a 0:01:53.040 --> 0:01:57.560 book called Recession, The Real Reasons Economy Shrink and What 0:01:57.640 --> 0:02:00.920 to Do about It. He finds in that book, as 0:02:00.960 --> 0:02:03.160 Adam Smith once said, there is a lot of ruin 0:02:03.400 --> 0:02:06.520 in a nation. It takes a lot of overlapping shocks 0:02:06.600 --> 0:02:10.560 to tip an economic expansion into reverse. But pretty much 0:02:10.560 --> 0:02:13.680 everything else we thought we knew about recessions he thinks 0:02:14.000 --> 0:02:17.079 was wrong. Expansions don't die of old age, they don't 0:02:17.080 --> 0:02:19.920 get more likely the longer an expansion continues. They're not 0:02:19.960 --> 0:02:24.360 the inevitable punishment for an excessive boom, and they don't 0:02:24.600 --> 0:02:27.440 cleanse the economy either of the bad decisions taken in 0:02:27.480 --> 0:02:30.480 those booms, or make it easier for businesses to undergo 0:02:30.960 --> 0:02:35.800 necessary restructuring. Perhaps most important, we haven't really got any 0:02:35.800 --> 0:02:39.639 better at avoiding or shortening recessions in the past seventy 0:02:39.680 --> 0:02:42.600 five years or so. But and this seems like an 0:02:42.680 --> 0:02:47.280 important but the book does find that unexpected shocks can 0:02:47.320 --> 0:02:51.720 play a big role in stopping an economy, especially those 0:02:51.760 --> 0:02:54.919 involving food and energy. So all things considered, it seemed 0:02:54.919 --> 0:02:57.520 like a good time to talk to doctor Goodspeed about 0:02:57.520 --> 0:02:59.240 his book. Tyler, thank you very much for joining me. 0:02:59.280 --> 0:03:01.400 You're in London, I'm in New York. I'm sorry about that, 0:03:01.400 --> 0:03:02.600 but we appreciate you coming in. 0:03:02.720 --> 0:03:03.600 It's great to be with you. 0:03:08.160 --> 0:03:11.040 There's a lot of economic history in this book, and 0:03:11.280 --> 0:03:14.920 conveniently for a sort of transatlantic podcast, it's drawing on 0:03:15.000 --> 0:03:19.080 the history of both the UK and the US economy. 0:03:19.400 --> 0:03:20.079 I can't help. 0:03:19.919 --> 0:03:22.280 Wondering how you even found time to do this while 0:03:22.320 --> 0:03:26.079 you were chief economist of a major global energy firm. 0:03:26.320 --> 0:03:30.920 Fortunately, before joining Exxon, I was back in academia after 0:03:30.960 --> 0:03:33.160 a few years in government, and so that was when 0:03:33.160 --> 0:03:35.160 I did most of the grunt work for the project. 0:03:35.720 --> 0:03:38.960 But that said, I'm very much looking forward to having 0:03:39.000 --> 0:03:40.320 my evenings and weekends back. 0:03:40.960 --> 0:03:43.560 Yeah, I'm sure I sort of summarized some of the 0:03:43.680 --> 0:03:46.560 hard truths for economists who thought they understood the economy 0:03:46.600 --> 0:03:48.840 that are in your book. Just tell us briefly what 0:03:48.880 --> 0:03:52.720 you set out to do, and for you the more 0:03:52.760 --> 0:03:55.120 surprising conclusions, and then we can unpack some of them. 0:03:56.080 --> 0:03:58.480 So what I set out to do was to better 0:03:58.640 --> 0:04:03.440 understand econo contractions, having just lived through one of the 0:04:03.440 --> 0:04:06.800 sharpest economic contractions in US and UK history with the 0:04:06.800 --> 0:04:08.400 twenty twenty pandemic recession. 0:04:08.920 --> 0:04:09.560 And when I. 0:04:09.600 --> 0:04:13.800 Started the project, I thought that was such a unique event, 0:04:13.920 --> 0:04:17.599 such a unique shock. But as I got further into 0:04:17.600 --> 0:04:22.159 the research, I realized that actually most recessions are about 0:04:22.360 --> 0:04:27.200 adverse shocks that we could neither fully anticipate nor effectively 0:04:27.279 --> 0:04:31.400 hedge against. One thing we often tell ourselves about recessions 0:04:31.920 --> 0:04:35.400 is that they're inherently cyclical phenomena, that there's a boom 0:04:35.400 --> 0:04:39.920 and then a bus, That there's some excess or malinvestment 0:04:40.320 --> 0:04:44.600 or error in an economic expansion to which recession is 0:04:44.640 --> 0:04:49.120 the inevitable and even necessary remedy. And there's a certain 0:04:49.160 --> 0:04:53.600 moralizing to that story. But it's just not true. Economic recessions. 