👴👵🤖 Humanity’s Great Fight for the Future: Demographics vs. AI
There could be an economic tug-of-war between AI-led productivity gains and the budget impacts of retirees and falling population growth
Quote of the Issue
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The Conservative Futurist: How To Create the Sci-Fi World We Were Promised
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The Essay
👴👵🤖 Humanity’s Great Fight for the Future: Demographics vs. AI
The year 2040 sounds, at least to my ears, like a time in the distant future. Just think about the science fiction that takes place around then:
I, Robot (2035)
The Martian (2035)
Looper (2044)
Ready Player One (2044)
Event Horizon (2047)
Blade Runner 2049 (2049)
Of course, 2040 really isn’t that far away. I mean, 16 years in the past only brings us back to 2008. To me, the Global Financial Crisis and Great Recession still seem pretty fresh.
Still, a lot can happen in a decade and half. And while that’s always true, it may be especially true now, given the factors highlighted in the analysis “Megatrends and the U.S. economy, 1890-2040” by two researchers from investment giant Vanguard, Joseph H. Davis, the company’s global chief economist, and investment strategist Lukas Brandl-Cheng.
What is the outlook for the U.S. economy and financial markets over the next decade? Will we have a future of a few productive workers due to AI, or too-few workers due to a demographic drag and the retirement of the Baby Boom? Will an aging society, rising fiscal deficits, and a stalling in globalization lead to a higher inflation world? What are the macro effects if AI is as transformative as electricity, or is as marginal as social media? Answering these important questions hinges on the joint evolution and interaction of important, supply-side factors such as the rate of innovation, the complementarity between human labor and technology, demographic patterns, debt levels, and their contributions to economic growth, inflation, and interest rates. Collectively, we refer to these supply-side factors as megatrends.
What the Vanguard researchers attempt to do is analyze what impact five key megatrends — technology, demographics, fiscal deficits, globalization, and energy transitions — have had on U.S. real GDP growth, inflation, interest rates, and the stock market over the past 130 years. To do this, they assembled a new historical dataset on those various factors and then built an economic model that attempts to simulate unique effects of key technological innovations, policy changes, and other "shocks.” From there, they predict a range of likely future scenarios, boiling things down to this: “an emerging horserace between (a) productivity boosted by AI and other technologies, and (b) worsening structural (budget) deficits driven by an aging society.”
In short, a tug of war between AI-led productivity gains and the budget impacts of retirees. Let’s start with their Demographics Dominate scenario: An aging US population and retiring Baby Boomers constrain growth. AI-driven automation fails to deliver anticipated productivity improvements, especially in services. This slows economic growth below the real financing costs needed to fund future entitlements. (“Loosely speaking, too-little automation from AI fails to fund future age-related spending commitments.”) Deficits subsequently worsen from rising age-related spending without offsets like tax hikes or spending reform. As persistent deficits exceed domestic saving and foreign capital inflows, real borrowing costs increase, quickening inflation expectations as investors fear that will be how Washington gets out of its fiscal mess.
Then there’s the Productivity Surges scenario:
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