AI – New Economy 2.0?

Kevin Warsh bets on the beneficial effects of high-tech

Donald Trump has made it clear that he expects Kevin Warsh, the designated chair of the Federal Reserve Board, to cut interest rates significantly as soon as he takes the helm at the Fed in May. However, finding serious reasons for this is not easy given an inflation rate of around 3% and a relatively low unemployment rate. Warsh will likely use the growing influence of artificial intelligence (AI) on the US economy as his main argument. In an opinion piece in the Wall Street Journal in November, Warsh wrote: “AI will be a significant deflationary force, increasing productivity and strengthening US competitiveness.”

New Economy as a model

Warsh is clearly banking on AI having a similar effect to the advances in information technology at the turn of the millennium. At that time, the US economy grew much more strongly than had been generally expected, partly due to a massive increase in productivity. In its economic projection published in the summer of 1995, the Congressional Budget Office (CBO) assumed real economic growth of 2.3% on average and an inflation rate of 3.3% for the following five years. In fact, growth was a full two percentage points higher at 4.3% per year. In contrast, the inflation rate was significantly lower than expected at 2.5%.

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