0:04:53.800 --> 0:04:57.440 As Ben Bernanke put it, they're murdered. And over the 0:04:57.480 --> 0:05:00.920 past few centuries, one of the shocks that we're potentially 0:05:00.960 --> 0:05:04.360 living through right now, namely energy supply shocks, has been 0:05:05.000 --> 0:05:08.000 a serial killer or serial accomplice to the murder of 0:05:08.120 --> 0:05:10.520 otherwise healthy and innocent economic expansions. 0:05:10.800 --> 0:05:14.440 That point of the inevitable consequence of booms. We do 0:05:14.520 --> 0:05:17.320 tend to look back. I think, you know the nineteen 0:05:17.400 --> 0:05:20.400 twenties or some of the financial manias that you read 0:05:20.440 --> 0:05:23.559 about from earlier centuries, or even in the two thousand 0:05:23.600 --> 0:05:26.080 and eight crisis, we tend to think that was a 0:05:26.080 --> 0:05:30.760 banking crisis caused by a lot of excess in lending 0:05:30.760 --> 0:05:34.520 in the financial sector. What piece of that is is wrong, 0:05:34.600 --> 0:05:36.880 or at least it is not being properly described. 0:05:37.560 --> 0:05:41.680 When you look at the height or speed of an 0:05:41.680 --> 0:05:45.560 economic expansion, as measured, for example, by the volume of 0:05:45.600 --> 0:05:48.200 bank lending or the increase in the volume of bank lending, 0:05:48.760 --> 0:05:52.760 then under the boom bus hypothesis, the height or speed 0:05:53.279 --> 0:05:56.440 of the increase in bank lending during an economic expansion 0:05:56.480 --> 0:05:59.680 should predict the depth or speed or duration of the 0:05:59.720 --> 0:06:03.040 subsequent recession and it simply doesn't. And the nineteen twenties 0:06:03.080 --> 0:06:05.080 are actually a very interesting one because, first of all, 0:06:05.080 --> 0:06:07.960 that was actually a very short expansion that preceded the 0:06:07.960 --> 0:06:10.680 recession that began in the second half of nineteen twenty nine. 0:06:10.720 --> 0:06:13.400 When you look at a lot of measures of economic activity, 0:06:13.720 --> 0:06:18.960 including building activity, including investment, there were some large increases, 0:06:19.600 --> 0:06:24.480 but it's in the context of a severe negative deviation 0:06:24.680 --> 0:06:30.159 from trend during World War One, the subsequent recession, the 0:06:30.200 --> 0:06:34.960 subsequent pandemic nineteen eighteen nineteen nineteen, nineteen twenty were very 0:06:34.960 --> 0:06:39.600 difficult postwar years, characterized by shortages in the continued shortages 0:06:39.640 --> 0:06:43.280 in the United Kingdom, by widespread strike activity in the 0:06:43.360 --> 0:06:46.560 United States. So what you saw in the nineteen twenties 0:06:46.720 --> 0:06:49.680 was to a large extent catchup for the growth and 0:06:49.800 --> 0:06:53.479 increase in economic activity that didn't happen during that six 0:06:53.560 --> 0:06:55.760 year period from nineteen fourteen to nineteen twenty. 0:06:55.960 --> 0:06:58.240 The other thing that was interesting to me was the 0:06:58.279 --> 0:07:00.680 thirties is the classic sort of caution tell especially if 0:07:00.720 --> 0:07:03.440 you're an economist and you read the Knes General theory 0:07:03.560 --> 0:07:06.480 and all that is all about something which you don't dispute, 0:07:06.480 --> 0:07:09.840 which is that policy makers can definitely make recessions worse. 