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This is Wall Street Week. I'm David Western, bringing you stories of capitalism, the wine industry, brace us for another round of tariffs on imports to the United States, Why being a domestic producer won't necessarily help, and artificial intelligence could change the fundamentals of our economy and give central banks new tools to monitor and manage it. Plus the growing business of wellness wearables and whether they really can
help us live longer, healthier lives. But we start with the profound changes President Trump is bringing or promising to bring to us all from the one big, beautiful bill to more tariffs. He says, our only day, we welcome back our special contributor Larry Summers to tell us what is likely to have long lasting effects.
David, it has to be recognized that it's a big legislative accomplishment. It's a larger bill passed sooner than other presidents have achieved. But I don't think it's going to take the country in the right direction. I think it's going to grow our budget deficits in the future very substantially.
And you're already seeing some market reaction to that. And I think that what it does to our social safety net is really going to be devastating relative to the path the country would have been on if you look at cutbacks.
In the social safety net.
There were cutbacks in the welfare reform bill that was passed during Bill Clinton's presidency. There were cutbacks made by
President Reagan and his original tax and budget legislation. This is the largest cutback in the social safety net that anybody has been able to find, and it's coming at a time when we appear to be on our trajectory to massive cutbacks in spending on scientific research, massive cutbacks in support for the arts and humanities, maximum cutbacks in support for foreign assistance programs, including ones on which large numbers of Aige patients in Africa are dependent for their
life saving medicines. So this is legislation that, to my mind, both compromises our capacity to defend ourselves as a country because of all of the debt, and frankly compromises what makes our country worth defending in terms of being a humane force in terms of the world, in terms of our sense of national community and protecting everybody, in terms of some of our greatest contributions to humanity in both the sciences and the arts, and so I think this
is a very troubling piece of legislation in ways that go beyond the problematic immediate economics.
This one big, beautiful bill is one part of a more sweeping plan that President Trump has for I think it's fair to say really redoing the American economy. And yet we don't see much reaction yet from the economy in the numbers. And I'll give you an example in the tariffs. A lot of talk about tariffs, a lot of fear about tariffs, and yet if you look at the CPI numbers, the PPI numbers are coming out, they don't indicate the inflation that most economists predicted.
I think it's early days.
It may be that there are a set of other developments going on through artificial intelligence, through technology that are exerting a deflationary force. It may be that people, given all the huge uncertainties about tariffs, are waiting to see how it shakes out before they establish their new price structures. It may be that for a time it's possible for the people in the middle to eat the tariff increases
in order to try to get market share. I agree, I agree with you, David, I would have expected more inflation, and what you have always have to do as an economist is watch the data and be prepared to change your mind. But for now, I think that I wouldn't want to rush to a judgment that these tariffs are innocuous for inflation. I think the more likely thing is that they're going to be somewhat more delayed.
In their impact.
Certainly, there have been many careful studies that compared the sectors that were tarifted and the sectors that were not tariffed during the president's first term and found the tariffs did translate into higher prices. So I would rather wait and see on this. I think that's the approach that the Felleral Reserve is taking, and I think, frankly that is the right approach.
I mean, we've really seen a move up in the thirty year yield. We're above five percent relatively constantly. Now there are some who are concerned about exactly what that's telling us about inflation expectations and term premium.
David. You know, I look at the.
Ten year market relative to the twenty year or thirty year market as a sign of where the markets see very long term rates going over the very long term what market participants call the forward rate, and we now have forward rates on regular bonds that are well above five percent, and forward rates on tips on bonds linked to inflation that are well above three percent. And those are ominous indicators about our nation's credibility over the medium term.
They're ominous indicators with respect to the government's ability.
To issue long term debt.
They're ominous indicators with respect to the deficit because if you look at the projections people quote from the Congressional Budget Office from other places, they're building in much lower interest rate assumptions. So I think if you look at what's happened to bond markets, if you look at what's happened to the dollar, you have to view our nation's fiscal situation with considerable trepidation and concern.
While the government grapples with all that debt it's taking on, consumers and small businesses have their own responses to Trump administration policies, as Bank of America Chairman and CEO Brian moynihan explained.
