Tag Archives: economic growth

the case for an AI bubble

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I feel like I’ve been at least somewhat of a cheerleader for the AI boom, so let’s talk a little bit about the case for an AI bubble. The Guardian talks about it mostly in stock valuation terms, with a little discussion of corporate debt.

In focus at the moment is the concentration of equity in just seven companies, the Magnificent Seven: Amazon, Alphabet (Google), Nvidia, Meta (Facebook), Microsoft, Apple and Tesla (possibly soon to merge with Elon Musk’s other venture, Space X)…

It is disturbing that the 10 largest companies in the S&P 500 account for about 40% of the index’s total market capitalisation, which is well above the 27% peak reached during the tech bubble of 1999-2000…

Yet the AI bubble has further to run because the top 10 are making huge profits, they have a US president who is prepared to lose wars to keep the financial markets happy, and the world is awash with savings looking for a home.

In my mind, we need to see an acceleration in real GDP growth and productivity growth to go along with this stock market surge, and then we might be able to hope for a soft landing. If I were much smarter I would make some kind of dashboard to look at all this data side by side. There must be smart people doing this, no?

June 2026 in Review

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Most frightening and/or depressing story: The latest paper from Johan Rockstrom and company lays out climate scenarios through the year 3,000. There is plenty still to be figured out about the scientific details, but some major uncertainties are the sensitivity of the climate to greenhouse gases – in other words, how much warming will occur per unit of emissions – and how likely the major feedback loops are, such as melting permafrost releasing massive amounts of methane, loss of sea ice reducing reflection of sunlight in an accelerating loop, and major shifts in ocean currents that distribute and rebalance heat across the planet. These are existential risks, and they can potentially reinforce each other in multiplicative ways. So even though there is scientific uncertainty over whether it will get bad, or really catastrophically bad, there is no logical or moral case for not taking precautionary action now to reduce the risk of these outcomes.

Most hopeful story: If AI does in fact accelerate productivity and create significant new wealth, there are many well-known effective policy options for redistributing this wealth. Some of these have the word “tax” in their names, but there are also less efficient but perhaps more politically palatable options like baby bonds. Perhaps if the rate of new wealth creation is really a major departure from the past, our system may have a chance at implementing some of these.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: I wanted to teach my own children not only some basic financial literacy concepts (Johnny wants ice cream today but is trying to save for a new bike) but also how those relate to the idea of a capitalist economy (why does interest exist, what causes inflation, and what the heck is money anyway?) and the real physical world (yes, little Johnny, the consequences of taking natural resources out and putting pollution back into our biophysical system are in fact intertwined with our human economy). A daunting task, considering that Nobel laureates have struggled with this. But the Nobel laureates aren’t going to explain it to the children, so your intrepid blogger waded in and came up with something.

Global Justice?

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Here’s a report called the GLOBAL JUSTICE REPORT: A Plan for Equality & Prosperity Within Planetary Boundaries. The big name on the report is Thomas Picketty. This is an academic report – despite their insistence that it is concrete and practical, it is definitely more of a vision along with a catalog of policies that could be pursued to support that vision. Part of it is about a global wealth tax funneling into a global sovereign wealth fund, and in fact I came to the report through a brutal take-down of the political achievability of that particular idea. Nonetheless, if there is a clear vision, countries that want to can start to review and try to align policies with the vision over time. And if a large enough group of countries agreed to band together to pursue the policies collectively, perhaps they could move the needle.

The idea I found most interesting was an idea they call “targeted sufficiency”, which goes like this:

Sufficiency includes a sharp reduction in labour hours and material footprint, a large shift in consumption from material to immaterial sectors (education/health), and a substantial change in food habits, allowing for a strict deforestation ban and a gradual return of global forest cover to the 1900 level…global convergence of all countries to 60k Euros 2025 PPP in per capita GDP by 2100

So you implement income/wealth redistribution policies; reduce working hours, shift remaining working hours from transportation, food, manufacturing, and construction to health and education; reduce the environmental footprint of those high impact industries, which may require reducing their actual magnitude; and persuade (or force?) people to shift their increased leisure time to experiences and services rather than consumption of physical goods. I think it’s a nice vision, and just pointing policies in this direction and achieving some small fraction of it in the near term would be an achievement. That’s the thing about changing the course of a large vessel – if they had just given the steering wheel on the Titanic a little tweak early enough and stuck to the new course, it would not be at the bottom of the ocean.

