San Francisco Fed President Mary Daly Talks AI, Economy | Bloomberg Talks

We don't know. I mean, that's the part that makes it hard is in productivity numbers, especially when they're happening in what I would think of as real time. It's very challenging to assess or draw it back to exactly what the factors are that have shaped it. You know, in fact, people still don't agree on what happened in the '90s all the time if you look at research. So, it's just something to keep in mind. So then what you do, what any good economist or person, any industry person would do is they'd say, well, what am I seeing? And so right now while we can't find it in the macro studies that would do very sophisticated empirical econometrics and ask the questions how much of this is AI, we still can see that there's something going on there. The question isn't is it happening, the question is how long will it persist. And so clearly something's happening in the economy. But if you make a series of one-time adjustments, so say you automate a production line or you use AI to help in loan application process, you save money once. You don't save money forever. And I mean, you keep saving that money, but you don't get growth out of that. You don't get productivity growth. You get one-time adjustments to the level of productivity of your employees or your process. So what we're looking for is a technology to give us consistently good changes in productivity so that all industries at scale get better. Industries figure out new ways to generate revenue, new ways to do product design, new ideas to come and shape the economy. That's the thing that has a sustained productivity growth part. So it's undeniable productivity growth has gone up. What's not as clear is how long will that last.

Absolutely.

It is absolutely possible and something we have to interrogate. I mean right now as you know too well, inflation's still above our target, our 2% target and price levels have been much higher for a long time and people are feeling stretched by the high inflation that they see. And now oftentimes people say, 'Well, now AI is going to hurt the labor market and so now I'm in double doom,' as people say. But I think ultimately the way many people think about AI is the investment part of any technology can actually boost demand for goods, services and people and can then raise the pressure on inflation. But then the productivity part comes and that can be, that's a disinflationary part. You can see this is all about the timing. And so what we end up investigating is not just the models but asking questions. Are the buildout of data centers raising prices for construction workers? Are the buildout of data centers raising prices for metals and other things that go into them? The raw materials. Are the productivity gains? And then on the other side of that, are the productivity gains already affecting the cost structure of firms? Do they see that? And even in a series of one-off adjustments can actually change the cost structure. And if you look at profit margins, when prices haven't been rising as rapidly as they once were, and firms are saying they don't have as much power to pass through, you would think that they're doing something to help margin protection. And so I think there's something going on here. Whether we want to link it all back to AI and then use that as a demonstrative proof that we're in a transformative state, I think that's a little bit too far, but certainly something's happening. And thinking about the productivity growth is exactly what we did back in the 1990s. We saw evidence firms were being more productive. We were interrogating how long that would last. And interestingly the 1990s when I said it was the roaring '90s that followed it was good growth but it was also a good labor market, a really strong labor market and so those two things went together because ultimately we had this conversation in the round table and one of the participants made a great point, it's true, economics is, this is how economics works is if an employee using AI gets much more productive you hire more of them, right, not fewer of them. So you know the economy grows faster, the product development goes faster and demand gets stronger.

Well, I think we have to separate what we're talking about into now, next, later. So, let's think about now. Right now, we have more demand than we have supply for energy, for electricity. Right? If you talk to, we regularly have CEO roundtables with the big power companies across the 12th district. You can look throughout the nation, demand for power is higher than the supply of power. And there's a lot of reasons why supply has fallen behind. One is demand's just gone up rapidly. But another part is that they've got an aging infrastructure. They have to get those things built out. It's a highly regulated industry, so the infrastructure doesn't just come on like a light switch. Then there were supply chain issues that made it hard to get the transformers and other things. So all of this just adds to the imbalance of demand versus supply. But the remedy for that isn't to take away demand, it's to increase supply. So when any CEO of a power company says we can solve this problem by adding more supply, absolutely. But that's a next and later. And so what you said, my constituents, what consumers and businesses are saying is I'm worried my electricity prices are going to rise and they've already been going up and the CEOs of power companies are saying but if we just keep building that will go down and both are true.

