An AI Boom does not equal a Productivity Boom!

US Labor Productivity has turned NEGATIVE, and history does not suggest AI will lead to a structural increase. Hence, it will not solve the growing global debt issue.

If you frequently hang out on X or LinkedIn like me, you will have come across these annoying posts with texts like ‘If you are not using AI, you are left behind’ or ‘My boss thinks I’m an AI genius, but I’m not it’s because …’, followed by some Substack or website link. That’s just cheap advertising. Moreover, there’s a good chance that the people behind these posts overestimate the productivity impulse of Artificial Intelligence.

Productivity Spikes are only Temporary

Before this post takes on a life of its own, I do believe in the added value of Artificial Intelligence. I have several subscriptions, including ChatGPT Plus, which help me enrich my work. However, this is different from assuming that potential GDP growth will surge in the coming decades through the integration of AI.

And the data is pretty clear on this. The chart below shows US labor productivity growth – the growth in the output produced with one unit of labor – since 1950. I use a 3-year moving average to avoid being distracted by the volatility of quarterly data, which is unmistakably high.

We are LESS productive

What immediately stands out is that labor productivity in the US has declined over the past three years! So, even if AI will contribute to an increase in labor productivity, it has to come from very depressed levels.

We saw something similar between 1996 and 2000 when tech pundits ‘promised’ a massive structural acceleration of productivity growth driven by the Internet. But although the productivity growth was above average for a few years, this was also from a low level, and it also proved cyclical instead of structural.

AI Fixes This, Right?

Productivity growth moves in long waves, and if I would draw a best-fit line through those waves, the trend would be downward. Historically, there is little evidence to expect structurally higher productivity growth based on technological breakthroughs.

Debt Issue

And that brings me to one of my other ‘showpieces,’ debt. The most effective and orthodox way to reduce the quickly spreading towering debt ratios across the globe is either painful austerity (or raising taxes) or structurally increasing GDP growth. But with an aging population, deglobalization, and historically low productivity growth, the latter will be difficult, if not impossible, to achieve. By the way, given the increasing polarization of politics, I also have little faith that austerity will get us out of the massive piles of debt.

Therefore, central bankers, policymakers, and economists will look for other, ‘more convenient’ ways to try to ensure debt sustainability. How about low interest rates and higher inflation? I wrote about that earlier and will do so in the future.

Until next time!

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