0:07:09.920 --> 0:07:13.160 They can mismanage sort of the path into a recession. 0:07:13.600 --> 0:07:17.040 But the conceit was that policy makers post World War 0:07:17.120 --> 0:07:20.840 Two had got better at managing these things. Recessions were 0:07:20.920 --> 0:07:24.800 less deep, was shorter. I guess we've already been questioning 0:07:24.840 --> 0:07:26.800 that a little bit over over recent years, but you 0:07:26.920 --> 0:07:29.200 find that's not even in the sort of post World 0:07:29.200 --> 0:07:31.880 War two data for the UK or the US. 0:07:32.160 --> 0:07:35.080 That's right, and just one moment on the nineteen thirties, 0:07:35.120 --> 0:07:38.000 I think it's really important to remember just the volume 0:07:38.120 --> 0:07:41.760 of severe shocks that hit the US economy, not so 0:07:41.800 --> 0:07:44.760 much the UK economy between nineteen twenty nine and nineteen 0:07:44.840 --> 0:07:48.880 thirty three, a massive increase in business taxation. You had 0:07:49.080 --> 0:07:53.720 four distinct banking crises, three of which were actually highly 0:07:53.800 --> 0:07:56.440 regional in nature, one of which, at least one of 0:07:56.480 --> 0:07:59.640 which had to do with a once in a generation 0:08:00.280 --> 0:08:03.559 drought throughout much of the US that was succeeded by 0:08:03.680 --> 0:08:07.520 a plague of locusts of providential proportions that contributed to 0:08:07.520 --> 0:08:10.040 a wave of bank failures. You had a tiff shock. 0:08:10.400 --> 0:08:12.440 There was just a lot going on in the US 0:08:12.440 --> 0:08:16.320 economy during that period. So yes, you were spot on 0:08:16.400 --> 0:08:20.320 to highlight the conceit of a lot of postwar policy makers. 0:08:20.640 --> 0:08:22.520 We saw this in the nineteen sixties again in the 0:08:22.560 --> 0:08:28.360 nineteen nineties that they thought that because of the rollout 0:08:28.360 --> 0:08:31.240 of automatic stabilizers a greater role for the state in 0:08:31.280 --> 0:08:35.559 the economy, that recessions would become more rare and shallower. 0:08:36.160 --> 0:08:41.920 The reality is that recession depth has been remarkably constant 0:08:42.000 --> 0:08:44.880 over time, going all the way back to the seventeen hundreds. 0:08:44.920 --> 0:08:48.920 Recession duration has been remarkably constant over time, going all 0:08:48.960 --> 0:08:51.920 the way back to seventeen hundred. Most recessions are over 0:08:51.960 --> 0:08:55.120 in about a year, and the vast majority within two years. 0:08:56.040 --> 0:09:00.360 So what has changed is that expansions have had actually 0:09:00.480 --> 0:09:05.960 gotten longer over time and recessions have actually become less frequent. However, 0:09:06.160 --> 0:09:10.760 that is a very long run trend that goes back 0:09:10.800 --> 0:09:14.559 to seventeen hundred and probably before, and you can statistically 0:09:14.640 --> 0:09:18.439 test was there a particular point in time when economic 0:09:18.480 --> 0:09:24.800 expansions transition to greater length, greater duration, and statistically there's 0:09:24.800 --> 0:09:27.360 no clear breakpoint. So this is a long run, smooth 0:09:27.400 --> 0:09:29.440 trend that goes back to the eighteenth century. 0:09:29.600 --> 0:09:31.439 I promise we will get to some sort of positive 0:09:31.480 --> 0:09:35.120 conclusion the lesser part of this conversation. But if you're 0:09:35.160 --> 0:09:37.120 sort of thinking, oh, that you can learn about economics 0:09:37.360 --> 0:09:40.679 and get better at doing things, it's not entirely encouraging. 