Tag Archives: economic growth

AI predictions for 2026

It’s easy to find predictions for where AI technology, the “AI race”, and the knock-on effects for the US and world economies might go in 2026. I find myself slightly fatigued from hearing about it, but nonetheless it is important.

Here’s one knowledgeable sounding blogger’s predictions:

  • Artificial general intelligence will not be achieved in 2026.
  • Robots will not be able to clean my bathroom in 2026.
  • ‘No country will take a decisive lead in the GenAI “race”.’
  • “Work on new approaches such as world models and neurosymbolic will escalate.”
  • The AI-driven stock market bubble may pop, or it may not. The exact words here are “the beginning of the end”. Well, I can predict with 100% confidence that the stock market will either go up, down, or stay the same.
  • AI will be discussed in the US midterm elections.

Okay, nothing too earth shattering here. On the subject of “countries in the AI race”, one perspective is that the US is focusing nearly all its investment on private sector AI, while China is spreading its investments across a basket of technology and infrastructure investments including AI, “electric vehicles, batteries, robotics, solar panels, wind turbines and other forms of advanced manufacturing” (“the Antimonopolist” blog). The US was also at least trying to do this during and after the Covid-19 pandemic era, but that sensible long-term strategy has been monkey-wrenched by a certain fool in 2025.

Then again, we could ask whether the basic econ 101 lessons are completely disproven? Is it possible we should invest more in what we are good at and sell it to others, while buying things from them that they can make better, faster, or cheaper? There’s a tension of course between being highly efficient and focused on comparative advantage, and also being diversified so you are resilient if something happens to upset your trade flows. But we are certainly not seeing rational debate about all this in the US political context.

Chartbook makes an argument that if you compare the US and European economies, it is really just the performance (measured by profits and stock market values) of the “superstar” US tech firms that makes the US look better. And while life at the top of the heap may skew the US numbers, quality of life for the average working European aided by their bumbling, stumbling social welfare systems is actually not that bad.

evidence for the return on (U.S.) government non-defense R&D

This 2024 report from the Dallas Fed provides very clear evidence of the positive returns from past U.S. government research and development funding.

Total factor productivity is a noisy but generally accepted measure of the amount of GDP/productivity growth that is due to innovation rather than increases in inputs. Summary: The return CAUSED BY non-defense R&D spending is 140-210% over 8-12 years, which is higher than investments in infrastructure (which still provide a positive return) and defense R&D (NO CAUSAL EFFECT IDENTIFIED).

Since it’s noisy, maybe I would smooth it in the graph above, but nonetheless there is a very clear relationship between falling R&D spending and falling economic growth. Conversely, if you wanted to intentionally reduce growth and innovation in our economy, a good way to do that would be to reduce R&D spending. Another implication is that if R&D spending on weapons and war does NOT provide as great benefits, there is an opportunity cost to spending your R&D money on weapons and war rather than peaceful or at least dual-use technologies. So it’s pretty clear the actions of the current US administration (drastically cutting R&D spending and shifting it from civilian to military applications) do not match their stated intentions to boost economic growth.

Where does the global economy stand at the end of 2025?

Well, I’m writing this on December 20 so there is always the chance things could change drastically in the next 11 days. And of course, I have no idea when you my dear reader might be reading this. I will just assume you are an alien archaeologist reading this in 3025 as you sift through the rubble of our vanished civilization.

Anyway, a few themes right now:

  • The possible “AI bubble”. This can refer to the stock market index gains being dominated by AI-related companies. In rational econ world, this should mean that investors collectively think the future earnings of these companies are most likely to be very large.
  • The companies certainly think their future earnings are likely to be very large, and this justifies borrowing large amounts of money to invest in the technology and infrastructure. This might be okay, but there are a couple concerns. First, loans are being made to these companies under a framework of “speculative private credit“, which some say resembles the sub-prime mortgages leading up to the 2008 crash. You would like to think the banks might know what they are doing, but of course they didn’t leading up to the 2008 crash and the world is still paying the price today.
  • Second, there are some suggestions that all the borrowing and investing in AI is driven by a fear of not being a “first mover” in some sort of winner-take-all, zero-sum race to artificial general intelligence. And if that is the case, it might come crashing down if the market at some point collectively decides that particular milestone is not in fact on the near term horizon. In other words there is a risk of a hype bubble popping even though the underlying trend of slow, steady, technological progress is bumping along just fine. This is analogous to the dot-com bubble. Technological progress tends to be exponential, but we don’t know if we are on the early, slow and steady part of the curve or close to the knee where it will take off. But collective opinion can be wrong on this either one way or the other.
  • My head spins when I try to understand the relationships between bond yields, prices, economic growth, and investment returns across countries. But Reuters says real bond yields are negative in many countries and “Five of the Group of Seven major economies have experienced growth contraction this year, with Japan and the euro zone already half way into recession — defined as two quarters of negative growth.” [Um, so if my calculations are correct they had a quarter of negative growth?] There is also a clear real estate bubble deflation going on in China, which looks something like the one in 1980s Japan, but whether it will usher in several “lost decades” like it did there I am not able to say. The quality of life for many citizens of Japan seems to be just fine, I note. And China just really seems to have a winning approach to the intertwined manufacturing, education and research, infrastructure, and export issues.
  • Climate change is manifesting itself in extreme weather. There is some evidence that recent extreme weather, and not just the steady creeping advance of average temperature and sea levels, has caused gains in crop yields to plateau globally. Then, there are projections showing these yields falling steadily in the future, with the rate of decline of course dependent on the climate scenario chosen. The rate of population growth has slowed and seems likely to eventually plateau itself, but that will take awhile and the world is still projected to add around 2 billion more people (these forecasts themselves subject to scenarios, of course.) Less food and more mouths to feed translates in economic terms to inflation in more developed economies and potentially malnutrition/starvation in less developed ones, and in the segments of society left behind in the more developed ones.

