🔮 Generative AI & economic growth

How AI could power productivity for a Great Acceleration

Hi,

We have a special expert commentary for all members today by

James Pethokoukis

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I have been following James for a number of years - and was lucky enough to be on his podcast back in 2021. James is a senior fellow and the DeWitt Wallace Chair at the American Enterprise Institute (AEI), where he analyses U.S. economic policy. While I don’t always agree with the AEI, I’ve regularly found their analysis to be critical, challenging and additive to the debate. None more so than James’ work.

I asked James to share with us his perspective on AI’s role in shaping our economic future¹. His book The Conservative Futurist: How to Create the Sci-Fi World We Were Promised will be published on October 3. I highly recommend you pre-order it. And until the book comes out, you can check out his pro-progress Substack, Faster, Please!

Thanks to James for taking the time to share his view — if you find it thought-provoking, please share it with your network.

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Generative AI & economic growth

By James Pethokoukis

From jobs to GDP numbers, U.S. economic statistics are often subject to revision. And stats about worker productivity, or inflation-adjusted output per hour worked, are no exception. They’re notoriously volatile. Both good news and bad should be taken with many grains of salt.

That caveat understood, it’s still hard to avoid getting a tiny bit excited about the recent news that U.S. labour productivity rose at a rapid 3.7 percent annual rate in the second quarter, April through June. It was the biggest increase in nearly three years and easily exceeded the consensus economic forecast of 2.2 percent. What’s more, many economists think the third quarter will show another strong number.

In this essay, I go over (1) why productivity growth matters, (2) why one of the most important economic questions may be whether AI is a general-purpose technology, and (3) if so, what needs to happen for AI to serve a strong economy. 

It’s the productivity, stupid

In the short run, a productivity pickup would be especially good news if you are worried about inflation. If workers are more productive, they can be paid higher wages without causing employers to significantly increase prices. (And that’s not just mere Econ 101 theory. Although you may have heard otherwise, productivity and pay remain tightly linked.) Rapid wage increases have been a big worry for the Federal Reserve in its fight to lower historically high inflation. But if that second-quarter number signals an extended productivity acceleration, “wage growth of 4 percent is no longer necessarily a deal-breaker for the Fed,” according to Capital Economics, a consultancy. And the sooner the Fed can stop raising interest rates, the less risk it will need to raise them so high as to nudge the economy into a recession.

Avoiding a recession would be awesome. A lengthy and fundamentally solid expansion would allow the economic progress of the pre-pandemic period — falling inequality², rising real wages across the income spectrum — to kick back into gear. And if I were a political incumbent, an economy of low unemployment and rising real wages would be an almost dream scenario for 2024. Indeed, many economic forecasts have been reducing the odds of a recession happening anytime soon.

But there are some important long-term implications if we are seeing the start of an extended productivity upturn.