This week on Facing the Future, Dr. Kent Smetters, Faculty Director of the Penn-Wharton Budget Model (PWBM) discussed a new report on the potential economic and budgetary impact of artificial intelligence (AI). He also described an illustrative package of tax and spending reforms to reduce future budget deficits and grow the economy.
“AI is going to have an impact, but it’s going to differ a lot by sector,” Smetters said. He noted that office administrative support occupations, business financial operations, and the like are “going to be greatly exposed to AI. Up to three-quarters of their work is going to be replaceable, essentially, by AI. So let’s call it 40 percent of the economy. That sounds like a lot, for sure, but that doesn’t mean that 40 percent of all wages being paid are going to be replaced by AI.”
“A lot of times,” he noted, “these are higher paid jobs, like computer or math occupations, where it’s estimated about 63 percent of those tasks can be replaced by AI, whereas building and grounds and cleaning maintenance operations, that’s the lowest.”
Smetters estimates that, “For the type of AI that is very prevalent right now, it’s going to increase productivity and GDP by about 1.5 percent by 2035, by nearly 3 percent in 2055, and a little less than 4 percent by 2075.”
The PWBM paper also makes a very preliminary projection of AI’s impact on the federal budget. According to Smetters, “Our first pass at this is that the AI dividend on the federal budget will be about $400 billion over 10 years,” which he noted would be “much much smaller” than some commentators have speculated. The notion that AI would, by itself, solve the federal budget’s problems is “just completely wrong” in Smetters’ view.
Looking ahead, Smetters noted that bond markets are already pricing in higher interest rates for U.S. government securities because of the large national debt.
“People say, ‘well, interest rates aren’t crazy today.’ No. They’re not taking into account that we have this enormous capital glut right. We actually have higher interest rates, probably a couple hundred basis points (2 percent) higher, than they would otherwise have been without federal deficits. So, it’s not like our interest rates are low. They should be much lower than they are, and they would be, and mortgage rates would be a lot lower, if we had our federal deficits under control,” Smetters estimates.
“The biggest worry,” he said “is where bond markets stop believing that the government’s going to repay in real purchasing power terms; that instead, the debt’s going to get repaid with monetization. It’s that bank run problem that exists with bond markets. That’s the scary part. And when that happens, it’s not like you can say, ‘Oh, okay we’ll do something about it now.’ What you have to do at that point is much more painful than solving the problem today.”
Smetters said that in the PWBM solutions paper, “We don’t advocate for anything. We’re just simply trying to show the possibilities.” The paper contains 13 major spending and tax reforms.
“We could analyze each one of those separately and just add up the results,” Smetters explained, “but that would be incredibly misleading because when you change incentives to work and so forth, it just doesn’t change federal income taxes it also changes Social Security and vice versa. All these things had to be solved together. It’s a combination of a lot of tax reforms early on, so we get some more revenue. But then later on, we get some more spending controls. That includes, for example, the retirement ages and Medicare and Social Security. We don’t have to increase them immediately, but at least a couple decades from now, they should continue to grow.”
Over the next 30 years, Smetters estimated that taken together the reforms would “reduce federal budget deficits by almost 40 percent, grow the capital stock by 31 percent, wages by almost 7 percent, and reduce healthcare premiums by 27 percent. It just shows that there are possibilities here for really taming the budget deficit while actually growing the economy, not killing the economy, and actually reducing poverty, not increasing it.”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