So if you look on the consumer side, and our seventy million consumers who engage with the economy every day and through their accounts and in their it's spend the cash and everything about four trillion, five trillion dollars a year. That grew up four percent plus the second quarter twenty
five or the second course of twenty four. So they because they're employed and because wage growth, and that's not every single consumer, it's but in the large, in the main, they are continuing to grow and spend more and that helps the economy. And so you're seeing in some of the moderate income households there's a little bit of cheff
moving around to different things. You're seeing people trade from wanting another less planes, more cruises earlier, that's leveling out now, a lot more going to movies because the movies are good. But the end of the day, they're spending discretion necessary about the same percentage they traditionally spent. They've got money in the accounts, they're employed, and the wage growth has been relatively strong, and you know, so they're pretty good shape.
The credit quality is good. They have equity in their homes, they're rate financing the mortgage, so consert is pretty good. When you go to small businesses, that's more of the question small medium sized businesses, because is the interest rate environment hits them harder because they borrow on lines of credit short term for a lot of their activities, and
that rate went up substantially. And anythink about the if I'm one hundred million dollar company, a fifty million dollar company here in North Carolina, and I'm engaging in the world finance, I'm importing goods and manufacturing them, further manufacturing, I'm selling them. You know, it got pretty interesting here trying to figure out all the trade and terriffs. So I think the certainly on the tax rate helps them, meaning the big beautiful bill passing and the tax rate,
that's a very good thing. The alternative would have not been good if their tax rates would change. A satisfactory resolution to the trade so that they could learn the rules of the road over the next thirty sixty ninety days and get their plans for next year put together. And I think ultimately they're going We've got the satisfactory
resolution on immigration and population growth. Because the end the day, when I'm hearing more from the construction companies, farming companies, and travel entertainment type companies, is I'm starting to worry about I'm starting to struggle with labor availability and that's that we got to make sure they have the workers because they will supply great service economy continue to grow up.
Next, we've been hearing about those tariffs coming our way since President Trump returned to office, But where will it really affect us in our daily lives? It turns out that those of us who drink wine could be on the front lines.
Where you going to find champagne? Where are you going to find shout enough to pop? Where you're going to find kyanti? You're not going to find it in Oregon or California.
This is a story about bottled poetry. That's what Robert Lewis Stevenson called wine, and it's something that many of us enjoy regularly, but also something that may be a good deal harder to get a hold of if President Trump follows through with the tariff threats he's made against the European Union.
We've been taking advantage for many, many years by god.
Be's vote quote friend in voe, and frankly, the friends have been worse than the bos in renegages.
A new deadline and a new threat. The US could impose a thirty percent tariff on imported wine from the European Union if no deal is struck by August first, we have worked.
And now are ready to respond with countermeasures.
It's been a mess.
In New York, importer Victor Schwartz has spent nearly forty years supplying restaurants and wine shops with hand picked bottles from small European vineyards. Now tariffs threaten to upend the business.
That was ten percent, and they threatened fifty percent.
How different is the effect on your business of a twenty versus a ten.
I mean, in our industry, end of the day, we might make five percent as a net profit, five to ten percent, So obviously we can't afford ten percent. We can't afford twenty percent. But twenty percent is really egregious. Twenty percent, I mean, think about what that does. God, you know it makes a twenty dollars wine, you know, twenty five dollars basically, because you know, there's kind of a multiplier effect as it goes through the system. You know,
it's it's a much bigger impact. And don't forget when when we raise a price, it's not as if the consumer just accepts it.
Where do American customers for wine go if they decide the price is too high. I'm not going to buy that.
Where you're going to find champagne, where you're going to find shot enough to pop, where you're gonna find Kyanti, You're not going to find it in Oregon or California. A Finger Lakes wine, let's just be clear, is nothing like a Napa Valley wine, nothing like a wine from southern Italy or northern Italy or the center of Spain, et cetera. My gist is is that these products are so connected to their place, and that's what's wonderful and
interesting about wine. Otherwise, to be the wine company of the world and it will come out of a spigot, red white rose and sparkling done right. But that's not why we love wine.
