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Simon Johnson on stablecoins, artificial intelligence, inequality, and more

May 21,2023 - Last updated at May 21,2023

Simon Johnson Says More…


Project Syndicate (PS): Last November, you defended Gary Gensler, the chair of the US Securities and Exchange Commission, from “intense” industry pushback against his efforts to tighten regulation on some parts of the financial sector. Gensler recently testified before the House Financial Services Committee about the SEC’s enforcement strategy, including its attempted crackdown on digital assets. What is missing from the current US approach to such assets, and which steps are most urgently needed to avoid “[l]etting people run de facto banks without proper supervision”?

Simon Johnson: The obvious issue that urgently needs to be addressed is stablecoins, which operate just like banks: The “coins” are demand deposits, which many holders feel are as good as cash, and the issuing entity holds assets. If those assets are stable in value and fully liquid, then redemption demands can be met. But any loss of asset value or impediment to liquidity, especially if it occurs amid a sharp market downturn, can trigger a kind of bank run. Recent experience with Silicon Valley Bank and other regional banks has reminded everyone how those work.

PS: In February, you and Daron Acemoglu highlighted the risks posed by artificial intelligence, which is “being designed and deployed by corporate America in ways that will disempower and displace workers and degrade the consumer experience, ultimately disappointing most investors.” Since then, an open letter calling for a six-month (or longer) pause on advanced AI research has attracted more than 27,000 signatories, including many tech leaders. Do you think such a moratorium would make a difference in mitigating some of the risks you identify? If regulators were given six months to devise a framework to guide AI development, where should they start?

SJ: I don’t think a six-month “freeze” on advanced-AI development is the right approach, not least because some people, in the US or elsewhere, would simply ignore the moratorium, using the time to catch up with the market leaders.

A better solution would be to redirect efforts away from pure automation (building AI applications to replace people) and towards developing technology that complements human capabilities and activites, by creating new tasks for humans to perform, boosting human productivity and creativity, and generally increasing the demand for labour. This is by far the best way to increase wages and improve living standards everywhere.

PS: In March, you and Acemoglu called on governments to “reempower” users of social networks with interventions like a tax on digital advertising. This proposal reflects the core argument of your new book (also co-authored with Acemoglu), Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity: technological advances have brought shared prosperity only when their direction, and “society’s approach to dividing the gains,” were “pushed away from arrangements that primarily served a narrow elite.” Where is such a push likely to come from?

SJ: Historically, the key has always been some form countervailing power. The companies that develop and deploy new tech (steam engines, railways, oil, electricity, etc.) reap big profits and amass political power. In the nineteenth century, the rise of trade unions and the expansion of suffrage generated the major countervailing force. In the twentieth century, governments developed the ability to regulate big business, not only through antitrust law, but also by establishing detailed rules of the game.

Over the last 40 years, however, countervailing forces have become much weaker. As a result, Big Tech can create whatever its leadership wants unencumbered, leaving the rest of us scrambling to deal with the consequences. The trajectory of social media’s development is a case in point — and an ominous portent of what generative AI may bring.


By the Way…


PS: Power and Progress focuses on the role of narrative and vision in determining which paths technological progress takes, and on how a society can become trapped by a prevailing vision or narrative. How can societies avoid such narrative traps, or, no less important, escape them once ensnared?

SJ: The first and most important step is to realise that there is always a prevailing, and carefully constructed, narrative framing how we think about technology. The dominant mantra today is techno-optimism: Invent as much as you can, and good things, higher wages, better health, and more opportunity, will follow.

But the idea that technological advances necessarily create shared prosperity is an illusion. That is not what happened in medieaval Europe, in the first century of the Industrial Revolution, or in the digital transformation we have experienced since 1980. Read the history and think hard about how you are being manipulated today.

PS: You point out in your book that the “US tax system has always favoured capital relative to labour, imposing lower effective taxes on capital earnings than labour income.” How must the tax system be overhauled to support broad-based prosperity, particularly as AI-based automation takes hold?

SJ: The best approach would be to scrap payroll taxes, which raise the cost of hiring people at a time when we should be encouraging companies to employ humans. To offset the loss in revenue, government should strengthen taxes on corporate profits. This must include measures to stop tax evasion and avoidance and to end the “carried interest” scam for private equity funds. It must also include far higher tax rates on the megaprofits that data monopolies of all kinds will generate.

PS: You have expressed confidence that the price cap on Russian oil is having an impact on the Kremlin’s war-making capacity. What more should be done to ratchet up pressure on Russia, and how hopeful are you that the West will maintain its resolve for as long as necessary?

SJ: The price cap is an effective tool for putting pressure on the Russian budget, but it should be lowered from the current level, $60 per barrel, to $30-$40 per barrel. The Russian government is desperate for cash and will continue to sell oil at any price that is above marginal cost. In fact, during the pandemic Russia continued to pump and ship oil, even though prices were close to $20 per barrel.


Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at MIT’s Sloan School of Management and a co-chair of the COVID-19 Policy Alliance. Copyright: Project Syndicate, 2023.

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