AI revolution and Trump disruption leave investors flying blind on US economy
Clive Crook
Ten years ago I praised a book on “radical uncertainty” by Mervyn King, the former governor of the Bank of England. At the time, I agreed with King that the kind of radical uncertainty that statistical analysis cannot deal with was a pressing problem for financial regulators. After the extraordinary year is over, the challenge is no longer so limited.
Over the past 12 months, the United States has seen every norm of economic policy — trade policy, fiscal policy, monetary policy — gleefully tossed aside. At the same time, the U.S. economy stands at the tipping point of an economic revolution that could be as significant as the shift from agriculture to manufacturing or from manufacturing to services; But the artificial intelligence revolution can happen much faster. I’ve been writing about economic policy for decades I don’t care to remember. I have never witnessed anything remotely like the wave of disruptions experienced last year.
Where will it go? Anyone who claims to know is either lying or being deceived. This is the point of radical uncertainty. The models that guide expert forecasts are based on data that has not encountered such changes before; Definitely not all at once. Risk measurements based on established patterns are essentially useless.
If the economy crashes next year, it will be the most extravagant crash ever seen, and there are plenty of reasons to choose from. (Talk about abundance.) Far from collapsing, though, perhaps the economy is on the verge of a productivity revolution so powerful it could overwhelm any choices, good or bad, that President Donald Trump’s administration and his successors might make. Nobody knows. This is as radical as uncertainty.
The current confusion about the state of the US economy seems symbolic. Over the past few days, official statistics have told us that America’s economy is strengthening (gross domestic product rose an impressive 4.3 percent annual rate in the third quarter) even as unemployment appears to be rising (leading the Federal Reserve to cut its policy rate by another 25 basis points earlier this month, worried about a possible downturn).
Perhaps AI creates this strange combination; While it increases growth and productivity, it causes labor demand to decrease. But this seems unlikely. AI certainly has the capacity to transform the workplace, but it’s still early days. The boom is certainly in the investment figures (all those data centers are costly) but the effects on employment and productivity are just estimates for now. Even if the figures we have were reliable, it would be difficult to interpret the figures, but it is not so. Official statistics are still in disarray due to the US government shutdown.
Here’s what we know.
First, decades of conventional wisdom about international trade have been thrown out. In the past, business was about competition, efficiency, comparative advantage and mutual gain. Now it’s a matter of who exploits whom. Appalled by decades of imagined technological backwardness and economic underperformance, the United States refuses to fall any further behind. “Reciprocal tariffs” or something similar would restore some measure of global economic justice. From now on, trade will no longer be so-called “free” or “fair.” It will be managed by experts in Washington to give the United States maximum advantage at the expense of international sanctions, including withdrawal from long-standing alliances.
Second, there is no such thing as fiscal policy anymore. American politicians will continue to fight over taxes and government spending (who wins and who loses when both sides prevail), but public borrowing and public debt are now politically irrelevant. Neither side believes that the impact of any policy on the budget deficit is worth mentioning.
Am I exaggerating? The US economy is at or near full employment and growing at a good pace; but the budget deficit is roughly 6 percent of gross domestic product. Public debt stands at 100 percent of GDP (a 60-year high) and looks set to continue rising. Not long ago, policymakers were worried about fiscal room for maneuver, the government’s ability to stimulate the economy by increasing borrowing during a crisis. The point is not that most politicians believe “fiscal space” is unlimited, which would be bad enough. They don’t even think about it anymore.
Third, monetary policy as we know it has also been disrupted. Until recently, conventional wisdom, as clear-cut as the ideas that free trade is good and fiscal responsibility is important, held that central bank independence works. Monetary policy acts with a lag and politicians are preoccupied with the short term, so a politically driven central bank introduces a bias towards higher inflation: it will take the more popular route (low interest rates) even though it knows that the delayed, and therefore politically irrelevant, outcome will be higher prices.
The Trump administration has already moved to politicize the Federal Reserve; he appointed a White House official (Stephen Miran) to his policymaking committee, tried to oust another governor by bringing mortgage fraud charges, and berated his leadership at every turn. Chairman Jerome Powell is expected to resign in May, and the president will name his successor soon. He is expected to choose a political follower. Treasury Secretary Scott Bessent also just said that the Fed should review its inflation target once inflation returns to 2 percent. Instead of aiming for prices to rise by 2 percent per year, perhaps it should adopt a target range of 1.5 percent to 2.5 percent or 1 percent to 3 percent.
Bessent’s objection to the current target is apparently that “decimal point precision is completely absurd.” This is rather odd, given that the Fed does not see itself as committed to such certainty. Inflation has exceeded the 2 percent target for five years, and the Fed doesn’t expect it to return until 2028. (And anyway, don’t the limits of any target range still include decimal point precision?) What matters is the obvious risk that the ceiling of any range will actually become the new target (2.5 percent or 3 percent, not 2 percent). This perception, along with a less independent Fed, would cause reasonably expected inflation, and thus actual inflation, to rise.
The US economy is an incredibly resilient creature. It will have to be that way in the coming months. Perhaps it could slip away as the consensus on trade, fiscal and monetary policy that has served it so well for decades crumbles. Perhaps the new norms will be good, or the old norms will be resurrected post-Trump. Perhaps none of this matters, given the emergence of artificial intelligence, and the economy will grow from strength to strength regardless. Investors are gambling heavily on the promised golden age without any idea of what it means.
Bloomberg
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