How Will AI Affect The Economy? Will Unemployment Increase?

These are questions that have been on my mind and highly relevant to the J2 and IB Y6 classes that I have been conducting. Recently, the Straits Times published a really interesting article: “The Coming Creative Destruction From AI.” Goldman Sachs estimated that 300 million full time jobs could be replaced by AI. Reported by BBC.

Mind Boggling.

Macroeconomics students should, by now, be very familiar with the concept of technological displacement of workers leading to structural unemployment. This is certainly behind the projected 300m job losses and the “destruction” from AI. At the same time, new industries and new jobs are created. But it is most likely the case that the retrenched lack the right skills to take on those jobs and remain unemployed.

How else could AI affect the economy? I asked my new digital assistant, who is surprisingly unbiased and professional in handling the task I have given IT.

Me: How does AI bring about creative destruction and what are the implications on economic growth, unemployment and inflation?

IT:

AI can bring about creative destruction by disrupting traditional industries and creating new ones. This can lead to both positive and negative implications on economic growth, unemployment, and inflation.

On the one hand, AI can drive economic growth by creating new industries and markets, increasing productivity, and reducing costs. For example, AI-powered automation can streamline production processes, increase efficiency, and reduce the cost of goods and services. AI can also create new products and services, such as personalized healthcare and financial advice, which can stimulate economic growth.

On the other hand, AI can also lead to job displacement, as automated systems can perform tasks previously done by human workers. This can lead to increased unemployment, particularly in industries that rely heavily on manual labor. However, AI can also create new job opportunities, particularly in fields such as data science, engineering, and programming.

The impact of AI on inflation is less clear. On the one hand, AI can reduce the cost of production, which can lead to lower prices for consumers. However, it can also lead to increased concentration of wealth and power in the hands of those who control the technology, which can lead to higher prices for consumers.

Overall, the impact of AI on economic growth, unemployment, and inflation depends on a complex array of factors, including the pace of technological advancement, the ability of workers to adapt to new technologies, and the actions of policymakers and business leaders in shaping the development and deployment of AI.

Me: If unemployment is widespread, won’t AI lead to lower economic growth instead?

IT: Yes, if unemployment is widespread, AI can lead to lower economic growth instead of boosting it. When a significant portion of the population is unemployed, the overall demand for goods and services decreases, leading to lower economic growth. Although AI can increase productivity and reduce costs, if it leads to widespread job displacement, it can also reduce consumer purchasing power, which can negatively impact economic growth.

Additionally, high levels of unemployment can lead to social unrest, which can also negatively impact economic growth. For example, in countries with high levels of unemployment, social unrest can lead to disruptions in production and supply chains, which can further reduce economic growth.

Therefore, it is crucial to ensure that the benefits of AI are distributed equitably and that policies are put in place to support workers who may be displaced by the technology. Such policies may include education and training programs to help workers transition to new industries, financial assistance for those who are temporarily unemployed, and social safety nets to support those who are permanently displaced. By addressing these challenges, AI can be leveraged to support economic growth while minimizing its negative impacts on employment.

Me: If AI leads to deflation, that usually won’t be good right?

IT:

While deflation may seem beneficial at first glance since it implies a decrease in the general price level of goods and services, it can have negative consequences for the economy in the long run. Deflation is a sign of weak demand, which means that consumers are not spending enough money to keep the economy growing. This can lead to a vicious cycle where businesses lower their prices to attract customers, which further reduces demand and creates even more deflation.

In this context, if AI leads to deflation, it can hurt economic growth by reducing demand for goods and services, leading to lower revenues for businesses, and increasing the risk of bankruptcies and unemployment. Deflation can also increase the real value of debt, making it more difficult for individuals and businesses to repay their loans.

Moreover, deflation can lead to a decrease in investment, as investors become more risk-averse and prefer to hold cash instead of investing in new projects. This can further exacerbate the negative effects of deflation on economic growth.

