Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk

by Philipp Carlsson-Szlezak, Paul Swartz

An essential new guide to navigating macroeconomic risk.

The shocks and crises of recent years—pandemic, recession, inflation, war—have forced executives and investors to recognize that the macroeconomy is now a risk to be actively managed. Yet unreliable forecasting, pervasive doomsaying, and whipsawing data severely hamper the task of decoding the landscape. Are disruptions transient and ephemeral—or permanent and structural? False alarms are costly traps, but so are true structural changes that go undetected.

How can leaders avoid these macro traps to make better tactical and strategic decisions?

In this perspective-shifting book, BCG Chief Economist Philipp Carlsson-Szlezak and Senior Economist Paul Swartz provide a fresh and accessible way to assess macroeconomic risk. Casting doubt on conventional model-based thinking, they demonstrate a more powerful approach to building sound macroeconomic judgment. Using incisive analysis built upon frameworks, historical context, and structural narratives—what they call "economic eclecticism"—the book empowers readers with the durable skills to assess continuously evolving risks in the real economy, the financial system, and the geopolitical arena.

Moreover, the authors' more nuanced approach reveals that the all-too-common narratives of economic collapse and decline are often false alarms themselves, while the fundamental strengths of our current "era of tightness" become visible.

With rational optimism rather than gloom, Shocks, Crises, and False Alarms speaks to the key financial and macroeconomic controversies that define our times—and provides a compass for navigating the global economy. Rather than relying on blinking dashboards or flashy headlines, leaders can and should judge macroeconomic risks for themselves.

Genres: Economics, Business, Finance, Nonfiction

400 pages, Kindle Edition

Published July 9, 2024

Reviews

[GM · Rating 3 out of 5]

key takeaways:

1. don't have a master-model mentality - use scenario forecasting rather than point forecasts.
2. better to have some optimism. don't rely on headlines which will be pessimistic more often than not
3. identify drivers and dynamics. History is important but isn't everything. Context matters.
4. Will always be impossible to predict small details (e.g. Maybe you'll predict Covid = Supply shocks, but you won't be able to predict how much each country gives out in stimulus package or what trade policies they might enact.)
5. Not all capital stock is equal. Structures (e.g. bridges, airports) depreciate slowly, adding to the capital stock for multiple decades, but today's investments are generally in IP / software, which depreciates much quicker. Investment must also overcome depreciation and need to keep the existing capital stock steady.
6. Productivity booms take time. E.g. 1990s ICT boom was 30 years in the making --> uplift for about 10 years (lifting by 100 bps), then there was the slump. Gravity of growth (diminishing returns)
7. Need to separate Political Willingness vs Political Ability (e.g. Greece might be Politically Willing but Politically Unable bc of wider Eurozone politics)
8. On debt levels - more of a problem if growth < rates. Debt risk is more about shifts in burdens, constraints, and costs than about sudden and dramatic collapse. Debt levels provides little information.

[Mark O'mara · Rating 5 out of 5]

An engrossing, rational, well researched and argued account around macro economics. I found a lot of the information very useful as a guide to investing and deciphering the macro landscape and the implications of policy responses etc.

[Alexandre Pittet · Rating 5 out of 5]

Well written, concise yet insightful perspective on macro for practitioners.

[Markus Auer · Rating 1 out of 5]

This book is the "Nothing ever happens"-meme blown up to 250 pages

I understand this book was written by BCG consultants for aspiring executives to be grabbed at the airport bookstore and read on a 3h flight to meet some other BCG consultants, but the intellectual reductionism of the book is borderline offensive.

The main thread of the book is that real-world processes in politics, economics, and business are way more durable and persistent than detractors would like you to believe during or before moments of crisis. Good point, but I'd expect the target audience of this book (senior managers) to have sufficient intellectual acumen and life experience to realize this without the help of a book.

Beyond this general argument, the book is filled with the typical consultant flip-flop argumentation that is less helpful than a horoscope (at least that one tells me when to water my plants): "Many people believe horrible thing A might happen, but in most cases more benign thing B happens. Nevertheless, horrible thing A might still happen."

Economic scenario analyses are reduced to decision trees only three layers deep and fail to consider any scenarios that lie outside what has been observed in the US in the last 100 years. The few attempts that are made to look beyond this very narrow scope are mere regurgitations of economic hearsay presented as scientific fact.

