Adam Michael Bauer
CHICAGO/NEW YORK — The artificial intelligence (AI) race is already generating forces that are transforming the global economy. That makes it surprisingly similar to the green transition, given the potential of both to upend traditional industries, labor markets, and geopolitical balances. Both call for trillions of dollars in upfront investments in exchange for significant benefits over the medium and long term.
The promise of AI is that it will cut unnecessary costs, boost labor productivity, and help humans solve previously intractable problems. Equally, the green transition would do nothing less than contain climate change, the mother of all global externalities. It would eliminate the risk of both “climateflation” (higher prices caused by climate-driven supply shocks) and “fossilflation” (when hydrocarbon supply shocks, like the one caused by the current closure of the Strait of Hormuz, reverberate through the world economy). It would also improve public health, increase economic resilience, create jobs, preserve fragile ecosystems, and deliver many additional benefits.
Gernot Wagner
But while the long-run gains in each case are clear, the shorter-term effects of a mis- or unmanaged transition could be wildly disruptive. Consider the implications of a near-term spending burst. The BlackRock Investment Institute estimates that the AI buildout could increase inflation by up to half a percentage point over the next ten years, before finally mitigating inflationary pressures through productivity gains. Whether the green transition will cause near-term upward pressure on inflation is an open topic of debate. But what is not in doubt is the need for significant upfront investments to tackle major challenges down the road, combined with policy responses to manage the concurrent transition risks.