Therefore, while AI can lead to lower prices and reduce inflation, policymakers should monitor the effects of AI on prices and take action to prevent deflation from becoming entrenched in the economy. This may include measures such as increasing government spending, lowering interest rates, and implementing policies to boost consumer demand. By doing so, policymakers can help ensure that the benefits of AI are maximized while minimizing its negative impacts on economic growth.

Me: But the deflation arising from AI should be due to large increase in aggregate supply rather than a fall in aggregate demand?

IT: You are correct that the deflation arising from AI would typically result from a large increase in aggregate supply rather than a fall in aggregate demand. AI can increase productivity and efficiency, leading to lower costs for businesses and increased output. This can lead to a higher supply of goods and services in the economy, which can put downward pressure on prices, resulting in deflation.

In this context, deflation due to an increase in aggregate supply is less likely to be harmful to the economy than deflation due to a fall in aggregate demand. This is because the increase in aggregate supply can lead to an expansion in output and employment, which can boost economic growth. However, if the increase in aggregate supply is not accompanied by a corresponding increase in demand, it can lead to excess capacity and lower profits for businesses, which can ultimately reduce economic growth.

Moreover, if deflationary pressures persist, they can lead to expectations of further price decreases in the future, which can discourage consumers and businesses from spending and investing, further reducing demand and slowing down economic growth.

Therefore, policymakers need to monitor the effects of AI on aggregate supply and demand and take appropriate measures to support aggregate demand if needed, such as implementing expansionary monetary or fiscal policies. This can help ensure that the deflationary pressures from AI do not lead to a prolonged period of weak economic growth.

Me: Any historical examples?

IT: There are several historical examples of how technological advancements can lead to deflationary pressures. For instance:

1. Industrial Revolution: The Industrial Revolution of the 18th and 19th centuries led to significant technological advancements, such as the steam engine, which increased productivity and lowered the cost of production. This led to an increase in the supply of goods and services, resulting in deflationary pressures.
2. Information Age: The advent of the internet and the subsequent growth of the information age in the late 20th century led to significant technological advancements in communication and information technologies. This increased productivity and efficiency, leading to lower costs for businesses and consumers and putting downward pressure on prices.
3. Agricultural Revolution: The Agricultural Revolution of the 18th and 19th centuries, which saw the introduction of new farming techniques and machinery, led to increased agricultural productivity and output, leading to lower prices for food and other agricultural goods.

In each of these cases, technological advancements led to increased productivity and output, resulting in deflationary pressures. While the deflationary pressures resulting from these technological advancements were generally beneficial for the economy, they could also lead to periods of weak economic growth if not managed effectively.

Therefore, policymakers need to be vigilant in monitoring the effects of technological advancements on the economy and take appropriate measures to support demand if needed, such as implementing expansionary monetary or fiscal policies. By doing so, policymakers can help ensure that the benefits of technological advancements are maximized while minimizing their negative impacts on economic growth.

Me: Does this mean that asset prices like that of properties may also fall?

IT: Yes, deflationary pressures can lead to a decrease in asset prices, including property prices. In a deflationary environment, the general price level of goods and services falls, which can also put downward pressure on the prices of assets.

Moreover, if deflationary pressures persist, they can lead to expectations of further price decreases in the future. This can lead investors to hold back on investing in assets such as real estate, which can further reduce demand and put downward pressure on prices.

Furthermore, deflationary pressures can also lead to a decrease in consumer spending and business investment, which can impact the overall demand for real estate. If there is less demand for real estate, it can lead to a decrease in property prices.

However, it is important to note that property prices can be influenced by a variety of factors, including interest rates, demographic changes, and government policies. While deflationary pressures can contribute to a decrease in property prices, other factors may also play a role.

In summary, deflationary pressures can lead to a decrease in asset prices, including property prices, but it is important to consider other factors that may influence property prices as well.

WOW! That is plenty of fun economics, so relevant to what I am doing with my Macroeconomic students. You would have noticed AI reiterating the point about having the right government policies – exactly the next topic for most of my JC2 classes!

Plenty to learn from this exchange including consequences of deflation! Hope this has been really useful as a sneak peak into the near future and to boost your exam grades!

(I love IT when IT admits I am right/I know better)