Photo by Steve Johnson on Unsplash

Forbes Magazine warns AI will set off “The Great Deflation Bomb.”

Will we be buying eggs for fractions of a penny, houses for a song?

The impact of Artificial Intelligence on the economy is heating up as AI begins to seep from its original killer app of cheating on college essays and porn.

According to layoff firm Challenger, Gray & Christmas, in the last year, AI has accounted for one in ten layoffs in the tech sector and one in 50 layoffs overall.

Small potatoes compared to the panicked warnings of a few years ago.

But as Ray Kurzweil says, 1% in an exponential process is halfway there. And AI's economic impact is likely to be exponential -- so small you can barely see it, then it blows up and takes over everything.

AI and Jobs

The question of whether AI is a blessing or a curse very much depends on how hard it is to create new jobs.

If it's easy to create new jobs, AI isn't a job crisis at all -- it's a ladder.

Think Silicon Valley in the 90s, when the new jobs paid much better than whatever Palo Alto townies were doing before tech showed up.

On the other hand, if it's hard to create new jobs, think Detroit in the 1970's. A hellscape. The old jobs are gone, nothing to replace them. Minimum wage at best, riots over universal basic income at worst.

AI and Deflation

Still, setting aside the job dynamics, one thing we can be sure of is AI will radically reduce prices -- deflation.

This is because, across the board, AI replaces things that were more expensive -- especially when you consider AI combined with robots.

Contrast with the 1990’s internet, which reduced some prices -- say, buying things from Amazon or downloading an mp3 or movie. But a lot of the benefit from the internet was quantitative -- meaning stuff got better. It didn't necessarily get cheaper.

After all, the 1990s internet couldn't run a factory. Or a chicken farm. It couldn't drive you to work, deliver your supply chain, or produce historical documentaries with a one-sentence prompt.

So, yes, we could conceivably get eggs for pennies.

The Fed and Deflation Phobia

Now, there is one caveat. Because our Federal Reserve has a giant money printer, and they fear deflation more, apparently than they fear World War 3.

Meaning that as soon as AI and robots start bringing down prices -- which is a good thing -- the Fed's immune response will kick in, and they'll do everything they can to print money. Potentially for years on end.

Aside from what easy money does to the economy, that will make assets boom.

So, eggs for pennies, houses for millions.

What’s Next

Putting it together, if we did the jobs thing right, AI is a utopia, up there with the mechanization of agriculture -- or fire itself -- as one of the most amazing things to happen to humanity's quality of life.

We might expect a ten-fold plus increase in standard of living -- roughly the difference between Switzerland and Botswana.

But if we did the Detroit thing on jobs, making it hard to create jobs with regulation, licensing, and taxes, we become a continent-sized Detroit of former middle-managers warming their hands in steel drums made of rusted-out windmill turbines.

A tiny AI-enabled elite at the top. A huge underclass below.

Clamoring, no doubt, for Universal Basic Income.

AI’s impact will take a while, and the first decade might look closer to the internet — qualitatively better but similar prices.

But when it hits in full, I think we’re looking at something akin to the industrial revolution.

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