0:09:40.800 --> 0:09:43.200 Reading your book. One thing that you do highlight, and 0:09:43.240 --> 0:09:45.520 you've already mentioned, actually some of the differences between the 0:09:45.600 --> 0:09:48.720 UK and the US. I was sort of surprised to 0:09:48.840 --> 0:09:53.319 see such a big difference between the two economies in 0:09:53.400 --> 0:09:55.840 terms of the number of recessions. Having grown up in 0:09:55.840 --> 0:09:57.280 the UK, we tend to think of it as rather 0:09:57.360 --> 0:10:00.000 crisis prone and rather unsuccessful, and as you point out, 0:10:00.000 --> 0:10:03.480 it has been quite unsuccessful. But it has been successful 0:10:03.559 --> 0:10:07.320 at one thing, which is relative to America avoiding recessions. 0:10:07.360 --> 0:10:10.240 What is the difference in terms of the likelihood of 0:10:10.240 --> 0:10:12.160 having a recession between the UK and US. 0:10:12.280 --> 0:10:12.680 You're right. 0:10:12.760 --> 0:10:16.440 One of the fascinating findings in the book is just 0:10:16.559 --> 0:10:19.480 how much more recession prone the United States has been 0:10:19.559 --> 0:10:21.719 over the past two hundred and fifty years than the 0:10:21.800 --> 0:10:24.200 United Kingdom, or how much less recession prone the United 0:10:24.240 --> 0:10:28.760 Kingdom has been. And there are fundamentally two reasons for that. 0:10:29.640 --> 0:10:34.240 One is that from eighteen twenty six onward, the United 0:10:34.360 --> 0:10:38.760 Kingdom had a nationwide system of branch banking, so you 0:10:38.760 --> 0:10:42.520 could operate multiple branches across the national economy. 0:10:42.720 --> 0:10:43.720 And if you think. 0:10:43.520 --> 0:10:46.760 About a large diversified economy, it's kind of like a 0:10:46.880 --> 0:10:50.680 well diversified portfolio, so shocks in one area, one sector, 0:10:50.800 --> 0:10:53.920 or one region can be offset by resilience in another. 0:10:54.559 --> 0:10:58.319 In contrast, in the United States, for most of US history, 0:10:58.400 --> 0:11:02.240 for domestic political economy reasons, not only could a bank 0:11:02.400 --> 0:11:06.400 not operate across state lines, they could only operate one 0:11:06.520 --> 0:11:10.400 location within a state. And what that meant was you 0:11:10.440 --> 0:11:15.040 had tens of literally tens of thousands of small, undercapitalized 0:11:15.040 --> 0:11:20.360 financial institutions that were insufficiently diversified, not only on the 0:11:20.400 --> 0:11:23.040 asset side, so they're very exposed to local shocks, but 0:11:23.080 --> 0:11:27.840 also their capital base was underdiversified because all the shareholders, 0:11:27.840 --> 0:11:30.160 all the partners in the bank were also exposed to 0:11:30.160 --> 0:11:34.000 the local economy. And that really only started to change 0:11:34.440 --> 0:11:36.640 in the nineteen seventies of the nineteen eighties. Now, the 0:11:36.679 --> 0:11:41.880 second reason for greater UK resilience in the face of 0:11:42.040 --> 0:11:46.920 adverse recessionary shocks is that from nineteen twenty six to 0:11:47.040 --> 0:11:50.319 nineteen seventy two, the UK economy went without a single 0:11:50.400 --> 0:11:54.560 official coal strike, and during that period the United States 0:11:54.600 --> 0:11:58.640 experienced multiple recessions that were oil induced nineteen forty eight, 0:11:58.760 --> 0:12:02.880 nineteen fifty three, nineteen fifty, nineteen seventy and during that 0:12:03.000 --> 0:12:06.200 time instead, the UK economy was just much more reliant 0:12:06.200 --> 0:12:09.640 on coal. The UK economy had an abundant supply of 0:12:09.720 --> 0:12:12.680 coal and it was their primary source of energy. 0:12:12.800 --> 0:12:15.000 So it's partly that, and I guess we can't really 0:12:15.040 --> 0:12:18.720 congratulate ourselves on having been more efficient at avoiding recessions. 