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This edition was written by Tristan Loa, Chase Parry, Jack Spira, and Louise Sheiner.
Surveying economists, alongside other experts and the general public, Ezra Karger of the Federal Reserve Bank of Chicago and co-authors analyze short- and long-run projections of economic growth, labor market outcomes, and inequality given various assumptions about the pace of AI growth. In a “rapid AI” scenario—where AI outperforms humans at most cognitive tasks and robots do so at most physical tasks—economists project that, by 2050, real GDP growth would rise to 3.5%, the labor force participation rate would fall to 55%, and the fraction of wealth held by the top 10% of households would increase to 80%, a level comparable to pre-World War II inequality. Roughly half of the projected decline in the labor force participation rate is due to AI growth, with economists predicting particularly large job loss among blue-collar workers. Despite assigning a 61% probability to moderate or rapid AI progress by 2030, economists’ forecasts for growth are fairly moderate by historical standards, which the authors attribute to diffusion lags for AI as well as geopolitical, structural, and demographic constraints, such as trade wars and climate change, that could offset AI-driven economic gains. To address the economic impact of AI, economists overwhelmingly favored targeted policy interventions like worker retraining, whereas the public favored broader interventions such as job guarantees and universal basic income.
Thomas Drechsel and Ko Miura of the University of Maryland find that tighter-than-expected bank regulation reduces bank lending and raises the unemployment rate for several years, implying larger short-run macroeconomic costs than previously estimated. The authors identify regulatory news using high-frequency movements in bank stock prices around speeches by Federal Reserve officials on banking and use the joint behavior of stock prices and bank risk to distinguish regulatory news from other bank-related news. They estimate that a shock that lowers bank stock prices by 1% and is associated with lower bank risk reduces bank lending by 0.5% to 1% and raises the unemployment rate by roughly 10 basis points over two to three years. The authors note that longer-run stability benefits may nonetheless justify tighter rules.
Enghin Atalay of the Federal Reserve Bank of Philadelphia and co-authors argue that the decline in official measures of manufacturing productivity between 2009 and 2023 reflects insufficient adjustment for quality improvements. Comparing sectoral producer price indices, which are used to calculate official productivity statistics, with their corresponding consumer price indices, which incorporate additional controls for product quality improvement, the authors find that inflation in consumer prices of manufactured goods was consistently lower than in producer prices for durables manufacturing, especially for high-tech industries characterized by rapid innovation. Recalculating productivity using consumer price measures, they estimate that annual productivity growth has been understated by 5.5 percentage points for computer and electronics manufacturing, 1.38 percentage points for durables manufacturing, and 0.35 percentage points for manufacturing overall. These differences are large enough to reverse the official decline in manufacturing productivity growth over this period and bring it in line with that of the broader economy.
“Well, I’m thinking that if ever there was ‘Team Transitory,’ it’s this. I don’t believe this is going to get embedded into inflation expectations. We can see forward inflation expectations; they are well-anchored. And core inflation is coming down. And traditionally, as we’ve seen, the fourth and first quarter actually have been very noisy numbers that tend to err on the high side. I think at a point this war will end and things will normalize—and I think the Fed is doing the right thing by sitting and watching. I would be shocked if, for instance, the [European Central Bank] hiked, although I do have to say that many European countries, [like] the UK, [and] many Asian countries are subsidizing demand, which we haven’t done in the U.S.," says Scott Bessent, Treasury Secretary.
"In terms of: Do I think rates should be lowered? Eventually. I think now that we have to wait and see; we have to wait and see what happens to the economy. But I think as we went into January [and] came out of January and February, the economy was very strong.”
The Hutchins Center on Fiscal and Monetary Policy invites you to attend an event with Fed Governor Christopher Waller on Transforming the Fed's Operations for the 21st Century on Tuesday, April 21 at 2:30 pm. The event will be held both online and in-person.
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