And Americans do love their wine. In twenty twenty three, we consumed just under nine hundred million gallons of it, more than any other country in the world, with a value of over one hundred and seven billion dollars. More than a third of that is shipped in from abroad, making tariffs a real issue for importers, but those in the business say it's not just the imports that will be hit, it's the entire wine ecosystem. Quartan Ben Anif
is president of the US Wine Trade Alliance. He has a shop in Tribeca that sells fine wine, which typically goes for over twenty dollars per bottle.
Distributors and importers, even those by the way, that represent US domestic wines about seventy five percent of their revenue comes from wine. So that's one of the really interesting things about this on the tariffront, all of the major domestic wine producing organizations, from Wine Institute to NAPA Valley mint Ners to Wine America, they're all against tariffs on
imported wine because they understand their domestic growers. Their producers rely on healthy wine distributors for access to market.
Put another way, because state laws prevent domestic vineyards from supplying restaurants and wine shops, they need distributors, and the distributors rely critically on selling imports alongside their domestic wines. That's why those who import fine wines like Victor Schwartz, and those who sell it to US like Ben Anniff, have no doubt that tariffs will cripple their business selling
both foreign and domestic wines. But there's another part of the business, the value wine business, where a bottle or its equivalent typically costs less than a LIE, and producers for this segment, like Stuart Spencer in California's Central Valley, say they need protection from multinational companies bringing in cheap, subsidized imports that force American growers out of business.
There is a lot of what we call bulk wine coming in in these big twenty foot bladder containers, and it is this bulk wine that is really undercut in California grapegrowers.
There's a lot of talk about the difference between free trade and fair trade. From your experience as a grower, but also from your dealing with Lodi, there are unfairnesses in some of the exports to the United States.
I mean it's a completely unfair market. I mean we are competing in a global marketplace. The European Union spends you know, over two billion year between EU money and member state money propping up their wine sector. They are not only paying growers to inventnors to distill access wine and buy it up, but they're also paying them to plant new vineyards. And they spend hundreds of millions of dollars in market promotion all around the world. And the
US is the number one target market. They also have trade barriers, so it gets really complex when you get in the weeds. But we are not playing on a level field.
Last year, California wineries, which make nearly ninety percent of US wine, we're stuck with more than five hundred thousand excess tons of grapes. Now seventy seven million gallons of wine are sitting in storage tanks.
And you can still see some of the grapes on the vines. We have thousands of acres of grapes that are being torn out right now, and we have small farms and family businesses that are up for sale because there's just not a prospect for them moving forward. My family's been in this for fifty years, and I talked to old timers that been in it for multi generations, and they've never seen it as challenging as we are.
Now.
Seventy percent of all wine sales in this country is controlled by about a handful of five to six large multinational companies. They're bringing wine in bulk, blending it in with California wine up to twenty five percent and calling American appellation it's a federal loophole. We have, you know, millions of gallons filled up in tanks right now in
California that don't have a home. But simultaneously, twenty four million gallons of bulk wine is poured into California, coming in at super low prices and undercutting the California grapegrower.
Are you in favor of the tariffs the President Trump is talking about.
Well, I think if I was to speak to our seven hundred grape growers that I represent, I think many of them would support the tariffs to help level the playing field. And I think what we would really hope is that would bring these other trading partners to the table to negotiate fair trade. The challenge we see with what's going on with a lot of the trade negotiations now is wine is just upon in a larger story
and the issues are about bigger issues. But I think none of us, you know, want to see tariffs in place permanently. I think what we really want to see is really free and fair trade.
Some domestic producers kicking californ or complain about unfairness from Europe because there are subsidies given to vineyards over in Europe. Are tariff's an effective way to deal with that problem?
I feel really, really really bad for those guys. But a tariff is not going to solve their problem. Farmers that grow grapes to sell until, for instance, grocery store boxed wine, and that's terrific for them. It's a great product for certain customers. The demand for those products is collapsing. You know, people aren't buying bulk wine the way they used to.
