This is starting to feel like aggregate overheating. That the AI data center cost increases are jumping out of its lane. That prices are going up in spaces that are not just components in data centers. That's problematic.
Welcome back to another episode of Compound Interest from Semaphore Business. I'm Liz Hoffman, Semaphore's business and finance editor, and I'll be joined in just a minute by my colleague. Central banks are easier to talk about in metaphor. They're spiking the economic punch bowl or taking it away when we all get too drunk. They're bellows putting oxygen on the fire or a damper putting it out. Part of that is because literally no one understands monetary policy, and part of that is because so much of it happens outside of view, behind the curtain at the Fed, which is only peeled back much later as records are released, or diffused out through market channels that can be tough to untangle.
Our guest today is Austan Goolsbee, a central banker who happens to be a champion talker, literally. He won a high school contest for extemporaneous speaking. He's the president of the Chicago Fed and will be a member of the committee that sets interest rates starting in 2027. He's generally been a dovish voice arguing for more booze in the punch bowl, to use that analogy, but has sounded cautious lately, warning that the economy is at risk of overheating. We want to talk to him about where the economy is now, what would justify another rate hike when the Fed meets in a few weeks.
We'll talk about the inflationary pressures of AI and the deflationary promise of a world of AI abundance, and whether it's a problem, strictly speaking, for the Fed if the robots do all the jobs. We're not going to talk about Fed independence. It's important. Austan is on the record saying it's important. And Kevin Warsh, the new Fed chair, voted last month with all of his colleagues to raise interest rates, even though President Trump wants them lower, which suggests that he knows it's important, too. We want to use our time with Austan to unpack the big questions hanging over the economy right now: whether the Fed's toolkit still works and why we should trust it to solve big problems. We'll be right back with Austan Goolsbee.
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Austan Goolsbee, welcome to the show.
You are a great communicator in a world of wonks. Literally a champion talker. Kevin Warsh wants the Fed to talk less and to force investors to look at the numbers and make their own decisions. What do you think?
I'm an old friend and fan of Chairman Warsh. I worked with him back in the financial crisis before he ever got there. You know, I've been uneasy with people expressing what we're now calling forward guidance. That is saying, 'Here's what I think will happen at the next meeting. Here's what I think four months from now the interest rate should change.' Most of the discussion about communication seems to have been about that, and I kind of agree we should phase out that kind of communication. I'm engaged in a demystification project about the Federal Reserve. Here's what we do. We're not the bad guys. We're the Guardians of the Galaxy. I'm going to stay on that for sure.
Getting to those numbers that you would all like the market to put more stock in and make their own decisions about, even if they were prepared to be weaned off the commentary, does the data that you're seeing right now lay out a clear picture?
I like how you phrase that. I would say no. Not a super clear picture because inflation is still way too high. I have been worrying publicly about the potential for supply shocks like tariffs, like oil prices, to shove us into a stagflationary kind of a trade-off. There is one sense in which it hasn't been ambiguous. It hasn't been stagflationary. The job market still looks very stable to me. Growth has been solid. Consumer spending solid. We're falling down on the inflation side of the mandate. But the ambiguity comes: is the inflation getting better on its own, as it might if a supply shock kind of worked through, or if you had a tariff that was just a one-time increase in the level of prices that should fade away? And it hasn't really been fading away. And you've seen inflation in services kicking up, and that's not really from tariffs, that's not really mostly from oil. So that's where you start to get the ambiguity, and it's not totally clear.
How much of that is AI, which obviously is driving a huge investment boom that's sending up the price of inputs, power, land, up, but at the same time there is, right, this deflationary promise that it'll make everything cheaper? How do you think about those two things?
This dynamic where there is great promise to come that is factored into massive stock market valuations and massive incentives for companies to engage in business investment, all of those things, the bigger the hype, the greater the chance that you overheat the economy in the short run. For the day job of the Fed, the more promise there is, the more temptation, the more tendency to spend today based on the promise of what is to come. And that you got to be careful about because that's just old-fashioned overheating right now.
What would a financial unwind of that trade, of the AI trade, actually look like from where you sit?