0:12:18.840 --> 0:12:21.480 One thing that was striking to me was despite having 0:12:21.880 --> 0:12:24.480 this might be self evident to some people, despite having 0:12:24.679 --> 0:12:28.319 much more successfully avoiding recessions than the US, it has 0:12:28.360 --> 0:12:31.679 not been a more successful economy over this period. Quite 0:12:31.720 --> 0:12:35.040 a large gap in living standards opened up in the 0:12:35.040 --> 0:12:37.440 first part of the twentieth century and has got quite 0:12:37.440 --> 0:12:40.280 a lot larger in the last few years. So, you know, 0:12:40.320 --> 0:12:42.600 the other great thing that policy makers tend to say 0:12:42.640 --> 0:12:44.840 is well that one of the most important things you 0:12:44.920 --> 0:12:47.680 can do is avoid You should try and keep the 0:12:47.720 --> 0:12:50.559 economy running stably, even if it's growing a bit more slowly, 0:12:50.640 --> 0:12:56.160 because it's avoiding recessions that really helps you maintain living standards. 0:12:56.800 --> 0:12:59.480 That doesn't seem to be borne out either by your 0:12:59.480 --> 0:13:01.640 comparison between the two countries. 0:13:01.720 --> 0:13:02.400 Not at all. 0:13:02.559 --> 0:13:06.880 In terms of the policy maker endeavor to prevent recessions, 0:13:07.600 --> 0:13:11.319 it's inevitably going to be a vain attempt because recessions 0:13:11.320 --> 0:13:14.040 will continue to happen because history continues to happen. There 0:13:14.080 --> 0:13:18.199 has never been an immortal economic expansion. And as you note, 0:13:18.840 --> 0:13:21.560 the UK is about thirty percent poor per person. 0:13:21.679 --> 0:13:23.400 I think that's actually it's quite a lot bigger now. 0:13:23.440 --> 0:13:24.839 I think I was looking at the day to other 0:13:24.920 --> 0:13:27.000 I think it's forty or fifty percent poor because of 0:13:27.000 --> 0:13:27.920 the last twenty years. 0:13:28.040 --> 0:13:28.880 Yeah, and has. 0:13:28.800 --> 0:13:31.160 Long been substantially poorer than the United States. So I 0:13:31.200 --> 0:13:34.800 think that's an important lesson that the majority of years 0:13:34.920 --> 0:13:38.880 in which an economy expands matter much more than the 0:13:38.880 --> 0:13:41.560 minority of years in which it contracts. And so what 0:13:41.600 --> 0:13:44.080 policy makers should be focusing on if they want to 0:13:44.080 --> 0:13:49.520 increase human prosperity and flourishing is focusing on increasing the 0:13:49.559 --> 0:13:51.960 pace of growth during the periods of expansion. 0:13:52.400 --> 0:13:55.160 So let's sort of think more about the current moment. 0:13:55.280 --> 0:13:57.960 You obviously had a peer where you were sitting in 0:13:58.000 --> 0:14:00.800 the White House and the Council of Economic could just 0:14:00.840 --> 0:14:03.760 looking at the time that you were running the Council 0:14:04.120 --> 0:14:06.920 was as COVID hit the economy. So I guess, as 0:14:06.960 --> 0:14:08.760 you say, that was kind of a searing experience that 0:14:08.840 --> 0:14:11.320 made you want to think more about the causes of recessions. 0:14:11.720 --> 0:14:13.800 But if you were there now, how would you be 0:14:13.840 --> 0:14:16.760 thinking about the risks from this crisis in the Middle 0:14:16.800 --> 0:14:20.400 East and indeed the other potential risks on the horizon. 0:14:21.080 --> 0:14:23.160 So I think the risk is duration. 0:14:23.680 --> 0:14:27.720 If indeed this is a short conflict and it is 0:14:27.800 --> 0:14:33.160 contained and normal traffic resumes through the strait of hormones, 0:14:33.560 --> 0:14:36.600 then I think this will be a temporary setback, but 0:14:36.960 --> 0:14:40.520 not a recessionary shock. But if this does persist for 0:14:40.600 --> 0:14:44.800 several weeks, then it does have a nineteen seventy three 0:14:45.040 --> 0:14:49.440 nineteen seventy nine feel to it, where actual physical barrels 0:14:49.760 --> 0:14:53.120 are removed from global supply. A lot of traders on 0:14:53.200 --> 0:14:57.640 trading floors today probably don't have a memory of episodes 0:14:57.680 --> 0:15:00.840 of energy supply shocks