Whether tariffs could give some relief to bulk wine producers or not, they certainly would have unintended effects on the American economy overall. You have spent some of your time down in Washington trying to explain to lawmakers policymakers exactly what this would mean for the wine business. What would you want them to understand that maybe they don't understand right now about the business and the effects of tariffs.
The United States has been talking about their concerns with respect to a trade deficit. We import more European wines than we sell American wines Europe. But the reality is we have a huge economic surplus on the sale of European wines in the United States. You know, we import about five point three billion dollars worth of wine from the European Union into the United States. But American businesses make almost twenty three billion dollars from the sale of
those products, making a big margin on wine. For a restaurant, it is not a luxury, it is an absolute necessity for their very survival.
If in fact, tariff's do get imposed, what are the likely long term effects in the wine business?
Contraction? And then you know what that means. Contraction means American businesses closing and firing all their employees.
What about the uncertainty itself quite apart from the tariffs.
I mean, I'll tell you I had phone calls from you know, wine distributors who said, you know, my grandfather started this business. We were in terrific shape and growing and hiring in January, and now I might have to decide if I'm going to close the doors in two weeks. You know, when they're they're put into this position when their choice is either to pay a tariff that they cannot afford because these these are small businesses, or don't
bring in wine. Don't bring in the wine that represents seventy five percent of the revenue for your next three or six months. You know, we had restaurants from South Florida say, in the summertime, we need sancer and rose. That's what keeps our businesses alive. And there really is no substitute for these products.
And one of our favorite.
So in your wine store you have Bordeaux. If you can't get the Bordeaux, will the customer say that's okay, I'll take the cab.
The answer, flat lay is.
Now we talk about terror.
War.
It's a word that gets bandied about. It sounds fan and see it's forign, but it really well, it means terrowar land terror and it just means the place, right, it's just geography. Part of terrawar is the human element, the culture, the civilization, the people, the people who've been on this piece of land in southern Italy for multiple generations. They cook certain kinds of food, they make certain kinds
of wine that go with those foods. And it's very specific, right, I mean, don't you love to drink an Italian wine when you're having your spaghetti and meat sauce.
Schwartz is trying to hold off the administration as the lead plaintiff in a lawsuit challenging the tariffs. The US Court of International Trade ruled in his favor, but the appeals Court stayed the injunction to give itself time to hear the case. If the tariff's going to effect four European wines August one, how long will it take before we see it in our lives.
I think you'll start to see it pretty quickly. You know, the first tariffed wines only have only now started to come in, so distributors have still been selling through some wines that didn't have tariffs on them. You're gonna start seeing those prices come now. You're gonna start seeing a lot less choice. You know, there are importers and distributors that have halted all of their shipments because they're not sure they can afford to bring them in now. At
the same time, they have no substitutes for them. They're not buying more domestic wine, for instance, they can't afford to they need to sell these European wines in order to buy more American wine. In a nutshell, American businesses are incredibly good at selling European wine and they support huge numbers of jobs in the United States. So some of the most famous importers actually got into the business because they were in France or Italy during World War two,
said oh my god, I love this. This is what I do want to do with my life, and their classic American entrepreneurial success stories. As a matter of fact, many of the most famous European wines in the world. They're famous today because they were discovered by American wine and they were brought back. They tasted ten thousand wines, said these three are the best, and they were right. Funny story. One of the first guys to do that, by the way, was Thomas Jefferson. You know, he went
to Burgundy. He bought Mohersche and Mahrsokudor for he and George Washington. He bought Chateau de Kem for he and George Washington, and today those are still some of the greatest wines on the planet. He had a pretty good paltte, I think.
And now, ironically American's affinity for European wines, nurtured by the likes of George Washington and Thomas Jefferson, may be challenged by the most recent occupant of their high office and perhaps make it more difficult for us to enjoy that bottled poetry they discovered two hundred and fifty years ago in Fine French wines up next. From our wrists to our fingers, everyone seems to be wearing some device to monitor how healthy our habits are. We visit the
wonderful world of Whoop to see what's really possible. This is a story about the Fountain of Youth. Since long before Ponce de Leon supposedly got lost looking for it in the swamps of Florida in fifteen thirteen, humans have been on a quest for a longer and healthier life, leading to everything from exercise regimens to diet crazes to weight loss drugs. Now, as in everything else, big tech is in the game. But our elaborate wellness device is
really worth it? Or does the path longevity boil down to just a few fundamental principles.
