AI could turn an ordinary recession into an economic crisis, says IMF

The true disruptive effects of artificial intelligence on the economy and financial markets may not become apparent until there is a recession, which could lead to a full-blown crisis unless the risks of AI are addressed, the government recently warned. second in command of the IMF.

During a speech at an AI summit in Switzerland on May 30, IMF First Deputy Managing Director Gita Gopinath said the debate over AI risks has largely focused on privacy, security and disinformation. But much less is said about the risk that AI will amplify the next recession.

In a world of widespread AI adoption, the technology could turn an ordinary recession into a much deeper economic crisis by disrupting labor markets, financial markets and supply chains, he said.

Risks of AI in labor markets

In normal economic times, companies have historically tended to invest in automation, but still retain workers because they have the profits to do so. But when companies cut costs during a recession, workers are laid off and replaced by automation, he explained.

Gopinath pointed to IMF research showing that in advanced economies, 30% of jobs are at high risk of substitution by AI, compared to 20% in emerging markets and 18% in low-income countries.

“So we have a much broader scale of potential job losses that we could have,” he warned. “And again, the risks of long-term unemployment are quite serious.”

Risks of AI in financial markets

The financial industry has long embraced automation and earlier forms of AI, such as algorithmic trading, and today the sector is rapidly adopting newer AI technologies.

Gopinath noted that some AI operations are being replaced by more complex models that can learn on their own, and forecasts suggest robo-advisors will control more than $2 trillion in assets by 2028, up from less than $1.5 trillion. of dollars in 2023.

While AI can improve market efficiency and inclusiveness, its risks are more likely to manifest in a recession, he added. This is because new AI models would perform poorly on novel events that are different from those on which they were trained.

“And one thing we know is that no two recessions tend to be the same,” Gopinath said.

In such a scenario, AI could stimulate a rapid and simultaneous move towards safe assets, leading to a fall in risky asset prices, he explained.

The AI ​​models would then detect price drops, see them as an affirmation of their previous moves, and then double down on their efforts with more asset sales. And given the black box nature of AI, that behavior could be difficult to control.

“Fire sales and disruptive behavior could occur, leading to even further declines in asset prices,” Gopinath said.

Risks of AI in supply chains

As companies adopt AI, they could allow it to play a larger role in deciding how much inventory to hold and how much to produce.

In normal economic times, that could boost efficiency and productivity. But AI models that were trained on “stale data” could produce major errors and lead to a cascade of supply chain failures, he said.

Ways to mitigate AI risks

After laying out the grim scenarios, Gopinath also provided recommendations to mitigate the risks of AI without limiting the upside of AI.

One way is to ensure that tax policies do not inefficiently favor automation over workers, although he was careful to note that he is not proposing a special tax on AI.

Another way is to help workers with education and new skills, as well as strengthen the social safety net with more generous unemployment benefits.

AI can also be part of the solution, for example in upskilling, better targeting of care and early warning in financial markets, he added.

“I think there is a real need for a parallel effort to make sure that we are also protecting the global economy from AI,” Gopinath said.

His warning comes a year after he said we may not have much time to determine how to protect people from AI.

“We need governments, we need institutions and we need policymakers to act quickly on all fronts, in terms of regulation, but also in terms of preparing for probably substantial disruptions in labor markets,” he told the meeting. Financial times.

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