It was exactly 30 years ago when then-Fed Chair Alan Greenspan became convinced that the 1990s technology boom would drive inflation lower. One after another, his contacts in the tech space told him about how productive they were because of the internet, and it convinced him that it would be a deflationary force.
Greenspan knew it in his gut. He believed computers, the internet, and information technology were transforming American business in ways the data could not capture. Workers were more efficient. Supply chains were leaner. Inflationary pressure was structurally lower than the government statistics reported. The economy could grow faster without overheating.
This became the "productivity miracle" thesis. Greenspan staked his reputation on it. And in 1996, through the sheer force of his personality, he convinced the Federal Reserve to keep interest rates lower despite inflation that was accelerating.
Fast forward to today. Kevin Warsh, President Trump's nominee to lead the Federal Reserve, has a theory. AI will turbocharge productivity. That productivity will suppress prices. Suppressed prices justify lower interest rates.
In a November 2025 Wall Street Journal op-ed, Warsh wrote: "AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness. A 1-percentage-point increase in annual productivity growth would double standards of living within a single generation."
He told CNBC in July 2025: "AI is going to make everything cost less."
It is seductive. It is also exactly what Alan Greenspan said in the mid-1990s. It ended badly.
The Data
Greenspan was half right. Productivity did improve in the late 1990s. Output per hour in the nonfarm business sector rose 2.9% annually between 1995 and 2000, up from 1.4% between 1973 and 1995. But here is the critical point: even this improvement did not make technology deflationary in the way Greenspan claimed.
(source: St. Louis Federal Reserve)
His error was not believing in technology. His error was conflating productivity gains with price deflation. Productivity means producing more with the same inputs. A baker who makes 800 loaves instead of 400 in an eight-hour shift has doubled his productivity. That is a real gain. It raises living standards. It increases output. But it does not necessarily lower prices.
Prices are determined by the interaction of supply and demand, moderated by monetary policy. If the money supply grows alongside productivity, prices can stay stable or even rise.
The lesson is not that technology is useless. The lesson is that productivity gains and monetary policy are separate variables.
Many are making the same mistake today. Stripped to its bones, the argument is this: AI will raise productivity. Higher productivity means lower unit costs. Lower unit costs mean lower inflation. Lower inflation means the Fed can cut rates.
I want to believe that, actually. But if I look back at the last 20 years, I don't pay less for my iPhone. And since the 1999 tech bust, fiber-to-the-home prices fell, yet I don't pay less for my internet. Even if AI does raise productivity, there is no guarantee it will be deflationary. It will likely help the economy achieve higher growth and could put upward pressure on prices as firms scale up.
(Source: St. Louise Federal Reserve)
The capital investment required to build AI infrastructure is enormous. Data centers, semiconductors, energy consumption, and skilled labor all cost money. Those costs flow into prices somewhere in the economy.
Technology is not deflationary. I'm not sure it ever has been. It produces growth and rising living standards.
The computer revolution of the 1980s and 1990s did not produce deflation. It produced the longest expansion in U.S. history, a stock market bubble, and eventually a crash.
The internet revolution of the 2000s did not produce deflation. It produced Amazon, Google, and Facebook, alongside the housing bubble and the Great Recession.
AI may be different. It may raise productivity more than previous technologies. It may transform industries in ways we cannot yet imagine. But there is no economic law that says productivity gains must be deflationary. There is ample historical evidence that central bankers who bet on that law end up making policy mistakes.
I remain in the higher-for-longer camp on interest rates. Mid-cycle adjustments ranging from insurance hikes or cuts might overshadow big hiking or cutting cycles while the economy responds to AI's growth and productivity miracles, but the structural case for elevated rates has not changed.
Sources:
· Federal Reserve Bank of Richmond, "The Productivity Puzzle: AI, Technology Adoption and the Workforce," Economic Brief No. 24-25, August 2024
· Finexus Research, "The Greenspan Put: Moral Hazard and the Bubble Machine," March 19, 2026
· CNBC, "How Silicon Valley shaped Fed nominee Kevin Warsh," April 20, 2026
· Wall Street Journal, "The Federal Reserve's Broken Leadership," November 2025 (Kevin Warsh op-ed)
· Federal Reserve Historical Materials, FOMC Transcripts and Speeches, 1996-2000
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