Wearable technology and the sensors that we have today will continue to unlock new capabilities.
Eventually we will write a point where we can really monitor our processes and intervene early on before a disease could develop.
Something on your body. It starts to say a lot about who you are.
We think that wearables are a key to the MAHA agenda making America healthy again, and we are going to My vision is at every American and is wearing a wearable within four years.
Health and Human Services Secretary Robert F. Kennedy Junior's goal might seem ambitious, but the market for global wellness wearables is on the rise. Data firm IDC expects global revenues to grow from sixty three billion dollars last year to nearly seventy eight billion dollars by twenty twenty nine.
With wearable technology, you need to build something that's either cool or invisible.
We like to say.
Will Ahmed is the founder and CEO of Whoop, one of the major players in the wellness wearable field. As of its last funding round in twenty twenty one, it was valued at three point six billion dollars. Will first came up with the idea during his time as captain of Harvard's squash team.
Who builds wearable technology that's really designed to improve performance and health. The company was founded out of the Harvard Innovation Lab twelve years ago. We started with the world's best athletes, where we were really designing high performance technology to replace what at the time was a lot of medical technology. An electrocardiogram, a PSG machine, the gold standard for sleep, a chest strap, which measures heart rate during exercise.
This is the original prototype that was built in twenty twelve. Now it looks ridiculous in a million ways, but it could measure this thing called heart rate variability from the wrist, which was a breakthrough. We wanted to take these sophisticated but antiquated pieces of technology and put them in a much smaller form factor, and the business has really evolved quite beautifully from being a very high performance athletic product to now being a tool that many people are using to live longer.
While wellness wearables today are heavily focused on new technology that can measure heart health, it was more than one hundred years ago when the idea for the pedometer was first patented. Poehler raised the stakes in the eighties with the first wireless heart rate monitor, but it was fitbit in the early two thousands it took the industry mainstream. Today, the wellness wearables arena is crowded, attracting billions in investment and spawning new startups regularly.
Wearables today are nearly ubiquitous. I think, certainly when I go out and about, I do see people with an Apple watch, a whoop, an aura. We do see people wearing with various devices out in the world today.
Alex Morgan is a partner in Cosla Ventures, where he focuses on investment in emerging biotech, healthcare, and data science.
For many wearables, the competitive landscape is a challenge. We certainly saw in some of the first generation of activity based wearables that were many companies that were all measuring activity and heart rate and it was very hard to compete with a product that really didn't provide unique information and it was much more about brand and packaging and perhaps influencer And there are ways that you can win in a competitive landscape with better branding, better marketing, better
access to influencers. We tend to look for technology that is unique, often protectable with IP that offers unique benefit, and that is something that we particularly look for.
Samsung recently released the Galaxy Watch eight, offering new health tracking capabilities. In late twenty twenty four, Apple announced its latest smartwatch with advanced features like a sleep apnea detector. But not every company is successful. Amazon discontinued its Halo fitness band in twenty twenty three, underscoring the challenge of entering this market without a clear edge. With multiple devices to choose from. How does one brand set itself apart
from the pack? Wearables have become popular in various ways. How do you compare what's your market niche?
So we've designed the product to be worn very easily in whatever location you want. And what does that ultimately achieve, Well, it achieves a solution where you can be collecting this health data twenty four to seven and continuous data is ultimately what makes.
Our tool so successful.
You know, A real challenge I think with other products that came before Whoop is they would give you these sort of snapshots along the way. We collect an enormous amount of data on the human body, physiological data. It's really accurate. We've tuned the sensors to be really accurate. But what that also.
Means is we're not going to do a thousand other things.
