Economic Benefits of the AI Revolution

          If you have been closely monitoring stock market performance over the past couple of years, you recognize that the returns have largely been the result of lofty gains on the Artificial Intelligence (AI) stocks. In fact, nearly 2/3of the gains on the S&P 500 can be attributed to Al stocks. While earnings have contributed to a portion of the gains, much of the appreciation is based on speculation about the accelerant effect AI will have on the economy. The focus of this narrative is to provide a framework for the potential economic benefits of Al.
Unlike past technological advances that primarily affected lower skilled workers, AI is differentiated by its ability to impact highly skilled jobs. As a result, advanced economies face both greater risks and more opportunities from the implementation of Al. It is estimated that 60% of jobs in advanced economies will be impacted by Al and roughly 50% of the exposed jobs may benefit from improved productivity. The remaining jobs may be replaced by Al which could lower labor demand leading to lower wages and reduced hiring. The counterargument is that if Al instead complements higher income workers by increasing productivity, it may lead to disproportionate increases in labor income between higher and lower skilled jobs.

          There are five economic implications of Al. First and most obvious are productivity increases. Advances in productivity should result in lower inflation. Second, there will be a profound impact on employment and labor markets. As is the case with all technological advances, some jobs will be lost but others will be created. This feature of capitalism has always existed and is known as creative destruction. It should be noted that since 1 940, more than 85% of total US employment growth has come from entirely new occupations most often the result of creative destruction. Third, the innovation and competitive advantage afforded by Al will lead to the development of new products and services by enhancing the capabilities of existing ones. Fourth, the introduction of Al will lower entry barriers for some fledging businesses while increasing economies of scale in others. Finally, with the vast expansion of sources of information, predictive capabilities will improve allowing businesses to respond more quickly to trends.

          Prognosticators have three differing views about the impact of Al on the economy. Optimists believe that Al could accelerate wealth and prosperity for society in the future due to innovations that would increase productivity. McKinsey, the global consulting firm, believes that the use of Al technology could add between
$11-$17 trillion annually to the US economy.

          Pessimists believe that Al presents a threat to well-paying jobs which will decrease competition and increase income inequality. Unlike past technological advances such as robotics, which replaced low skill and low paying jobs, Al represents an assault on the highly skilled college educated work force. McKinsey estimates that by 2060, 50% of daily work could be completed by Al. As a result, McKinsey estimates that 1 2 million workers will require occupational training.

          Pragmatists tend to see both the pros and cons of AI. They believe that AI will support innovative manufacturing and change the way and nature of work. The impact will be limited to businesses who either have a need or the financial means to afford these new technologies. They also fear that the technology gap between small and large companies will expand.

          I have discussed the potential benefits of Al without recognizing the dangers. We have already seen a peek of abuses such as the mimicking of President Biden's voice on phone calls to voters during the primary season. As technology gets better at adopting human language and creating images, the risks of crimes such as identity theft will rise. This new technology also poses challenges to safeguard personal information that if accessed, could be misused. As is the case with any new technology, risks accompany benefits and vigilance is necessary to avert problems.

Sincerely,
Clifford L. Caplan, CFP”, AIF”

08/26/24