So what did we just learn about the global economy at the end of 2025? Nothing really, except that things are objectively not that bad for many of us humans here on Earth, and yet we are nervous and have some good reasons to be nervous. At a policy level, we can be cautiously optimistic but clearly need contingency plans if things don’t go well. At an individual level, it seems like a good idea to scrape together some well-diversified savings. Maybe owning a bit of land and learning how to grow a bit of one’s own food would not be a terrible contingency plan, and besides this can be fun and rewarding.

AI investment compared to railway boom

The blog Urbanomics has a comparison of the current AI investment concentration to the 19th century railroad investment boom in England and the United States. In this particular case, the blogger neglected to provide the original source, which he or she normally does. Financial Times and Economist are typical sources. Anyway, here are some stats mentioned:

  • Peak “railway mania” in the UK was around the 1840s, and railroad investment accounted for around half of all investment at that time.
  • Between about 1830 and 1870 in the UK, railroad investment accounted for about 20% of all investment.
  • In the US, episodic railroad investment booms occurred in the 1840s and 1870s. Railroad investment at these times was around 40% of all investment. This accounted for GDP growth of about 6-10%.
  • The brief clip actually doesn’t tell us how much of total US investment in 2025 is directed to AI. But it accounts for GDP growth of around 2%.

These are interesting numbers, but I don’t think comparing 19th century and 21st century US GDP growth is a very good comparison. That is essentially comparing a fast-growing developing country to a slow-growing advanced economy. If I had to pick one or the other to live in, I would probably go with the one that has safe drinking water, antibiotics, vaccinations, relatively painless dentistry, and air conditioning.

what’s next for (incremental improvement of commercial) AI

We normals are hearing in the media that the large language model approach to AI has run its course, that further scaling it up is prohibitive in terms of energy, and that there is an AI-hype-driven financial bubble ready to pop any moment. According to at least one blogger though, the big breakthrough happening right now is having these models “reason” internally before they give an answer.

Two of those leading engineers are: Julian Schrittwieser who helped teach AlphaGo how to play Go at a level never witnessed in human history and is now a lead researcher at Anthropic. And Łukasz Kaiser, who whilst at Google Brain, co‑authored the paper that launched the architecture now driving every major released model on “Attention is all you need”…

Kaiser, for his part, corrects time horizons. The category of work that still belongs unquestioned to humans is shrinking. He states, with a deep belief, that these AI systems will be able to do any labor task currently performed on a computer within a timeframe of five years! …

The question is not whether machines will pass some imagined threshold in the future, but what it means that they have already crossed thresholds we still debate as hypothetical. A society reacts to what it believes is true, not to what is true. When the prevailing public understanding is delayed by years, institutions are, by definition, operating in a prior decade.

We can model technological progress as a series of sequential, overlaid S-curves that have to overlap in just such a way to produce continuous exponential growth. At least some insiders are still thinking in terms of keeping this S-curve going, in a competition between companies and countries. And when we see a new technology break through into widespread public, commercial use, it has already been going in the lab for awhile. That used to be measured in decades, now it is months if these optimist insider voices are to be believed.

https://onepercentrule.substack.com/p/is-ai-on-a-new-trajectory

how to be a traitor to the United States of America

I happen to like my country, but I would like to offer some suggestions on policy options for the aspiring traitor:

