Tyler Goodspeed has one of the more unusual résumés in economics. He holds a double PhD from Harvard and Cambridge, chaired the White House Council of Economic Advisers, and is now Chief Economist at ExxonMobil. His new book, Recession: The Real Reasons Economies Shrink and What to Do About It, spans four centuries of economic history. It ranges from 18th-century Atlantic piracy to the 2008 financial crisis to today's AI investment boom. It arrives at a consistent, counterintuitive conclusion: recessions come from shocks nobody could have hedged against. They are not some inevitable comeuppance for economic excess.

In a wide-ranging conversation on the Earn The Right Podcast, Goodspeed explained why the 2008 crisis had less to do with subprime mortgages than with the price of oil, why 2001's dot-com bust wasn't really about the dot-com bust, and why he's skeptical of confident predictions about an "AI bubble."

Edited excerpts below.

How do you define a recession, and what macroeconomic indicators do people typically use to predict one?

The definition I use in the book is the same as that used by the National Bureau of Economic Research, which is that a recession is a significant decline in economic activity that's spread across the economy, across many sectors, and lasts for more than a few months. That combination of depth, diffusion, and duration allows one to sort of flexibly define a recession rather than adhering to a very strict rule of thumb like a recession is two quarters of contraction in gross domestic product... A defining feature of recessions is really the substitution of a sudden sharp upward movement in the unemployment rate for a more gradual downward or sideways movement.

What are some of the more unintuitive things you've learned about recessions?

Despite lots of institutional changes over the past four centuries... the depth and duration of recessions has been remarkably constant across time and space. So recessions have gotten rarer, but they haven't gotten shorter or shallower... The second big finding, somewhat unintuitive, is that recessions are not about boom and bust. We tell these stories... that there was some boom, there was some excess, there was some malinvestment to which recession was the inevitable, even necessary, cleansing remedy. But the reality is there is simply no information in the height, the speed, the duration, or the composition of an economic expansion that can explain anything in terms of the probability, the depth, the speed, the duration, or composition of the subsequent recession. Economic expansions don't die of old age or infirmity. In the words of former Fed Chairman Ben Bernanke, they're murdered.

What's your analysis of what happened in 2008 as it relates to an external shock and that recession?

The conventional narrative of 2008 goes something like this: that there are people who allegedly should never have been able to buy a home because they couldn't afford it... I challenged that narrative in part by pointing out that if anything, housing markets in the 2000s were telling us that actually the United States needed more housing, because the cost of buying a home as a multiple of median household income has never been higher than it's been in the past five years... If I asked you to name when the price of energy in the past century reached its all-time high, you might guess 1973 during the Arab oil embargo, or 1979 during the Iranian revolution, or 1990 during the Iraqi invasion of Kuwait. But the correct answer would actually be June 2008... By summer 2008, the average American household was having to spend a record $8,500 per year on energy goods and services. That was $2,000 more than they'd been having to spend just a few years prior. And as energy drove up the cost of food, food inflation topped 6%... And so by summer 2008, something had to give. And what gave was that about 5% of American homeowners fell seriously behind on their mortgage interest payments. And the rest, as they say, is history.

The conventional story of the 2001 recession is that it was the dot-com recession…

The decline in tech stock prices, which had actually already started to reverse by the start of the recession, was just one of at least four shocks impacting the US economy. And quantitatively it was the least important shock. There was also a big run-up in energy prices, particularly natural gas prices, a casualty of which was Enron... There was also the establishment of permanent most-favored-nation status with the People's Republic of China, an immediate consequence of which was a sharp decline in net new hiring in US manufacturing and industry. And then the most important shock to impact the US economy in 2001 was the terrorist attacks of September 11th... Without 9/11, there wouldn't have been a recession in 2001.

You've also studied the recession of the 1770s and earlier. Are there any parallels with the external shocks we're seeing today?

One finds evidence of really a depression-magnitude recession from about 1717 to 1720... tied for one of the longest recessions in US history, and you just have a complete collapse in trade for the American colonies and a big contraction of the money supply. So when I went back to consult the qualitative, contemporary sources, what I found was that the cause of that recession, unambiguously, were pirates... This was the golden age of North Atlantic and Atlantic piracy... all the classic names in piracy, including Edward Teach, better known as Blackbeard. You had Calico Jack... they were blockading the port of Charleston, a very important port... maybe the story is not so much about pirates, but about the importance of key shipping lanes and key commercial choke points. And so it's interesting to reflect on that recession in the context of Tehran having recently closed the Strait of Hormuz.

Talking about bubbles and recessions, like an AI bubble being created, what are your thoughts on that?

I have yet to find a satisfactory definition of a bubble... if you look at real physical infrastructure, whether that's canals in the 18th and 19th centuries, or railroads in the 19th and early 20th centuries, or fiber optic cables in the 1990s and 2000s... there's simply no instance of a contraction in that stock from a peak to which the economy did not subsequently return. When you think about some of these past transformational technologies, like canals, like railroads, like fiber optic cables, that long run trend resembles a remarkably smooth technology S curve, adoption curve. And so I like to make the distinction between asset valuations and predictions about the direction of asset prices, because one might correctly call a peak, at least a local peak, and bundle that with a prediction that therefore there will be a recession. And one might be correct in the former prediction, but more often than not they're going to be wrong on the second prediction, because a lot of these peaks are the casualty of recessionary shocks elsewhere in the economy rather than a cause thereof.

I'd love to get your thoughts on these two sides of the coin.

It's rare to observe a positive technology shock as causing a recession... over the long run, I would expect that, like with previous productivity-enhancing technological changes, I would expect AI to ultimately be complementary to humans in the production process, because at the end of the day, automating human tasks is something that we've been doing for a very long time. This is likely to automate a whole new category of human tasks, namely cognitive... That said, there are transition risks in terms of maybe it doesn't cause a recession, but there is going to be income and employment loss. And I think that's why it's potentially helpful that we do have infrastructure in place today, and maybe that needs to be enhanced to replace income where it's lost.

Rapid Fire

What's the biggest economic shift AI will create in the next 5 years?

Investment. Capital expenditure. The biggest change will be increased capital expenditure.

What's one economic idea most people misunderstand?

David Ricardo's theory of comparative advantage: the idea that two countries should specialize in production of the good or service in which they have the lowest relative opportunity cost of producing, even if one country has an absolute advantage in production of all goods and services.

One prediction for the next 10 years?

Insofar as economies exhibit a lot of trend stationarity, then I would expect the US economy to be substantially larger in 10 years, and for average incomes to be higher.

What's the biggest risk AI introduces for economic stability in the near term?

If you have a technological change that's going to raise future output and raise future incomes, then it has an investment effect today, because you need to build the infrastructure to enable that increased output. That can put upward pressure on interest rates. Also, insofar as rational, forward-looking consumers are looking ahead to higher incomes, they may pull forward some spending, because they're anticipating higher income in the future. So that can also put some upward pressure on interest rates and inflation.

What have we learned from previous financial crises that's still being ignored?

One of the things that the United Kingdom historically did really well during moments of financial stress was to adhere to some form of Bagehot's rule, which is basically that the lender of last resort, the central bank, should lend liberally and early against good collateral, and at a penalty rate, and also to facilitate or coordinate the absorption of weaker banks by stronger, healthier banks.