The AI Divide Between the U.S. and Japan

Summary

Robert Feldman and Michael Gapen discuss how AI could reshape growth, labor markets and productivity in the U.S. and Japan. They lean optimistic, expecting AI to be labor-augmenting in the U.S. and to ease Japan's labor shortage, while highlighting the importance of market flexibility and reskilling.

• AI diffusion modeled to spread twice as fast as the internet but still take a decade; manageable for the U.S. labor market
• U.S. baseline scenario: labor-augmenting AI leading to strong productivity, full employment, and beneficial outcomes for risk assets, equities, and credit
• Interest rates in the U.S. would likely stay higher than the post-GFC period under the constructive AI scenario
• Japan's outcome depends on goods and labor market flexibility; with high flexibility, AI could mean higher GDP, employment, and moderate inflation
• Reskilling remains a key challenge for Japan despite a healthy, willing older workforce
• General equilibrium feedback effects—such as wealth effects and monetary policy responses—are crucial in assessing AI's impact on labor
• Warning signs of a disruptive AI path would include rising layoffs, higher unemployment, and increased underemployment