CAMBRIDGE, Mass.–Rapidly developing technologies are making it impossible for the Federal Reserve to fulfill its two congressional mandates, according to the former chairman of the Council of Economic Advisers under President Reagan who is now a professor at Harvard.
Martin Feldstein says the coming “shocks” that are to be created by artificial intelligence and robotics simply will not be able to be offset by monetary policy in the future.
“Autonomous vehicles will put 3.5 million truck drivers at risk of losing their jobs,” wrote Feldstein in the Wall Street Journal. “Checkout machines may replace 3.4 million retail cashiers. That is only the beginning of the long list of jobs that will be destroyed by technological change…The benefits of automation will include lower production costs, which will increase real incomes and job-creating consumer demand. But the technology will also cause individual hardship and frequent periods of increased unemployment.”
Feldstein noted that in 1978 Congress gave the Fed a “dual mandate” of price stability and maximum employment, which differs from other central banks that are charged only with managing a target rate for inflation.
“Economic theory implies that low interest rates and an easy monetary policy can increase the demand for output and labor,” wrote Feldstein. “Thus, Congress charged the Fed with pursuing a monetary policy that would achieve maximum employment. The coming challenge is different. Job losses will be caused not by low demand, but by supply shocks as artificial intelligence allows machines to replace labor. Technological unemployment has happened in the past, such as when automated looms in factories replaced hand looms. But the experts expect that AI will lead to much more widespread disruption.”
The Wrong Response
Feldstein posited that an easy monetary policy would be the wrong response, and that policies that increase aggregate demand will not succeed in replacing the jobs that technology makes obsolete.
“Monetary policy will still be an appropriate tool the Fed can use to respond to traditional cyclical changes in demand,” wrote Feldstein. “But technological disruption will make the unemployment rate a very noisy signal of the demand level. The Fed’s policy goal should therefore be shifted so that it focuses solely on price stability, in line with what other central banks now do. Achieving the government’s goal of maximum employment will require different policies, like increased job training and the removal of state licensing barriers.”