To me, value added tax at the individual country level, a portion shifted into either individual accounts for citizens, baby bonds, or a sovereign wealth fund (these all amount to mathematically, economically, roughly the same thing, although vastly different politically); and another portion shifted into sustainable infrastructure and incentives for that shift in labor to education and health, could be an achievable way to steer toward this vision. You can tax (or cap and trade, which amounts to the same thing mathematically and economically…) carbon and/or other forms of pollution, both to raise revenue and provide incentives for sustainable choices. Because these are all real policies being successfully pursued by some countries in the world right now. If technology and market forces deliver large productivity gains at the same time, it might be more politically palatable to phase in these policies. I doubt it is politically feasible to ask wealthy and powerful interests to give up any of their absolute wealth and power. It may be possible to ask them to give up a portion of their relative share while the tide is rising, in exchange for some stability and predictability. This has been achieved in many societies, and even in the United States during the middle of the 20th century.

redistributing the wealth from AI productivity gains

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Urbanomics blog has a summary of ideas for redistributing the (potential? expected?) wealth gained from AI, rather than letting it all flow to already deep-pocketed corporations and investors.

  • “Clever tax reforms, such as levies on corporate profits that are above a normal return on capital, on land and on natural resources”
  • inheritance taxes
  • “public wage insurance” (I think we like to call this “unemployment insurance” in the US? although “public wage insurance” sounds like a more neutral term implying a random event rather than blaming the victim)
  • “active labor market policies”, with Denmark as an example. This appears to combine unemployment payments with assistance on training and job searching.
  • “partial nationalization of AI firms”
  • “citizens’ dividend from AI businesses”
  • “giving citizens shares in AI companies”

The article makes the point that there is no real economic difference between tax policy and public ownership of the private sector. In the US at least, there is obviously a massive political difference. Entrenched wealthy and powerful interests are going to fight tooth and nail against any new taxes, even though something as simple and proven worldwide as a small value added tax would make enormous sense. That would soak up part of those windfall profits in proportion to how well the companies are doing. You could redirect the proceeds by beefing up unemployment and disability insurance, while incentivizing education and retraining (but I would let the private sector handle that last, as the government is notoriously bad at it). Going a step further, you could give people benefits and subsidize jobs in housing, childcare, education, and health care. You could invest in public infrastructure, (non-military) research and development, all of which create jobs and provide a positive return. This is all assuming you don’t want to just hand people money and let them decide if they want to do something productive or enjoy more leisure time (we could just expand the successful program we already have and call this Social Security for All) – we seem to have moral issues with this in the US. A VAT that kicked in only when the economy or productivity growth exceeds a certain threshold would actually be pretty painless. The wealthy and powerful are actually smart enough to understand this, and so they create disingenuous anti-tax propaganda and buy off politicians to make sure we can’t have these nice things.

So if all those rational and relatively painless policies I just mentioned are politically impossible in the US, at least unless economic growth actually accelerates enough to change that conversation, we can turn to “ownership society” type tricks. Redirect any surplus tax revenue (let’s assume there will be some if there is an acceleration in economic growth, even without any shift to more efficient or fair tax policy) to baby bonds and/or individual retirement accounts. Match with shares in index funds, effectively creating a sovereign wealth fund carved into a hundred million little accounts with individual citizens’ names on them. This may work out to the exact same thing mathematically as a VAT and income redistribution scheme. The finance industry would find a way to fleece people in fees and extras of course – this is morally reprehensible when the equivalent government-run program would not do this, and yet if this is the price of buying off the wealthy and powerful to make the policies politically possible, then it may be the best way forward that works within the existing system.