The writing style is bland like 10-year-old oatmeal, except for occasional moments of weird American exceptionalism. Each of the 20 chapters begins with an executive introduction, then goes through a list of arguments, and ends with a summary of the list items you just read two pages ago. At first, I thought they used AI to write this, but even AI uses more engaging language. If it wasn't so disappointing, it could serve as a comedic testament to the soul-grinding pointlessness of the consulting profession.

[FM · Rating 5 out of 5]

"Shocks, Crises, and False Alarms" by Philipp Carlsson-Szlezak and Paul Swartz offers a fresh framework for assessing macroeconomic risks, challenging traditional model-based forecasting approaches. Instead of relying on specific predictions, the authors emphasize developing sound judgment by understanding the structural and historical contexts of the economy, a methodology they call "economic eclecticism."

Key insights include:
1. Rethinking Macro Risk: The authors argue that many disruptions are transient "false alarms," while structural changes are often overlooked. They propose analyzing macro risks through the lens of economic systems rather than sensational headlines or conventional models.
2. Navigating Core Risks: The book categorizes risks into three domains: the real economy, the financial system, and the global geopolitical environment. It explores issues like business cycles, long-term growth drivers, the role of technology, and policy responses.
3. Combating Doom Narratives: The authors advocate for a balanced view, avoiding excessive pessimism while recognizing the resilience of modern economies. They highlight the importance of rational optimism to uncover hidden opportunities during macroeconomic shocks.
4. Practical Applications: The book equips leaders with tools to interpret macroeconomic risks effectively, aiding better tactical and strategic decisions in a complex global landscape

This book is a valuable resource for leaders and investors seeking to navigate uncertainty without succumbing to overly simplistic or alarmist narratives.

[Kevin O'Meara · Rating 5 out of 5]

This was a fantastic book that helps make sense of all the things happening in the economy. It does this by building a model of trends in the economy and helping you determine what the overall trends and biases are in the direction of the economy.

For example, the market has a bias towards tightening, inflation and labor scarcity. This will drive wages up and will be a contest towards productivity gains. It may also mean companies will need to accept lower margins. The authors also discuss the overall direction of decoupling v. Globalization.

It is a “dense” book meaning it has a lot of detail and requires significant concentration to fully understand the concepts. I actually would have to reread sentences and paragraphs. Thankfully, I read it on a kindle scribe so I took a lot of notes.

[Juancho Vizcaino · Rating 5 out of 5]

“Recall that in the phase of convergence,the global allocation of production capacity was placed in the hands of businesses. This delivered a powerful structural force for cost optimization at the firm level and deflationary impulses at the macroeconomic level. In the era of divergence, governments instead seek to influence the allocation of global capacity in line with geopolitical objectives and risks. Whether through incentives or control, the emphasis on reliability will lower long-run economic potential as some specialization and benefits of trade are sacrificed. Yet, the shift in trade architecture also drives greater investment and more demand for labor in rich economies. Put simply, repatriating global production capacity will reinforce the era of tightness in the years ahead”.

[Hanie Noor · Rating 5 out of 5]

Peek into how big events like money problems, economic bubbles, & global changes affect everyone’s lives e.g., inflation, currency changes, petrol prices hike, etc., which shows how people as well as leaders can make smart choices in dealing with it. Dive into the complexities of macroeconomic risks & its implications for businesses, policymakers, & investors, particularly in an era of volatility & tightness. Ultimately, emphasises the importance of sound judgment & adaptability in navigating an uncertain economic landscape. A read for the curious mind.

• Non-fiction, economics
• ⁠By economic experts
• ⁠On persistence of “good macro”, financial cycles, & global trends.

[Irene Huang · Rating 4 out of 5]

Rational optimists in a ear of tightness.
Growth boosts beat growth risks
- Structurally tight labor markets
- Strategic investment demand
- New generation of technology: AI will result in more productive gain gradually.
It is all about judgement
1. Master-model mentality cripples economic judgement
2. There will be plenty of doom-mongering. In good times, recession risk will be more interesting than cyclical upside, and in times of crisis, systemic collapse more interesting than recovery.
3. Economic eclecticism should always be the analytical starting point.