If it's a discovery that the fundamentals are not there and it's a bubble, we have had bubbles in US history in the past, including in the recent past, and their unwinds can get ugly depending how much leverage is associated with those bubbles. It could be more like the popping of the internet. Now, you're not old enough. You don't remember it. But if you back up, if you're older than dirt like me, you'll remember we had an experience with the internet where they were building out the infrastructure premised on growth rates of 20% per year. And when the growth rate came in, well, it's only going to be 7% per year. That's still a pretty strong growth rate, but they were massively overbuilt. And so we kind of had this overhang. That's slightly different than finding out the fundamentals are different. It's slightly different than just an old-fashioned bubble, in my view.
But Alan Greenspan, I think, said basically that the Fed cannot deflate a bubble in real time without making life miserable for everybody else. Do you think that's still true?
There is a very significant debate among economists about the question. Should the Fed try to prevent bubbles, pop bubbles, just clean up after the bubble pops? All of those things. Anybody citing the 1990s and Alan Greenspan, it's worth at least just going back to give yourself a refresher on the history because it's not nearly as straightforward as how a lot of people want to remember it. It is true that in the mid-'90s, Alan Greenspan identified that he thought productivity growth must be accelerating. But people didn't know that; it wasn't showing up in the data yet. When he said that, he concluded because he said, 'Look, growth is giant. Profit margins are really high, but inflation is not going up. It's very tame and is going down. So there must be productivity growth.' And he concluded we don't have to raise rates if we're getting this unexpected productivity growth.
But by the end of the '90s, you'll remember it then started showing up, the productivity growth, and the stock market valuations began soaring, and actually the FOMC began raising rates quite significantly in a short period of time. You might not attribute that to trying to pop a bubble, but there were certainly people at the time who said that's what popped the bubble was that they increased the rates. But the Fed's expression, if you go back and read the transcripts, they're just nervous that the economy is overheating, that inflation is starting to kick up, the unemployment rate is so low, and the business investment is so high that they didn't really feel like they could do anything other than raise the rates.
As you said, the Fed has two jobs: keeping inflation low and steady and maximizing employment. What does maximum employment even mean if we have 100 million robots, like Elon Musk says we'll have, doing all the jobs?
Oh geez. Look, these are some deep questions. I will say when I see the technology people, look, they're really good at their job, and what they want is to become economists.
Well, you make it look so fun.
Look, it is fun. I see why they want it. It strikes me that they don't realize that people have been saying this about technologies for hundreds of years. So many people have said it, we even have a name for it. It's called the lump of labor fallacy: that all labor is just a lump that cannot move, and as soon as the machines are better than this lump, then everyone will be out of a job. If you asked me to take the over-under on will the unemployment rate be 40% in 10 years, I'm taking the under.
In a way, I feel like the technology people make more draconian forecasts almost as a way of bragging about how good their technology is, you know? So it's like they want to use it as a proof point: my AI algorithm is so good it's going to replace everyone's job. It's not. It's going to change a bunch of jobs. But it's also worth remembering this happens all the time. If you go to the Bureau of Labor Statistics, the average person by age 50 has had 13 different jobs.
How confident are you in the future of being an economist?
That's about where I am on journalists.
You know, that is the sort of high end of the market, the academic side of the market.
But there was a McKinsey report a few weeks ago that predicted, and it's a consultancy, but still, that 16 million US workers, this is around 10% of the workforce, and that's primarily low-income workers, should be prepared at some point in the next few years to switch their jobs because of AI. And I'm curious what you think the right policy response is if that does come to happen.
I thought you were making some joke like, is the right policy response to a consultant report to hire a consulting firm to come look at it? No, probably not. That's probably not the outcome. Look, the speed at which new technologies displace skill sets of specific workers, as I say, matters a lot to how difficult it is to adjust to the new technologies. Now, that said, I liked how you phrased this McKinsey finding, that they'll have to find new skills, tasks, or something in their jobs. I'm going to be puzzled. I'm going to go look at it. A lot of the AI use cases that are trumpeted are knowledge-work kind of cases. They're not low-income work. They're not in the health care space.
For example, going in and taking care of people. They are high-level knowledge work, you know, reading radiology scans and things like that. So I could be wrong.
