Basil Halperin

“The particular scenario under consideration is this idea of transformative AI that is a very radical scenario, really, like, on the league of the move from pre industrial revolution to post industrial revolution. Sort of a a 10 x speed up in GDP growth is the benchmark that we sort of have in mind very roughly. The thirty year real interest rate I was just looking this morning is 2.75%, which is immediately the highest it's been in twenty or twenty five years, but not not out of the range of historical norms, not anything like what you would see if markets were really believing what the people in San Francisco believed in terms of how soon we're gonna have really transformative changes.”

“The other takeaway, I think, as as you hinted at, is that doing macroeconomics in words is hard. I'm not sure that anyone, maybe Milton Friedman, can do macroeconomic intuition in their head in general equilibrium. You need math to really discipline you to ensure that your stories add up, that things come together. Like this story that we would run out of spending in the economy because no one would be earning labor income. I'm not and I I wasn't convinced that held together. The income has to go somewhere.”

“They say one of two things is gonna happen due to AI, and it's all gonna happen very soon. Number one, we're gonna have really fast economic growth. We're gonna live in untold prosperity, or AI is going to quite literally kill us all and and the human species. So interest rates are interesting in that light because both of those scenarios push interest rates up. That's in contrast to things like stocks where if we're all dead, stocks are not very valuable.”

“This calvo friction, the way it models price stickiness is it thinks of firm owners wake up every day, and they have some random chance, some exogenous chance that they're not allowed to change their prices. So this is mathematically convenient, kind of analytically beautiful, but I think almost is prima facie unsatisfying. It's not explaining why prices are sticky. It's assuming that prices are sticky. So this is the first theoretical critique, and there's a related empirical critique that this calvo friction doesn't match key features of the data, in particular, the state dependence that we see in pricing.”

“Say, you know, you have Davidville. There's a 100 firms in town, and firm number one becomes more productive. We know that for microeconomic reasons, if the firm's more productive and can produce things more cheaply, it should be lowering its relative price. If you're the the chair of the Central Bank of David Bell, if you're aiming for a stable price level, stable inflation, then to simultaneously have that one firm lower its relative price and the average level of prices, the price level, in the economy to be stable, you need that simultaneously. That one shocked firm lowers its nominal price, and the other 99 firms raise their nominal price. But that means that every one of those 100 firms is forced to pay this wasteful menu cost of adjustment.”

“The way I think about this is that NGDP targeting or something like like it is, like, eclectically optimal. It's it's from an eclectic set of perspectives, it's optimal, which to my theorist brain who spends all day pushing Greek letters around a whiteboard, like, that's that's not totally satisfying because all these frictions point to slightly different optimal policies. But you know, if Jay Powell or Christine Lagarde wants to come to research economists during a framework review or strategic review and ask, like, what is the academic baseline optimal policy? I I I kind of do think that the literature in the last twenty years or so has kind of come to this perspective that across this eclectic range of perspectives, nominal income targeting is is kind of what's pointed to being optimal.”

“I actually kind of think that oil shocks are kind of unique and should be studied separately in that energy prices are very flexible. So there there there's not so much menu costs on changing a lot of energy related prices because these things fluctuate so much. So instead, there's alternative perspectives like Aoki 2,003 is this great paper that's known but still underrated, I think, where he points out that if you have one good in the economy like energy that has flexible prices while everything else in the world is sticky, then you should just sort of, as a monetary policymaker, forget about that flexible good.”

“Right now, The US has, I don't even know, 90% debt to GDP ratio. That's 90% debt to the current level of GDP. So if we start having really fast technological growth, that makes it much easier to pay off that existing stock of debt. And then on top of that, the two competing forces that you mentioned, faster growth means higher tax revenue, but faster growth in general equilibrium means higher interest rates, that is higher rates on new debt. The best microeconomic estimates to my read find that this critical elasticity of intertemporal substitution parameter is less than one, and in fact, our best estimates are like point seven. That would mean that interest rates rise by more than growth goes up. And that would mean that it's harder to finance government debt in response to an acceleration in growth.”

“If we had developed advanced robotics today, I would certainly be interested to get a robot in my home to do the dishes, fold the laundry. But if you if you live in a country where labor is very cheap, you might be less excited, less willing to pay for an advanced robot. So for that and other reasons, you could imagine higher growth in, like, The United States, but not such a large acceleration in growth in, say, emerging market economies. But global capital markets are integrated. So if interest rates in The US go up, interest rates in other countries are also going to go up. You could imagine AI causing sovereign debt crisis for countries that don't benefit as much from AI.”

“But then a third factor is that another asset price that AI could affect is the price of land, not not housing per se, but but land, where, you know, you could imagine ending up back in a kind of Malthusian world where natural resources are the only thing scarce in the world of abundance because we can't produce more land, at least until we think about colonizing the stars and so forth. And that could push up the price of land, making housing more expensive through that channel in particular.”