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This edition was written by Chase Parry, Andrew Rosin, Zixun Tan, and David Wessel
Advances in digital technology are making it easier to move office work, from software development to legal drafting, across national borders. Using OECDdata, Richard Baldwin of the International Institute for Management Development finds that exports of digitallydelivered services have grown more than twice as fast as manufactured goods exports since 2008. Between 2008 and 2022, jobs linked to digital services exports increased by about 17 million worldwide; those linked to manufacturing exports fell by about 10 million. Baldwin also finds that, even after accounting for physical distance, each hour of time-zone separation is associated with about 4% less trade in digitally delivered services but has no significant effect on manufacturing trade. This may reflect the importance of real-time collaboration in office work. Among the 43emerging economies covered by the OECD data, value added from digital services exports has grown faster than GDP in 37 countries since 2008 versus 17 for manufacturing exports. Yet because digital services exports remain relatively small, they contributed only about 0.1 percentage point to annual economic growth in the median emerging economy, suggesting that they have yet to become the engine of economic development that manufacturing exports have historically been.
AI-driven automation could require enormous investment in machines, software, and other capital. Jesús Fernández-Villaverde of the University of Pennsylvania argues that even if technology allows machines to perform many more tasks, economic growth could be constrained if households fail to save enough to finance the investment. In his model, a scenario in which machines can perform all tasks currently done by workers by 2045 brings annual GDP growth to 11.7% in 2045 if household saving responds to higher returns on investment, compared with just 2.2% if the saving rate is held fixed at 23%, roughly the current U.S. gross investment rate. In the first case, saving eventually exceeds 50% of GDP, and rapid growth continues indefinitely because additional investment remains highly productive even as the capital stock grows. But the gains from full automation are uneven. Wages can fall far below their no-automation trend because firms would not pay workers more than it costs to have machines perform the same tasks. The consequences are particularly severe for households that rely on labor income and hold no assets. However, the cost of compensating these households falls relative to GDP as the economy grows: transfers sufficient to keep their income on its no-automation trend peak at 20% of GDP but fall below 4% by 2055.
When the Treasury issues new securities, primary dealers’ balance sheets expand as they hold some of the securities themselves and provide financing to other purchasers. Growing Treasury issuance has raised questions about whether dealers will have sufficient balance-sheet capacity to continue effective intermediation in Treasury markets. Jonathan Glicoes and co-authors at the Federal Reserve Board find that the balance sheets of the eight largest bank-affiliated dealers increase by about 21 cents for every dollar of Treasury coupon securities issued. Of this increase, 8 cents comes from larger Treasury holdings and 13 cents comes from greater lending to clients. Dealers sell off most of their new holdings within three to five days; however, the increase in lending is more persistent. The increase in lending was particularly large during the more recent period of quantitative tightening, when the Fed was shrinking its balance sheet and investors were absorbing more newly issued Treasuries.Even as dealers’ balance sheets grow, the effect on regulatory leverage requirements is small because these requirements are based on quarterly averages, which dilutes large fluctuations around issuance dates. However, issuance does bring dealers closer to their internal limits on risk-taking, suggesting that continued growth in Treasury issuance could put increasing pressure on dealers’ balance sheets.
"I am focused on two plausible inflation scenarios for the next 18 months. Under the first and more likely scenario, persistent strong demand and ongoing supply pressures keep inflation elevated absent some additional firming of monetary policy. I agree with Fed Chairman Warsh’s characterization of the recent increase in the FOMC policy rate as 'removing a dose of accommodation.' In my view, policy remains accommodative, and further firming will likely be necessary to ensure inflation converges to 2% in a timely manner," says Alberto Musalem, President of the Federal Reserve Bank of St. Louis.
"However, there is a less likely but plausible scenario in which additional policy firming will not be required. Falling energy prices and lower shipping costs, or an increase in potential output growth driven by higher productivity growth, might ease inflation pressures. Alternatively, aggregate demand might slow more than is now expected, perhaps because spending on AI or data centers slows substantially, or financial conditions tighten abruptly and wealth effects driven consumption spending decelerates.
"Because I view the second scenario as less likely than the first, I continue to judge that a further removal of monetary policy accommodation will be required to ensure inflation converges to 2% within 18 months."