McKinsey on high-growth industries

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McKinsey has a post with a data visualization on industries it predicted in 2022 would be growing quickly by now (May 2026 as I write), versus how they actually turned out. I find it interesting both for the industries/technologies themselves and for which are overperforming and underperforming. Overperforming ones include, of course, “AI software and services” and semiconductors. Robotics, however, has not kept up with expectations at least in terms of widespread commercialization (I think it is still coming, just behind schedule). Electric vehicles are also both high-growth and overperforming, while “shared autonomous vehicles” are high growth and were not considered in the original study due to “negligible baseline revenue” – more evidence that in the U.S. we are being duped as this combination of technologies explodes globally. Interestingly, batteries have not kept up with expectations as a high-growth, profitable industry/investment even though we know the technology itself has seen massive improvements in cost-efficiency. Biotechnology is a mixed bag – “obesity drugs” have exploded while “non-medical biotechnology” has seen no growth in the profitable investment sense. The holy grail of turbocharging construction productivity by making it more like manufacturing (“modular construction”) is about 50 years behind schedule. Maybe the robots can help with this eventually. And finally, even with all our fossil fuel woes the nuclear energy industry never seems able to capitalize, probably because of its long lead times and public risk-aversion on this particular technology.

My big picture analysis – technological progress is slow and steady, but when it comes to which will “hit” in a widespread profitable commercialization/investment sense, it is hard to identify the needles in the haystack at least in any sense of precise timing. In a personal investing sense, you can either gamble and go for broke, or you can diversify and be patient. In a broader economic sense, governments can use policy to try to give a particular industry a nudge, but there is a gambling aspect to this too, and my view is they would be better off focusing on reducing economic friction (great infrastructure, ease of starting a business, predictability, level playing field in terms of taxes and regulation) while protecting the environment and workers. Maybe provide childcare, health care, and education so people can start a business without worrying about those things, and have healthy skilled workers available when they do.

https://www.mckinsey.com/mgi/our-research/The-race-takes-off-in-the-next-big-arenas-of-competition

April 2026 in Review

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In fast-moving current events as I write (Saturday, May 2), active so-called “kinetic” warfare seems to have subsided in and around Iran. Let’s hope the trend continues in this hopeful direction. Human rights violations elsewhere and global economic impacts persist.

Most frightening and/or depressing story: We have heard horror stories about U.S. government debt over the decades, many not grounded strictly in evidence. But this time really seems to be different, where the absolute size of the debt at the moment means higher than normal interest rate payments as a fraction of the economy and tax revenue. At the risk of stating the obvious, this means the government has less money for things other than interest payments. Meanwhile the trends are increasing debt level, increasing interest rates, and potentially lackluster economic and tax revenue growth, all pointing toward a runaway train. Hoping for a pickup in economic growth seems to be the main strategy being pursued to counteract this feedback loop.

Most hopeful story: AI science seems to have been a theme of mine in April. We can constraint an AI scientist to actually respect the laws of physics, potentially accelerating scientific and technological progress. AI should also be good at synthesizing past research to form a basis for future progress, and organizing data in an accessible way so that others (human and/or AI) can confirm findings or make new discoveries from that same data. I know some very nice people who work in today’s academic publishing industry, but this may not be an area of rapid future growth. The future of engineering and scientific modeling will probably consist of giving an AI a very detailed specification for what you want it to accomplish, then reviewing/validating the result when it comes back.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: Augmented (aka mixed) reality glasses are getting pretty common in China, and slowly catching on elsewhere. Early adopters include cheating students, of course.

How problematic is U.S. national debt?

Here’s a plot from Gemini, not fact checked by me or any other human. Thanks Gemini!

I’ve always thought reporting “debt as % of GDP” is dumb. What really matters is how much interest payments on the debt are relative to the size of our economy. Or, in a more rational, less political environment, that is all that would matter – but in our real world politics matters a lot, and because politics limits our government’s ability to use taxes to pay the debt, debt payments as % of tax revenue also matter.