where there was actually a apply shock, 0:15:01.120 --> 0:15:04.160 physical barrels, physical cubic feet of gas that were removed 0:15:04.160 --> 0:15:08.080 from global markets. Twenty twenty two, there was a fear 0:15:08.120 --> 0:15:10.840 of that, but what ended up happening was a remarkable 0:15:10.880 --> 0:15:14.560 reconfiguration of global liquid flows and global gas flows. There 0:15:14.560 --> 0:15:18.080 were some transition costs, but there wasn't much disruption to 0:15:18.120 --> 0:15:22.080 the actual supply, Whereas if this strait of Hormuz shut 0:15:22.120 --> 0:15:25.760 down does persist for a period of weeks or months, 0:15:26.440 --> 0:15:30.320 then it would be a supply shock greater than that 0:15:30.440 --> 0:15:44.200 observed in nineteen seventy three or nineteen seventy nine. 0:15:45.240 --> 0:15:47.600 You're sitting in an oil company, but you know there 0:15:47.600 --> 0:15:51.280 has been a big shift in the administration's approach to 0:15:52.080 --> 0:15:57.280 energy transition, alternative sources of energy, and that could potentially 0:15:57.320 --> 0:15:59.840 set the US, in terms of its kind of energy 0:16:00.120 --> 0:16:02.720 model for its economy, on quite a different path from 0:16:02.800 --> 0:16:05.080 the rest of the world. How do you think about 0:16:05.080 --> 0:16:08.240 that in terms of obviously, the US has a lot 0:16:08.240 --> 0:16:10.520 of its own supply now that it didn't have in 0:16:10.560 --> 0:16:12.920 the nineteen seventies, and we've talked in the last week, 0:16:12.960 --> 0:16:16.560 we were talking about how that makes the US less 0:16:16.920 --> 0:16:20.160 vulnerable in many ways. But do you think the sort 0:16:20.200 --> 0:16:22.440 of impact of this kind of crisis in ten or 0:16:22.440 --> 0:16:24.600 twenty years time is going to be quite different just 0:16:24.640 --> 0:16:30.880 because of the approach to their energy supplies that different 0:16:30.880 --> 0:16:34.240 economies are taking. Some countries may just be entirely reliant 0:16:34.280 --> 0:16:37.760 on renewables and not so susceptible to these kind of 0:16:37.760 --> 0:16:41.480 shocks in ten or twenty years time, whereas the US 0:16:41.560 --> 0:16:43.680 will have its own supplies but will be reliant on 0:16:43.760 --> 0:16:46.080 kind of fixed supplies or fossil fuels at least if 0:16:46.080 --> 0:16:47.240 we continue on this path. 0:16:47.560 --> 0:16:48.560 That's a great question. 0:16:49.320 --> 0:16:53.120 The thing about the energy industry is that it is 0:16:53.160 --> 0:16:56.920 an industry with a very long investment horizon. So the 0:16:56.920 --> 0:17:00.480 company I work for, we every year produce a long 0:17:00.560 --> 0:17:04.119 run global economic outlook that we actually make it publicly available, 0:17:04.520 --> 0:17:08.800 and it is our best projection of what we think 0:17:08.840 --> 0:17:11.880 the world looks like in twenty fifty, what the world's 0:17:12.000 --> 0:17:16.399 energy demand is, and how that composition changes by twenty 0:17:16.440 --> 0:17:21.000 fifty from twenty twenty five. In response to this shock, 0:17:21.400 --> 0:17:24.639 following on the twenty twenty two shock, following on the 0:17:24.760 --> 0:17:29.520 pandemic shock, I suspect it will prompt both companies and 0:17:29.760 --> 0:17:33.840 countries to think more a bit more in terms of insurance. 0:17:34.640 --> 0:17:39.159 What is the probability that supply is unavailable, What is 0:17:39.200 --> 0:17:43.280 the cost to me in the event of that supply unavailability, and. 0:17:43.160 --> 0:17:45.760 How does the dot products of those two. 0:17:45.680 --> 0:17:48.400 Numbers compare to the premium I would have to pay 0:17:48.800 --> 0:17:52.720 to effectively ensure against that loss. So for some countries, 0:17:53.000 --> 0:17:57.760 for some companies, that might mean investing in energy sources 0:17:58.280 --> 0:18:00.680 that would not become unavailable in the event of a 0:18:00.760 --> 0:18:01.680 geopolitical shock. 