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1 Nathan Musick, Artificial Intelligence and Its Potential Effects on the Economy and the Federal Budget 1 (December 20, 2024)

handle is hein.congrec/afligcad0001 and id is 1 raw text is: Summary Artificial intelligence (AI) refers to computer systems that can perform tasks that have traditionally required human intelligence, such as learning and performing other activ- ities that require cognitive ability. A general attribute of Al is its ability to identify patterns and relationships and to respond to queries that arise in complex scenarios for which the precise computational algorithm that is needed cannot be specified in advance. Because Al has the potential to change how businesses and the federal government provide goods and services, it could affect economic growth, employment and wages, and the distribution of income in the economy. Such changes could in turn affect the federal budget. The direction of those effects-whether they increased or decreased federal revenues or spending-along with their size and timing, are uncertain. Some budgetary effects could occur relatively quickly, whereas others might take longer. In this report, the Congressional Budget Office provides an overview of the channels through which the adoption of Al could affect the U.S. economy and the federal budget. How Might Artificial Intelligence Affect the Economy? By increasing efficiency, enabling the development of new products, and altering the demand for workers, Al has the potential to change the economy, perhaps in ways that are difficult to predict. Whether or when those changes might occur is very uncertain. Surveys show that only 5 percent of businesses in the United States currently rely on Al to produce goods and services. For many busi- nesses, customizing Al to their specific needs is costly, and it is unclear when those costs might fall. As a result, the use of Al is concentrated among larger, and younger, businesses in a few sectors of the economy-although that could change over time as profitable use of the tech- nology became less dependent on a business's size. Research into the performance of businesses that have implemented Al is still in its early stages, so conclusions from that research, which vary widely among studies, should be considered preliminary. So far, the research has found that businesses that implement Al can be expected to become more productive than businesses that do not. Extrapolation of those results to the broader economy suggests that if AI's use became more widespread, it would boost economic growth. Evidence for AI's impact on employment and wages is also sparse and varies by type of Al. Studies of generative Al indicate that it could enhance the productivity of low-skilled workers within a given occupation; studies of earlier forms of the technology have found that Al boosted the wages of some skilled workers. How Might Artificial Intelligence Affect the Federal Budget? The use of Al could affect the federal budget through two basic channels: the economy and the government. Within each channel, Al could have an impact on revenues and spending. The timing of budgetary effects may vary. AI's Use in the Economy. The use of Al could affect the overall amount of income in the economy and its dis- tribution among businesses, investors, and workers. An increase in income would, by itself, eventually push up federal revenues. Initially, however, revenues could decline as businesses deducted from their income the cost of initial investments in the technology. Moreover, because different categories of income are taxed at different rates, changes to how income is distributed among workers and businesses could alter federal revenues. In particular, depending on how the demand for workers shifted in response to the use of Al, tax receipts tied to labor income could rise or fall. For workers who were left permanently unemployed or who took lower-paying jobs because of businesses' adoption of new technology, income and pay- roll taxes could decline; however, workers who were made Note: Unless this report indicates otherwise, all years referred to are federal fiscal years, which run from October 1 to September 30 and are designated by the calendar year in which they end.