So…after World War II interest payments on the debt were very high, but this wasn’t a big deal because the economy was growing very quickly. In the 1980s and 1990s, interest payments spiked as interest rates spiked and growth slowed down. Eventually interest rates came down and got us out of that particular pickle. But now, from the plot we can see that current interest payments as a % of GDP are spiking to a similar level to how they did in the 1980s and 1990s. Interest rates are higher than they have been in recent decades, but not crazy high like in the 1980s. The difference really is the size of the debt relative to the economy. We can hope for faster growth to get us out of this one – there is some hope for AI-led productivity gains, but at the same time we have our government shooting itself in the foot by gutting research, development, and education spending, the historical underpinnings of our nation’s growth, while also blowing enormous sums on reckless, illegal wars of aggression with no end in site, and actually reducing taxes on affluent tax payers and corporations. We have inflation and interest rates both seemingly ramping up. So the situation does indeed seem pretty dire. Do I really even have to suggest solutions here? Sure, don’t stand in the way of the AI thing, but also don’t put all our eggs in that basket and do the opposite of all the obviously stoopid policies I just mentioned.

February 2026 in Review

In fast-moving current events as I write on March 1, 2026, the United States (executive branch, which is unconstrained in this moment by the other supposedly co-equal branches or public opinion) has launched an unprovoked military attack on Iran, in crystal clear violation of the UN Charter and domestic law. Theoretically, there are mechanisms both international (International Criminal Court) and domestic (impeachment – which can apply to cabinet members, agency heads, and federal judges in addition to the President and Vice President; and court martial which applies to military officers who follow illegal orders) that could eventually hold the criminals involved accountable for their crimes. Lots of people have lots to say and we will see how this unfolds. I am just documenting that I am present at this particularly sad moment in history.

Most frightening and/or depressing story: I hadn’t heard of mirror life, technology we apparently have right now which can destroy all life on Earth. This new, shocking, theoretically existential threat narrowly edged out the usual stream of depressing climate disaster news, the existential threat known to be currently unfolding, but which I suppose I am somewhat desensitized to.

Most hopeful story: Falling consumer prices in China might represent a new industrial revolution analogous to the age of railroads and electricity in the west in the late 1800s, rather than a textbook financial recession which seems to be the (propaganda-tainted?) conventional wisdom. I put this in the win column because if it is true, I am hopeful we will see it spread peacefully to the rest of the world rather than representing a threat.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: Ray Kurzweil predicts broad consensus that Artificial General Intelligence has arrived by 2029 (defined as AI equal to the leading experts in all fields), “longevity escape velocity” in 2032 (which would reverse the US slipping in recent decades), universal basic income in the U.S. sometime in the 2030s, and the Singularity in 2045 (defined as 1000X human intelligence – always pronounced TIMES according to me), but most importantly and the only thing that truly matters, robots doing my dishes in a couple years.

Is China going through an economic slump or a second industrial revolution?

The rate of GDP growth in China is slowing, and prices for consumer goods are dropping. This article from Warwick Powell argues that the situation is not an economic problem at all, but rather caused by a sudden acceleration of productivity analogous to a period of rapid industrial progress in the west from about 1870 to 1890.

The period from roughly 1870 to 1890 in the industrialising world is often called the Great Deflation because consumer and producer prices fell steadily for nearly two decades. Yet this was simultaneously a period of rapid industrial expansion: steelmaking, railways, shipbuilding, chemicals, and textiles all experienced extraordinary increases in output, fixed capital formation, and labour productivity. Real wages also rose, even as nominal prices and, in some cases, nominal wages remained flat or declined. Conventional monetary interpretations – where deflation is associated with falling demand, recession and financial stress – don’t explain this apparent contradiction.