0:18:01.920 --> 0:18:03.280 One of the big lessons that comes out of your 0:18:03.280 --> 0:18:07.280 book is that, as you point out and show very 0:18:07.280 --> 0:18:10.960 clearly and the numbers, expansions don't die of old age. 0:18:11.400 --> 0:18:14.199 So we shouldn't just inevitably expect them just because an 0:18:14.240 --> 0:18:18.480 expansion is of a certain age, and specifically they stop 0:18:18.600 --> 0:18:26.040 because of an unanticipated stopping of key supports for the expansion. 0:18:26.560 --> 0:18:29.600 We've talked about energy as one source of that. We've 0:18:29.640 --> 0:18:32.880 also had quite a lot of shocks to global trade 0:18:33.160 --> 0:18:36.600 over the last year from the president's announcement of tariffs, 0:18:36.640 --> 0:18:37.960 and then some of them have gone in place, some 0:18:38.000 --> 0:18:39.520 of them have not been in place. Now the Supreme 0:18:39.560 --> 0:18:43.119 Court has ruled a whole chunk of them to be unconstitutional, 0:18:43.320 --> 0:18:48.400 but they're going to be recreated in different ways. If 0:18:48.400 --> 0:18:50.879 you're looking at the sort of broad range of shocks 0:18:50.880 --> 0:18:53.560 facing the economy, we're also looking at a very hard 0:18:53.600 --> 0:19:00.000 to predict potential revolution in business practices thanks to AI. 0:19:00.880 --> 0:19:05.520 Thinking about this work of your book, how concerned are you, 0:19:05.600 --> 0:19:07.119 What are the key things that you'll focus on, and 0:19:07.160 --> 0:19:09.199 what do you think the administration should be doing to 0:19:09.640 --> 0:19:14.000 help sustain the expansion or avoid that kind of unexpected shot. 0:19:15.080 --> 0:19:18.320 So, in terms of the conventional subjects suspects that you 0:19:18.720 --> 0:19:21.120 hear a lot of in the financial press, an AI 0:19:21.200 --> 0:19:23.960 boom gone bus, I think that on the basis of 0:19:24.040 --> 0:19:28.040 history that an AI expansion is more likely to be 0:19:28.080 --> 0:19:31.600 a casualty of a recessionary shock than a cause thereof 0:19:32.359 --> 0:19:34.600 everyone calls the two thousand and one recession the dot 0:19:34.640 --> 0:19:38.400 com recession. The decline in Nasdaq stocks was just one 0:19:38.440 --> 0:19:41.280 of at least four shocks impacting the US economy in 0:19:41.280 --> 0:19:44.280 two thousand and one, and I argue is the least important. 0:19:44.560 --> 0:19:47.680 The most important were the terrorist attacks of September eleventh, 0:19:48.040 --> 0:19:51.000 and in fact, all of the output decline during that 0:19:51.040 --> 0:19:53.320 two thousand and one recession was in the quarter that 0:19:53.400 --> 0:19:57.879 included those devastating attacks. When there was widespread fear, we 0:19:57.960 --> 0:20:01.480 grounded the entire US air fleet, we close US airspace. 0:20:01.880 --> 0:20:04.840 There was a sharp fall in consumer suspending because everyone 0:20:04.960 --> 0:20:08.879 was afraid rightfully. So without the nine to eleven attacks, 0:20:09.320 --> 0:20:11.960 the US economy probably would have continued to almost certainly 0:20:12.000 --> 0:20:15.760 would have continued to expand during that roughly eight month 0:20:15.760 --> 0:20:18.879 two quarter recession, and in fact, over the whole of 0:20:18.920 --> 0:20:21.359 that recession, the US economy did expand by about point 0:20:21.359 --> 0:20:25.200 six point seven percentage points. In terms of today's environment, 0:20:26.000 --> 0:20:29.920 one of the things that you learn studying historic recessions 0:20:30.119 --> 0:20:34.199 is that oftentimes a shock to a specific sector is 0:20:34.240 --> 0:20:38.840 more important than