Right, We're not a smart watch, we're not doing phone calls. You know, you're not going to call an uber with your Whoop. But at the end of the day, we don't spend that much time thinking about competition. Were just incredibly focused on how do we drive health outcomes?
So, how does a wearable company help drive health outcomes? For Whoop it's about differentiating itself through technology, using sophisticated biometric monitoring and data collection for more actionable health insights. Its most recent models are the Whoop five point zero and Whoop MG.
It's got a fourteen day battery life, it's got more accurate sensing. The Whoop MG has medical clearances, so it's able to do ECG monitoring, AFIB detection, blood pressure insights. So these are all really powerful innovations that frankly just didn't exist.
Whatever wearable technology is doing to measure or interact with an individual, the accelerating ability of a machine learning to improve the capability of that measurement or that intervention is only accelerating. We are translating to face where there are wearable technologies that aren't just providing insights but actually provide interventions.
They're actually therapeutic in some way, And I think that is going to accelerate the current adoption even more because I do think that most people, most customers, don't necessarily want insights. Most people want solutions to problems that they have, whether it's problems sleeping, problems with depression, concerns about wait wellness.
Wearables have certainly become popular, but are they a good business? And what takes a wearable from being nice to have to being a half to have.
When we evaluate a company, there's no single way we evaluate it. So sometimes we invest in unique technology. And that's actually the majority of my time trying to identify unique technology that is crossing over into being productizable and translatable into products that we believe will provide real value to customers in patients. And that's I think one of the first things we want to do, is this product or technology really able to help people in a potentially
powerful way. Another technology that I'm really excited about that's being used is a company called Flow Neuroscience.
So this is on.
The market in the UK and Europe. Over ten thousand people a month use it and it also uses a gentle electric stimulation to treat mild to modern depression and general anxiety disorder.
Numerous clinical trials.
Have shown benefit, so in some of the more recent clinical trials about sixteen percent improvement and remission and depressive symptoms compared to twenty percent in placebo. So the ideal startup for US is a technology that provides unique, powerful, patient and customer benefit in some way. They're able to say, here's an innovation in technology that is crossing over from basic science and research and moving into an opportunity to go out and help many people that have a particular
problem and able through that in a unique and special way. Certainly, there are are people using things like continuous glucose monitoring that you may not know that they're using, but if you ask someone with diabetes, that is probably how they may be managing it today if you're intolindependent diabetic. So I would say that it has crossed the chasm into being something that's speculative into being a product that's just part of the everyday lives for many Americans.
We're now in fifty markets. I think one of the biggest changes for Whoop in the last two years is going from being almost entirely a US business to being in global business that obviously introduces new challenges, but also enormous growth. And so we've seen the business growing considerably in the last twelve months, seventy percent year over year growth, which is really exciting.
We don't have the data yet to show that wearables like whoop will actually make us healthier, much less, live longer, and some believe the path to the fountain of youth ultimately means doing the things our mothers have taught us through the generations.
The secret of healthy life is very simple and it doesn't require an industry to maintain it. Ignore all that noise and focus on these five fundamental components from diet to exercise, stress, sleep, and so on.
Albert Laslo Barabasi is a network science physicist. He believes wearables may help users stay healthy, but there's no secret about the keys to success.
As long as you focus on these basics and you make sure that these are guaranteed, you are actually setting yourself up for a healthy lifestyle. Everything else is more or less an intervention that is trying to correct the problem because these have not been probably observed. Certainly, having access to all the data points about us does give us a sense of control, and I think that sense of control fails when we realize that we don't know
how to correct that. And we're all going to encounter that moment in our lives where the numbers are flashing and showing that something is out of balance.
Where do wearables need to go from here? If they're to become proactive health companions? Not surprisingly artificial intelligence may be part of the answer.
We've used artificial intelligence for a decade to really improve our algorithms for sensing, and the result I think is being able to demonstrate in the market we're the most performance product. We still have the world's best athletes that were whoop, we have medically approved features, and we have consumers that swear by our accuracy. You don't really get those combination of things if the underlying data isn't really good.
