I’ve been surprised at how frequently I am seeing people argue that a productivity boom (usually AI is invoked here) will lead the way to lower interest rates. Much-quoted economist Mohamed El-Erian makes that case here, former World Bank President David Malpass here. As I mentioned briefly in a recent column, this seems backward to me.

I’m glad to see Jason Furman also, and more authoritatively, pushing back. Productivity growth raises the neutral interest rate, and therefore central banks have to raise nominal rates to keep up: “The mechanism is straightforward. Faster productivity growth allows households to save less because they anticipate higher future income, while prompting businesses to invest more because expected returns rise. Both of these boost demand and push up real interest rates.”

El-Erian says that higher productivity paves the way for higher non-inflationary growth. That’s true if you hold the growth in the total amount of spending throughout the economy constant. (It’s simple math: Nominal spending growth equals output growth plus inflation.) But real rates still have to go up. If they’re instead held lower than the neutral rate, they’re inflationary.

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