Artificial inequality in the age of AI

AI is accelerating the divide already entrenched by decades of economic policy and asset inflation, writes Dr Kim Sawyer.

Wealth inequality has ALWAYS EXISTED, but it has never been the inequality we have now.

The richest 1 percent of the world’s population is almost twice as much wealth the bottom 99%. In Australia, the average household in the top 20% of the wealth distribution 93 times The average household’s wealth is in the bottom 20%, and in the United States the top 10% of income earners account for half of U.S. consumer spending.

Why has the world become so unequal?

Economists refer to this K-shaped economyThe difference between the haves and the have-nots. Two arms, one going up, the other going down; segregation has accelerated in the last 30 years.

in 2014 Janet L YellenChairman of the Federal Reserve, reflected On increasing inequality:

‘I am greatly concerned by the extent and continued increase of inequality in the United States. ‘Following more than 40 years of narrowing inequality following the Great Depression, the past few decades have seen the most sustained increase in inequality since the 19th Century.’

Since 2014, inequality has worsened due to low interest rates, the pandemic, and artificial intelligence (AI).

Much of the inequality is a result of decisions policymakers made in the late 1980s. Deregulation was supposed to create competition; instead it created extreme greed. Senior executives in universities, banks, and bureaucracies were able to extract monopoly rents. Public-private partnerships, an unexpected opportunity for some, were often costly for consumers. The economy has become dependent on the asset economy: house prices, stock prices, bond prices. An economy dominated by asset prices.

In the early 1990s, central banks began targeting inflation without knowing the correct target. When is the USA? Federal Open Market Committee A target of 2% was adopted in July 1996; this was not a unanimous choice; One third wanted 0%, one third wanted 3%, one third wanted 2%. A 2% target went from no target to consensus – the story of economics.

Central banks use interest rates to target inflation and prevent deflation, but rarely get the right result. Later Global Financial CrisisCentral banks have kept cash interest rates too low for too long. Between 2008 and 2022, the US Federal Funds rate never exceeded 2.5%; Most of the time this rate was below 0.25%.

Before 2008 the rate was below 2.5% for two years in the 1950s and three years in 2001-4. When rates stay too low for too long, savers and those on fixed incomes are disadvantaged, while those who own assets are advantaged by inflation in house prices and stock prices. Low interest rates increased inequality, but did the central bankers sitting around their desks understand? Central Bank (RBA)’s goals included both growth and inflation, but never wealth inequality.

As inflation soared after the pandemic, low-income households with debt were trapped. Low interest rates have widened the gap between rich and poor; Interest rate increases widened the gap even further. Central banks should have set limits on interest rates that were neither too high nor too low. But reducing inequality was never within the walls of Martin Place.

The pandemic opened the fault lines in the economy. The K economy has multiple fault lines. Older households have benefited from increases in house prices, pension fund gains and lower mortgage costs.

U.S. Federal Reserve data shows households 75 and older now own wealth 55% above national averageWhile there was only a 5% increase in the early 1980s, young households face many obstacles, including high house prices, high rents and student debt. They are dependent on the intergenerational transfer of wealth, that is, if they have access to it. No wonder the younger generation feels disconnected.

When people hear the numbers that GDP rose 4% last quarter and inflation was 3%, that has little impact on the lower branch of the K-shaped economy. They know they’re stuck.

Joanne HsuDirector of Consumer Research at the University of Michigan, put it this way:

“The economy is not monolithic. The population is not monolithic. Some people may be thriving at the same time that other people are struggling.”

Indeed they are.

Artificial intelligence is powering the K-shaped economy. While the technology, e-commerce and financial services industries have adapted to the challenges brought by artificial intelligence, travel, hospitality and retail have not. AI cannot replace non-repetitive business work; so plumbers and electricians can be safe. We should all hope the politicians aren’t like that.

Artificial intelligence has the same effect as low interest rates. Stock indices are at record highs due to AI stocks. The value of the US stock market increased more than twice reached US$75 trillion (AU$107 trillion) in the last decade; This represents two and a half times the annual output of the US economy.

The AI bubble is like other price bubbles, created by the irrational enthusiasm of investors who often price in expected or imaginary gains that last for years to come but may not materialize. AI-related stocks accounted for half of the rally S&P 500 It increased household wealth by 7% this year for U.S. consumers, but almost entirely for high-income Americans. Artificial intelligence has come to mean artificial inequality.

If the AI bubble bursts, the effects on the real economy could be devastating. It is estimated that at current valuations, a 30% decline in the US stock market could lead to a decrease in consumer spending of approximately $700 billion. The stock market now benefits from AI so much that even marginal changes in AI valuations can lead to major declines in the stock market.

Economics is a gloomy science, but does it have to be this bleak? The K-shaped economy is the result of greed, but it is also the result of policymaking that allows greed to be rewarded and unregulated. Unregulated greed has subverted the interests of all of us.