Eventually we will write to a point where we can really monitor our processes and intervene early on before a disease could develop. One way to think about it is that every single disease that I will have throughout my lifetime is already bit in me developing because I already born with all the mutations and all the defects that will eventually just develop themselves and manifest themselves with age. Is how can we capture that early and how can correct
that before it's too late? And in that respect, wearable technologies as well as the many monitoring devices that the technology is making possible eventually will be the answer. Are they the answer right now? Not necessarily.
We are translating to face where there are wearable technologies that aren't just providing insights but actually providing interventions. They're actually therapeutic in some way.
If we look at the next few years, right, health monitoring will start by enabling individuals and being kind of a continuation of that doctor's office, and I think in the long run it'll ultimately replace the doctor's office.
At the point where wearables can replace our visits to the doctor, or even make those visits a bit less frequent, they will truly move from the nice to the necessary for us all, and that could lead to a sort of technological fountain of youth found not in the swamps of Florida, but right on your wrist coming up. Some of us may be worried about artificial intelligence coming for our jobs, but does that include all those economists at the Federal Reserve that's next on Wall Street Week. This
is a story about an invisible hand guiding the economy. No, not the invisible hand of self interest that Adam Smith wrote about in the Wealth of Nations. This invisible hand is much more modern. It's that artificial intelligence we keep hearing so much about. Our special contributor. Larry Summers is a macroeconomist who also sits on the board of Open AI. Who better to ask what AI could mean for Adam Smith's economy.
My guess is that this is going to raise the neutral rate of interest over time, both because of the massive investment that's going to need to take place in data centers and because of the acceleration.
In the rate of growth.
So I think the so called our star is likely to be higher, perhaps even considerably higher, because of AI. I think it's possible that it's going to be a disinflationary force because of acceleration of productivity growth, as the Internet was during the nineteen nineties.
The economic potential of AI varies widely, with some saying that it can disrupt jobs, whole industries, and even pose existential challenges.
It's not yet like replacing jobs in the way to the degree that people thought it was going to.
Of course jobs will change, and of course some jobs will totally go away.
It really is an existential threat. Some people say this is just science fiction, and until fairly recently I believed it was a long way off. Now I think it's quite likely that sometime in the next twenty years these things will get smarter than us and we really need to worry about what happens.
Then, So let me ask you about one particular perhaps rule of thumb or rule, and that is the relationship between inflation on the one hand and unemployment on the other, which has been an important issue for the Federal Reserve, for example, with its dual mandate to address both of those. Do you think it could change that relationship?
It certainly could, and you can make arguments in both directions. Perhaps the more flexible economy means that rates of inflation or prices will be more sensitive to demand and unemployment than they were before. Perhaps the more rapid underlying productivity growth will mean that there's less sensitivity because when there's an increase in demand, the economy will be able to accommodate it more easily because there's more capacity fundamentally in
the economy. I think it's difficult to know, and if I had to guess, the effects that I described on the neutral interest rate and so forth are probably going to be more salient than any change in the slope of the Phillips curve of that relationship you referred to between inflation and unemployment. But nobody can be confident in their judgments about this kind of thing.
There's the uncertainty about what AI could mean for the economy, but there are also questions about what it could mean for central banks trying to set monetary policy and how it could change the way they gather and analyze data about the economy. Sasha Stefan of the Frankfort School of Finance has studied the ways AI might change monetary policy transmission specifically.
And this is all the most common or most natural thing people are thinking about here is it will improve forecasting. And I think this is sort of where everybody's interested. How our interest rates going how does the economy develop going forward? How is inflation going forward? So here we're going to see a lot already happening in terms of I and I think here there's also a lot to learn going forward.
Is it likely to make forecasting more accurate? Do you think?
I think definitely.
So.
