While many Americans shudder at the prospect of AI taking their jobs, business leaders and tech enthusiasts continue praising its potential, an optimism that is echoed across Silicon Valley and Wall Street. But all that hype may actually be injuring the economy in the short term.
“Together, these forces produce an inflationary surge in aggregate demand—the defining feature of the news shock’s initial phase,” the post’s authors wrote.
The economists compare AI hype to the optimism surrounding dotcom technology at the turn of the century. “Computers are everywhere except for in the productivity number,” Ozkan said, paraphrasing Nobel laureate Robert Solow, who spoke about IT improvements in the 1980s and again during the dotcom bubble. In both the dotcom era and the current AI hype, there is a disconnect between technological optimism and the actual economic data. In the dotcom era, the economists explained, the economy reflected the latter scenario, where gains failed to show, bursting the bubble.
Still, the authors lay out two possible scenarios as to how the AI hype could impact the economy. It’s all dependent on whether or not reality eventually catches up with said hype. If the anticipated gains do materialize—if businesses become more productive thanks to AI—the economy will experience stronger output growth, which would be accompanied by declining inflation as potential output expands.
On the flip side, if those gains fail to materialize, the economy could tip into a “prolonged period of weak growth and persistently elevated inflation.”
But the economists caution there’s still high uncertainty hanging in the air around AI’s payoff. “We don’t really know what are going to be those productivity gains,” Faria-e-Castro said. “We don’t know when they’re going to realize—and if even they’re going to realize.”