“Doubt is not a pleasant condition, but certainty is an absurd one”
Voltaire

[Giovanni Giacchetti · Rating 4 out of 5]

An updated compendium for macroeconomics. The book depicts the theory looking at the different events in the history, from recession to crisis. It explains clearly how to evaluated different macroeconomics interventions including monetary policy, inflation effects and geopolitical risks. It offers a good lens to understand effects of more frequent shocks and finally also paint a potential future outlook based on a tight scenario, where limited labour availability and high rates will keep a growing economy justifying also AI introduction and improve in productivity (evaluated as a small incremental effect over time).

[Zanis · Rating 2 out of 5]

I like economics, this is a book for people who love economics. I enjoy reading about economics through a lens of how incentives, both at a macro and micro level. This was not that and it was very dry. Author loves to use big words with long complex sentences to lend credibility, but they could've easily written in more casual language and been just as effective. It felt like I was reading a text book for school again, no thanks, I only read for enjoyment now. I got about 75 pages and gave up. I tried to read the summaries of the chapters after that just to get a gist, and I couldn't do that either. 2 stars only because I didn't finish.

[Michael · Rating 5 out of 5]

Great, realistic and clear-minded analysis

Of the real world, real people and real economy. Anyone who has some insight about how the real things work know they are far more complex than a title can explain. Unfortunately, that is exactly what many so-called expert and gurus are trying to do. Strongly recommend this book to serious readers who are interested in the real things

[Nenko · Rating 5 out of 5]

Very balanced view of what is to come debunking some of the popular narratives such as the inevitable conflict between the US and China. It has informative infogrpahics and charts. Makes a the prediction that the next decade will continie to be characterised with labour tightness.

[Wallis Chan]

Macroeconomics is about judgement - not prediction. Judgement is the basis of better decision-making (avoid costly traps), and it can reduce experienced volatility (enabling smoother leadership). Nobody controls economic volatility - but leaders can choose what they focus on.

[Lucille Nguyen · Rating 4 out of 5]

A thoughtful, well-reasoned perspective on modern macroeconomics. Some of the claims about trade may be under flux due to the Trump tariffs. Good positions on how to use models, numbers, and how to make decisions under uncertainty.

[Steve Brock · Rating 5 out of 5]

I have selected this book as Stevo's Business Book of the Week for the week of 7/14, as it stands heads above other recently published books on this topic.

[Elijah Wilson]

Currently Reading.

[HL · Rating 5 out of 5]

Very good book. Shows how relevant Macro is in business decision-making and offers great guidelines for sanity checks without delving too deep into the academic intricacies.

[Zachary Krivine · Rating 4 out of 5]

For the lay audience. Gets too broad towards the end but makes good insights throughout. Especially liked the sections about AI and whether its adoption will induce a productivity boom.

[Omar · Rating 5 out of 5]

Every foreign policy analyst should read this book.

[Qiu · Rating 4 out of 5]

Insightful way to think about macroeconomic risks. Book was a little meandering though and written in a very "consultant" way. Could have been shorter and/or denser

[Ollie Clark · Rating 4 out of 5]

SC&FA is written by a rare breed of economist: one who can communicate their ideas. As an economist, the book wasn't really written for me, but I still took a lot from it.

The opening chapters emphasise why businesses may find macroeconomics useful. Leaders make judgements under uncertainty—they're used to this—but a grounded knowledge of economics makes the world a little easier to navigate.

A large part of the book is devoted to demonstrating the authors' guiding philosophy: spend less time building quantitative models and, instead, more time developing your judgment around drivers and risks. I enjoyed this approach and found the clarity impressive, though I did wonder whether the authors were wilfully obscuring the fact that they did have economic models in mind. For example, the section on growth is almost entirely underpinned by the Solow growth model. Perhaps such models just don't sell well with businesses, and it's best to keep them in the background.

I found myself recalling Dani Rodrik's Economics Rules. In the book, Rodrik makes a cautious case for economic modelling. The formality of setting assumptions and testing them provides guardrails, keeping the ball heading towards the pins. Modelling also allows economists to quantify trade-offs. Truman's famous quip about the one-handed economist was lessened with the development of SVARs and DSGEs. Reduced-form modelling also allows us to measure historical patterns—something the author is keen on—but again, with more structure than from narrative alone.

There are few books I've highlighted more. I'll take away a deeper understanding of productivity, inflation, and fiscal deficits, but most importantly, the value of storytelling in delivering a message. I hope to remember and apply the parallels between economics as a band and the logic of studying health risks as it applies to the economy. This book succeeds in making economics feel useful again.