big macro shocks because some sectors have 0:20:39.040 --> 0:20:41.199 very high linkages to the rest of the economy and 0:20:41.240 --> 0:20:45.520 it's very difficult for producers and households to find substitutes 0:20:45.560 --> 0:20:47.680 for that product. So energy is of course the one 0:20:47.680 --> 0:20:50.920 we've talked a lot about, but another one today would 0:20:51.000 --> 0:20:54.159 probably be rare earth elements, those seventeen elements on your 0:20:54.200 --> 0:20:59.760 periodic table. China last year threatened to impose strict export 0:21:00.000 --> 0:21:03.480 restrictions on their exports of rare earth elements. 0:21:03.560 --> 0:21:05.680 That is currently suspended until November. 0:21:06.240 --> 0:21:09.719 I think if something like that were to be imposed 0:21:10.119 --> 0:21:14.960 and really enforced, that would potentially be a recessionary shock. 0:21:15.440 --> 0:21:19.359 Another one is there's currently a bill in Congress. I 0:21:19.359 --> 0:21:22.520 think it has a very low probability of passage, but 0:21:22.640 --> 0:21:25.359 it would impose an interest rate cap on credit cards. 0:21:25.760 --> 0:21:29.000 What would probably happen in that event would be that 0:21:29.080 --> 0:21:32.280 credit card companies would cancel accounts and massively curtail the 0:21:32.320 --> 0:21:36.600 extension of credit to consumers. We observed just such a 0:21:36.680 --> 0:21:39.840 shock in nineteen forty eight, almost observed the shock. It 0:21:39.880 --> 0:21:42.760 was the threat of the imposition in nineteen seventy and 0:21:42.800 --> 0:21:45.840 then in nineteen eighty President Carter did indeed invoke his 0:21:45.880 --> 0:21:50.439 authority to impose credit controls, and those were accomplices to 0:21:50.520 --> 0:21:53.520 the murder of the expansions that were then underway in 0:21:53.520 --> 0:21:54.480 all three instances. 0:21:54.840 --> 0:21:57.600 So it's interesting because that bill obviously is inspired by 0:21:57.800 --> 0:22:00.679 the President focusing on that as an aspect of the 0:22:00.680 --> 0:22:03.399 affordability crisis. So you would have been sitting in the 0:22:03.400 --> 0:22:05.560 White House saying this is really not and you would 0:22:05.560 --> 0:22:07.960 be you would have I think ninety five percent of 0:22:07.960 --> 0:22:11.399 economists on your side in saying this is not a 0:22:11.400 --> 0:22:14.920 good idea. The things that you've listed you say we 0:22:14.920 --> 0:22:17.479 should be worried about. I think you're quite right, and 0:22:17.520 --> 0:22:20.680 we are now all much more focused on our reliance 0:22:20.680 --> 0:22:24.440 on these quite obscure rare earths and how that could 0:22:24.440 --> 0:22:27.720 feed into any number of bits of the global supply chain. 0:22:28.240 --> 0:22:32.879 You've also highlighted how a terrorist attack is obviously by definition, 0:22:33.000 --> 0:22:37.080 can be an unexpected and widespread shock to the economy. 0:22:37.359 --> 0:22:39.520 The other one that comes through very strongly in your 0:22:39.520 --> 0:22:43.919 book the frequent references to locusts, is climate shocks and 0:22:43.960 --> 0:22:47.000 particularly food shocks, which we've obviously seen a lot of 0:22:47.440 --> 0:22:49.480 in the last few years. And actually you do remind me, 0:22:49.560 --> 0:22:52.159 I mean that in the lower Angles Wilder books the 0:22:52.160 --> 0:22:56.960 book is that it features the locusts just descending onto 0:22:57.000 --> 0:23:00.800 their crop. It's heartbreaking, but I recommend that to anyone 0:23:00.840 --> 0:23:04.480 because it just feels very real. Those kind of climate shocks, 0:23:04.760 --> 0:23:08.600 a climate related shocks are becoming more frequent. If you 0:23:08.680 --> 0:23:12.159 looked at the world today, it does seem like all 0:23:12.200 --> 0:23:16.600