Navigating the Sea of Macroeconomic Doom and Gloom: A Conversation with Philipp Carlsson-Szlezak

An Unconventional Economist's Journey

Philipp Carlsson-Szlezak, Global Chief Economist for the Boston Consulting Group (BCG), boasts a unique background, having earned degrees at Oxford and the London School of Economics, and worked at McKinsey, Sanford Bernstein, and the OECD. His perspective on economic analysis challenges the field's reliance on traditional models, particularly in light of their failures to predict events like the dot-com crash, the 2008 financial crisis, and the COVID-19 pandemic.

The Problem with "Peak Economics"

Carlsson-Szlezak argues that the economics profession, particularly in the realm of macroeconomics, suffers from "physics envy," clinging to models that oversimplify complex human behavior. He believes this "master model mentality" leads to inaccurate forecasts and a pervasive sense of doom and gloom in public discourse.

Instead, he advocates for a more eclectic approach, incorporating insights from history, finance, political theory, and behavioral economics to create a more nuanced and accurate picture of the economic landscape.

False Alarms and Real Risks

From predictions of a COVID-induced depression to fears of hyperinflation and an "inevitable" recession, Carlsson-Szlezak points to a string of recent "false alarms" that illustrate the limitations of traditional forecasting. He emphasizes the importance of distinguishing between short-term shocks and structural changes that have lasting impacts on the economy.

Carlsson-Szlezak explains that while all recessions are unique, they generally stem from issues in the real economy (like drops in consumption and investment), policy errors, or financial system failures. He highlights that financial risks have become increasingly prominent in recent decades.

The Power of Stimulus and the Limits of Models

Carlsson-Szlezak also discusses the critical role of government stimulus in mitigating economic crises, contrasting the timid response to the 2008 financial crisis with the more aggressive approach during the COVID-19 pandemic.

He stresses that traditional models often fail to account for the idiosyncratic nature of each crisis and the reflexive nature of markets and policy responses. This inability to incorporate human behavior and political decision-making significantly hinders their predictive power.

The AI Revolution and the Future of Productivity

Looking ahead, Carlsson-Szlezak acknowledges the transformative potential of artificial intelligence but cautions against overestimating its short-term impact. He defines true productivity growth as a change in the ratio of inputs to outputs, arguing that while AI may improve quality and speed, genuine gains require a reduction in inputs or a demonstrable increase in value.

A Call for Economic Eclecticism

Carlsson-Szlezak’s book, "Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk," (co-authored with Paul Schwartz) provides a framework for navigating uncertainty and assessing real economic risks. He encourages economists to embrace a more interdisciplinary approach, relying on narrative, judgment, and a healthy dose of humility.

His advice to aspiring economists? Consider related fields in finance and investment, unless your passion for economics is unwavering. And remember, the most valuable lessons often come from recognizing the limitations of conventional wisdom.