I think one dimension of AI is basically increasing the toolbox and the methodologies, improving on the methodologies thereby also making forecasting much more precise. Also basically using models to use existing data and use them in completely novel ways. Right, So, how can we use bond market data? How can we use loan market data. So we can employ these models to look at things that we haven't been able to do before. We can look at websites, we can use
images from satellites, we can use social media. Right, So, actually I have a study, a recent one in which we try to use AI and Twitter or x in order to generate an index about what do individuals like households have an idea about how inflation is going to develop going forward? Right, So, this is what we call inflation expectations, and this is something where central banks, the Federal Reserve but also the European Central Banks are looking much more closely at compared to what we call like
realize inflation what we have. So, what do actually people households expect in terms of inflation going forward? Because this is going to affect how they're going to behave, what kinds of products are they going to buy, what kinds of sort of how are they going to save going forward? And also firms are going to be affected by that because they see if customers don't buy, the shelves are going to remain full and they basically report a completely different bottom or top line going forward.
What are the risks of expanding out the data that way, I mean a large language models and larger based on what human beings have generated, and human beings are not perfect, and you can get hallucinations that way. What are the risks, particularly as you go to things like social media for example.
X information sensitivity is always run right, which means that if new information arises that can cause maybe a complete meltdown of the market. Stocks are going to be sold, And of course AI makes it even more likely that these risks are actually or these new information is actually going to emerge, right. But also another risk is, for example, interconnectedness, and AI also will connect institutions more going forward, there might be shared data, there might be shared platforms that
might increase interconnectedness. So if one domino drops, the others might actually drop as well. So amplification of existing risks is definitely one problem. Another problem that's very frequently mentioned if you talk to practitioners in this field is also
a kind of what we call a model bias. Right, So what happens if we use data that has been generated by a model that has all better been falls to begin with, and then we continue to use their data going forward, there will be so colled perpetuation of these biases going forward, and like garbage in garbage out.
We hear from some experts in AI that we're getting to a point, maybe past a point where we don't actually know how it works. It's a black box in that sense. If that's true, how can a center back rely on it? How can it verify it or certify it to make sure that it's making correct inferences.
That's an absolute important point. This is on the one end, this is definitely a risk, right because if things go wrong, the question, the trust that might be there quickly goes away, and then the things might even be worth going forward. One of the potential powerful applications of AI for central banks is to not replace necessarily, but to complement the professional forecasting that the central banks usually rely on. They
usually do on a quarterly basis. Ask a lot of professionals and investm banks and other institutions as to what do they expect the economy to develop going forward, specifically when it comes to inflation, and now it might be actually possible to set up an AI model that exactly
does that. So it basically it is trained on the individual, it's trained on the cvs of the professional forecasters, how they have actually voted, or what they have done in previous forecasts, that they did, what is their job, what they learned, and then asked the model instead of the forecaster, And the existing research already tells us that there is a high degree of overlap in terms of what the professional forecast actually would tell him or herself and what
the model actually sells. Right, But then the one risk, and now coming back to your question, is that how can we actually make sure that the model actually uses only the information that is available at the time of a forecast itself is a train basically on information that it should not know because it actually happened afterwards.
Well, I wonder about the systemic risk because not being a conputer science, it's possible that AI could spot relationships that otherwise humans might miss. I mean, so you have something like Silicon Valley Bank in the United States. Is it possible AI would have spotted imbalances earlier that humans.
Missed, specifically with a Silicon value bank, it would have recognized this because it's also interesting that people did not realize this because it was obvious to be to be clear, because actually all the publicly available data was pointing exactly
at that, but no, you're absolutely right. So these kind of systemically important banks, also other banks risks emerging based on for example, liquidity consideration might be detected much much earlier compared to what the regulator or supervisor might actually might actually see.
And what we need human beings economists presumably to check what's going on to make corrections, because you can have hallucination in any model, and if you don't correct them, as I understand, they just compound.
I think this is exactly one danger that people might actually try to rely on AI and these models too much and think, Okay, these models actually know what's going to happen.
But the idea how to assess these.
Outcomes or these outputs, that's a crucial one. And this means I think also for us as not only as economists, but also as educators, we need to make sure that people understand the underlying theory and economics actually in order to evaluate is that what the model actually tells me, is this something that's actually plausible or something that's not right?
So I think that puts a lot of pressure on on us also as educators, but then also on the different institutions, do they actually train the people right going forward.
That does it for us Here at Wall Street Week, I'm David Weston. See you next week for more stories of capitalism.