The key is that this deflation was supply-led. Massive technological change (Bessemer steel, open-hearth furnaces, mechanised weaving and rail distribution networks), dramatic extensions of energy inputs (coal and steam), and economies of scale fundamentally changed production cost structures. Unit costs fell faster than aggregate demand could absorb the increased output. Prices therefore declined not because the economy was weak, but because the production system became structurally more efficient. This is what we could call “good deflation.” An excellent paper by Borio et al., (2015) explores this in more detail…

China’s current economic conditions – marked by soft consumer prices, prolonged factory-gate deflation and extraordinary expansion in clean-energy and advanced-manufacturing output – mirror the paradox of the Great Deflation of 1870–1890. Then, as now, falling prices were not signs of contraction, but the surface expression of deep productivity shifts and sectoral transformation. China today is experiencing a similar structural reconfiguration.

In our high school (U.S.) history classes, we tend to learn that the late 19th century was a time of rapid technological and industrial progress, but that was also coupled with rapidly growing inequality, labor unrest, and unregulated pollution. Maybe China’s system and leaders will be able to reap the benefits of progress while keeping these problems under control. My thinking is authoritarian political and economic systems can appear to work better than democratic capitalist systems when they have leadership in place that is rational and genuinely has the citizens’ best interests at heart. This might actually describe the majority of authoritarian places and points in time. But then they don’t have the safeguards in place to stop bad leadership from metastasizing if and when it does pop up, and that is how you get history’s worst and longest-lasting geopolitical disasters. I’m not guaranteeing the U.S. has the immune system to successfully fight off our currently spreading political and economic cancer, only time will tell.

January 2026 in Review

Well, I seemed to be in a political mood in January. I try to stay on the policy side of the line, but that is hard when bad politics makes good policy impossible. Inspired by a Nate Silver post, I took a look back at what I see as key moments in the last 25 years of U.S. history, and there were just so many that were on a knife edge and ended up going the wrong way, in my view. Maybe there are other universes where things went better, but remember my scientific theory that once they make a Spiderman movie about a scientific theory, it is almost certainly wrong. I find it depressing how we got here, but there is no sense crying over it. We need to learn from the past yes, but then face up to the present moment and start picking up the pieces from where we are.

Most frightening and/or depressing story: Evidence is crystal clear that sabotaging R&D spending is a very effective way to sabotage economic growth and progress. Attaboy to the fools, assholes and traitors currently in nominal charge of the U.S. government. Meanwhile, if a more rational administration ever takes hold, research on learning curves might provide some clues on where to concentrate our efforts for the greatest gains.

Most hopeful story: New York City congestion pricing was a hard-won U.S. transportation policy win in 2025. This is just good, economically sound urban policy that would be apolitical in a more rational world.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: I reviewed book reviews from 2025, one of which was Ezra Klein’s Abundance (not the 2012 book Abundance by Peter Diamandis, which while I am not a huge fan I continue to be puzzled how Ezra Klein could either not be aware of that book or intentionally choose to name his book the same thing.) I still find it hard to summarize that book in a sound bite, which would need to be done if it were ever going to serve as the basis for a political campaign. But here is an attempt: (1) Continuously review and streamline federal regulations, (2) increase public and private investments in critical technology and infrastructure, including recommitting to clean energy, and (3) address market failures in housing, health care, and education. #3 is a doozy of course, but the un-sexy answer just has to be understand and implement the latest evidence-backed policies. I would think ramp up housing supply, Medicare for All, and free (tax-funded) college or trade school for all. And um, if we want a chance for any domestic agenda to succeed, we also need serious plans to manage international risks including war, ecosystem collapse, famine, and massive refugee flows that may be coming. Now, I just want to acknowledge that there is a rosy future scenario where AI magically solves all these problems. The way that could work is that technological progress and economic growth suddenly pick up so drastically that we are awash in cash and resources to the point that even the wildly suboptimal operations of our dysfunctional political system are adequate to solve the problems. I don’t think it is safe to put all our eggs in that basket! We better assume that we will need to continue doing the hard work of allocating scarce resources to manage difficult problems for the foreseeable future.