You know it's hard to say energy could be disinflationary if we get to a point where supply is greater than demand. Right now I'm just looking for supply to equal demand and that would be a big benefit to consumers because it would mean that we wouldn't keep seeing inflationary pressure coming out of the energy sector.

So one of the things that is true is that the labor market has slowed but it's slowed for a whole variety of reasons and much like when you said well productivity has risen Mary so shouldn't we, isn't that AI, I think we always want to be a little humble about the correlations we see and ascribing causality to them. So I wanted to temper your enthusiasm for thinking all the productivity growth is AI, might be but it could just be general cost management in a slowing economy or to manage tariff costs etc. So on the labor market the labor market is slowing it's slowing in industries that are directly telling us that they're using AI and it's slowing in industries that aren't. So it's one of the things that I just want to be cautious. So what I talk to, we talk to workers, we talk to communities all the time. What's true is in technologies is a really interesting thing. No technology ever reduces net employment. Not in the history of technologies, but it does change what that employment looks like. And so there's a period of replacement. Right now it's replacement of tasks. So if your job has certain tasks in it, AI can do those for you. And the next part is augmentation. So you have replace, augment, and create. What's interesting about AI is that unlike say electricity when the candle lighters or the lamp lighters or the candle makers got displaced before the US completely became electrified, this is going more quickly. If you go to a firm, I was on a panel at the Reagan National Library Economic Forum with Patrick Collison from Stripe. And interestingly he said I am hiring more coders than I'm laying off but I am laying off coders whose technology skills didn't advance or they weren't the right workers and you're seeing this right, you're seeing businesses reskill themselves to meet the AI moment and that's going to cause worker anxiety and right now worker anxiety is high, we're in a low firing low hiring environment that's already going to make people feel vulnerable. If you haven't found a job and you're newly minted out of college, you just think, I was supposed to get a job before I graduated. Now I still don't have one. That's very worrisome to people. And then if you're thinking, well, I might lose my job, but I don't know how long it will take to get another one. Then you're worried about that. So, I think it's natural for the sentiment to feel nervous, but it's not the same thing as AI is taking all the jobs because what we're really seeing is AI is replacing tasks, augmenting workers. When we talk to firms, most of those firms are saying, 'I'm augmenting my workforce.' If you're in big manufacturing firms, they don't have enough workers that do skilled labor. And so, they're looking to augment their workforce. And then, we're also seeing jobs created. It's interesting. I gave this talk in 2023 and I used prompt engineers as the jobs they were creating but those jobs are now being replaced and so you're, but AI...

It's a warning you could think of it that way or it's an indicator. So let's take the warning, the warning is you can't keep up. I would say let's use it as an indicator. It's an indicator that the technology is evolving really fast and workforces need to skill in durable skills and durable skills are be AI ready, be able to use AI to lift yourself. In the educational space, use the technologies that are out there to build your skills up because you can learn a lot fast if you train yourself to look at AI say give me a lesson on how to write, I've been thinking about this, how to write a smart contract from end to end and what sort of software would I need? How would I do it? What would the code look like? How would I test the code? How would I know it's right before I execute on this smart contract? And so you can do these things in an evening and then it's just about being able to do that. So I think that's the message for workers and I would have taught my young self this same thing is if you put off technology because you're afraid of it then you won't be in the first place of trying to use the technology to further your own abilities.

Well, you know, we don't right now use AI in our monetary policy work, but we do use it in research. As researchers, if you go to any academic institution, you're going to see researchers using AI to see what they can do better on coding and other things, but also data analytics. What do you see? The place we are there is AI doesn't give you answers to problems. It helps you get to the discovery perspective. So if I use AI as a researcher to look at a bunch of data, I still have to test my hypothesis. I have to go in with a hypothesis. What am I trying to answer? So that's the human person. And so that's why it's not particularly well tooled right now to replace our forecasters and our thinkers, our scholars who think.