Last week, the U.S. Department of Labor reported a higher-than-expected uptick in the consumer price index. It turns out that stubbornly high inflation is still pretty stubborn, despite a series of interest rate hikes from the Federal Reserve. Still, as the Fed works to fight inflation and while keeping unemployment low and limiting the economic pain felt by Americans, the United States has a secret weapon: accelerating developments in artificial intelligence (AI), especially generative AI (genAI).
Since the period of 9% inflation in 2022, the Fed has raised interest rates 11 times. Higher rates have real consequences for Americans with fixed and lower incomes – as well as the startups and small businesses that are so additive to economic growth. It’s now more expensive to borrow the money needed to buy homes and cars, invest in business growth, and pay off debts. While economists are now largely forecasting a ‘soft landing,’ recession risks still loom large. In a Conference Board C-Suite Outlook, released last month, American CEOs cited an economic downturn or recession as their top concern for 2024, followed closely by inflation. Two-thirds of those CEOs reported that their organizations are unprepared to deal with those risks.
With the Fed already forecasting rate cuts in 2024 and inflation storm clouds still on the horizon, we should look to another, less economically painful vehicle to control inflation: increasing productivity. For the decade between 2010 and 2020, U.S. worker productivity – measured as hourly output per worker – increased steadily by about 1.4% annually. During the peak of the Covid-19 pandemic, those numbers spiked as millions of lower-paid workers across the services industry disappeared and workers across a range of industries found new employment. While some businesses floundered, others invested – to support a newly remote and hybrid workforce, meet new customer needs and decrease costs.
At the same time, investments in companies developing new AI capabilities super-charged our ability to boost productivity. While AI itself is not a new concept, the field was dramatically smaller just a decade ago. During the pandemic, many investors increased their investments in artificial intelligence. AI investments spiked 40% between 2019 and 2020, and 2021 levels – more than $275 billion – were some 30 times higher than just eight years prior. Much of that funding was channeled into health care and pharmaceutical research in the midst of the pandemic crisis, but sectors including education, retail, and automotive also saw big bumps in AI-related investment.
These investments produced dramatic breakthroughs in AI capabilities, exemplified by the launch and explosive growth of ChatGPT in late 2022, followed quickly by a suite of genAI tools. Those tools may have produced a revolution in productivity. Speaking at the Washington Economic Club on in early February, president and CEO of the Federal Reserve Bank of Richmond Tom Barkin noted a jump in U.S. worker productivity over the past four quarters, now holding steady at 1.6% annually. While Barkin declined to cite a cause or even call it a definitive trend, it’s certainly true that these productivity gains have been realized in an environment where nearly one third of U.S. CEOs say that genAI has already been rolled out across their company.
Is the timing relative to genAI’s growth correlation or causation? It’s too early to say. But at least anecdotally, business leaders are already seeing early productivity-boosting benefits. At a recent meeting of Detroit-area IT executives, a dozen chief information officers spoke with enthusiasm and optimism about genAI as an opportunity, sharing its capacity to support creation and delivery of reports and analyses, free up executive time and speed up the go-to-market timeline for new product features, products and services. With genAI integration still underway at many companies, expect even more productivity boosts as these benefits are multiplied across businesses around the country.
What will it take to sustain and realize the full inflation-fighting capabilities of genAI? We can start by doubling down on the policies that make American companies the undisputed global leaders in this field. That means maintaining the United States’ traditional ‘permission-free’ approach to innovation, and pushing back on entrenched industry players who seek to impose rules and laws that would inhibit new innovation. We should avoid following Europe’s example on AI regulation, which imposes restrictions so onerous that they are likely to suppress innovation rather than push it forward. It also means establishing legal guardrails that help protect both consumers and workers, and give American businesses certainty about permissible AI applications.
Things are looking good for the American economy and American productivity thanks to the increasing ubiquity of AI and genAI across companies and industries. Let’s make sure we recognize why we have been innovators and not mess it up!