And I want to just re-highlight: by age 50, they're right now, these are in the data up to 50-year-olds now, so before there ever was AI, 13 jobs people have had. They're constantly thinking, where is there demand in the marketplace, where can I build a good career, and they're moving from thing to thing. So they're probably right that AI, like computers before it, like a bunch of other technologies before it, and going back farther, introducing radio, introducing telephones, introducing electricity, introducing a whole bunch of big general-purpose technologies, did change both the economy and the labor force, but in no way did it lead the unemployment rate to head to 100%.
Because it happened at a speed at which the new people coming out of school, they're going to try to figure out. They have every incentive to try to figure out what are the technologies not replacing. And that's the stuff that we want to focus on, you know, the messier jobs.
But we want people to have jobs because otherwise they couldn't buy things and the demand side of the economy would collapse. And there's some emotional reasons we like people to have jobs. It gives them a sense of purpose. It's what we do all day.
That was really right there. We want you to have a job, son.
But I guess I'm asking, what about a world where the economic benefits of labor get divorced from actually having a job, where we tax the AI, we send everyone a check, the demand side of the economy holds up just fine? Should the Fed care about that? Nobel laureate Robert Fogel or John Maynard Keynes each had a theory that as time goes by and we get more and more productive, we're going to work less and less. So if we came back in 30 years and people were working 10 hours a week at massively high productivity because they had all these robots supporting them, so their per-hour-of-work income was high enough to satisfy consumption, should the Fed care about that?
Only to the extent that they would. If you're going to maximize employment and what everybody interprets as employment is working 10 hours a week, then fine, you know, that's the world we would be in. We're not in that world right now. And I think with the unemployment rate barely above 4%, and that's for where the majority of people are working full-time, that is my conception of what the full-employment benchmark should be. And all of the rest is just speculation. So I'm not going to speculate about what the job market is going to be in 10 years, except to say for the people who say it's going to cease to exist, I kind of think you got like 500 years of history that say that's probably not true.
Now, maybe this is the difference from all the others, but I kind of also want the folks saying that the whatever laws of economics from the last 200 years of industrialized society do not apply, I kind of need them to acknowledge that in the last 10 to 15 years, this is like the fifth time that they're saying that. You know, like we had blockchain was going to revolutionize and change everything. NFTs were going to change everything.
You mean you're not living in the metaverse as we...
No, I'm not on the metaverse. I'm not riding a Segway everywhere. Remember the Segway was going to change cities. For 15 years, we've been hearing that within 3 years, self-driving cars would eliminate every single professional driver in the economy. And it may still happen, but it didn't happen in 3 years as they were predicting at that time. And I would just again point folks to the history of general-purpose technologies. It takes a long time for those to work their way through the economy. And if they don't happen in a two-year period, we adjust.
And I'm not making light of sectors who are directly impacted. If coders coming straight out of college are replaced or have to change what they're doing, it can be for sure a traumatic adjustment. And if you look at old people like me, you know, if you're in your 50s, 60s or beyond, can you keep up with the new technologies? That's again a dynamic that we have seen before in the US and around the world. It comes with transition costs, but it doesn't blow up the economy and it doesn't blow up the labor market. So if I had to bet again, like I say, I would take the under on what the unemployment rate is going to be in 10 years.
Let's forget about 10 years. Let's talk about today, which is, I know where you want to go. We've been in a sort of low-hiring, low-firing world for some time. Is that fine?
No, it is not fine. It's not fine. But there's nothing the Fed can do about it, or there's little the Fed can do about it. It's weird. And I like that you raised it. It's worth just taking a beat and emphasizing how odd such an environment is. If you have low hiring, you usually have high firing and the reverse. That's the business cycle. My explanation has been that's a thing that characterizes uncertainty. That in uncertainty a business would say, we're definitely not going to hire anybody new, but we're not going to get rid of these people either, because what if we got rid of them and then we resolved the uncertainty and now we're going to have to go out and try to hire them? I'm going to have to revise my view. I still think that's true. That does characterize uncertainty, but it can't be uncertain forever, you know? And that's why in your question, you said it's been going for a long time. If that goes for five years, then I kind of think I'm going to need a rethink of what wasn't uncertainty.
We're going to pause there for a moment. We'll be back with more from Austan right after this.