  1. Remove funding for basic scientific research other than in weapons. This investment will take a while to pay off, but long term it will remove the basis for economic growth as an advanced economy, until one day we can no longer be an advanced economy.
  2. Make sure only the rich can afford adequate child care. This will ensure that single parents and adults in single-income households (usually mothers) will not be able to work or study. This removes a good chunk of the potential work force, and makes sure those women will not gain new skills or knowledge that might allow them to contribute to our economy. You can also remove access to birth control to help reinforce this cycle, and you have also retarded any progress on new or better birth control technology.
  3. Undermine education at all levels. This is also a slow burner because it will take a generation for today’s toddlers to become tomorrow’s ignorant incompetent adults (he who knows not and knows not he knows not, he is a child, be careful not to teach him anything). There are some immediate things you can do though. A big one is stop issuing visas for full-pay international students. This immediately subtracts hard currency from the nation’s economy, and also has an additional payoff tomorrow of making sure they can’t stay in the country and add value to the economy.
  4. Identify industries where the United States has a comparative advantage, and sabotage them. Also reduce the pool of skilled workers they have access to. If you’re lucky, they will throw up their hands and leave the country for a techno-libertarian island dystopia.
  5. Invest heavily in industries with no comparative advantage for an advanced economy. Textiles and footwear come to mind. But then you can also undermine free trade in general so that nobody will be interested in buying inferior, high-cost products anyway. By undermining research and development, you have also made sure that potential high-value-added industries like robotics and autonomous electric vehicles can never keep up with higher-tech, more productive foreign economies.
  6. Let the transportation, water, electric, and food infrastructure decay. You don’t have to actually do anything here. Just don’t talk about it and nobody will know or care or do anything.
  7. Here’s where it gets wonky, but you want to put incompetent people in charge of monetary policy and generally all things to do with money and finance. Do this, then get out of the way while the financial industry captures and manipulates your idiots to its short-term advantage while creating an unstable house of cards that will come crashing down in the not-too-distant future. Crypto-currency is not the core of this strategy but just a little extra grease on the wheels of chaos.
  8. Undermine the nation’s ability to prepare for, respond, and recover from natural disasters, such as fires, coastal and inland flooding, hurricanes and other severe storms, and earthquakes. There’s a certain element of chance here. You could get a major volcanic eruption if you are lucky, but you can’t control that. Drought and generally poor water management are some of those slow-burn policies that could take a long time to pay off, but climate change is on your side here. As they say, the end of civilization as we know it is two meals away.
  9. This is somewhat of a tricky play, but through a combination of foreign aid removal, lack of action on climate change, and poor diplomacy with nearby countries, you can ramp up flows of desperate migrants. This gives local people somebody to blame for all their problems other than your policies.
  10. Apply propaganda judiciously to make sure Americans don’t know Chinese factories are building autonomous vehicles for $10,000 and investing in ultra-modern high speed rail and automated ports. Also use anti-tax, anti-immigrant, anti-city, and anti-poor people propaganda (the last two go together pretty well) so that nobody will be willing to fund the government or expect it to do anything.

You might be surprised that I have left certain seemingly obvious policies off this list. But I actually would not send an angry mob to attack the legislative building or set it on fire. It’s better to have the empty symbols of democracy sitting there for people to look at. I would not cancel elections, but rather limit the choices to a few very bad ones. I would not blatantly limit speech but rather do the opposite, encouraging a huge amount of meaningless talky-talk so that everyone’s jaws are flapping at the same time and there is no way anyone can be listening let alone thinking.

Good luck, modern day Benedict Arnold, in your quest. And may God Bless the United States of America.

Is the AI bubble bursting?

Apparently trying to answer this question is consuming a lot of bandwidth in the financial, tech, and even geopolitical arenas right now. Here is one answer from Larry Johnson, whose politics and past statements I do not necessarily endorse. Just to very briefly summarize his article: YES.

A few insights of my own:

  • The AI “hype bubble” has almost certainly reached a commanding height, and will pop at some point. This will probably be felt in stock market index valuations, which are dominated by a handful of large tech companies at the moment. In my lifetime now covering half a century, we have seen this cycle first with the personal computer itself and then with the internet. In both cases, the expectation that these technologies would super-charge economic growth in a few years did not happen, and led to financial market declines. Both technologies have in fact transformed the economy drastically, it just took a few decades rather than years. Things do seem to be happening faster this time around, I admit.
  • When it comes to stock market crashes, there is usually some precipitating event like the Asian financial crisis in 1997 or U.S. derivative bubble in 2007. The combination of technology bubble bursting and external financial shock seems to be particularly powerful. In fact, when I look back, I think I can argue the forward progress of the U.S. halted around that 1997 (financial crisis) to 2000 (Bush v. Gore) to 2001 to 2003 (9/11 attacks and Iraq invasion) period, and went into outright decline between the 2007 financial crisis and 2020 Covid crisis.
  • Apparently some in Silicon Valley thought the artificial general intelligence singularity was so near when the LLMs first came out, and that US tech companies were so far ahead of international peers, that it justified huge short-term investments in order to gain a first mover advantage that would then be insurmountable. This particular bubble seems to be popping at the moment, with AGI clearly not here right now, and perhaps a loose, emerging consensus that LLMs are a useful technology but not a likely path to AGI. So companies may have over-invested in infrastructure that will hurt some of them badly in the short term, while possibly benefitting us all in the longer term (think about 19th century railroads for a fairly obvious analogy).

So there is somewhat of a race here – will we start to see significant economic benefits of these new technologies before some external shocker hits us? This is the luck of the draw. It seems luck has not been on our side for the last 25 years or so. Perhaps we’re due.

what government policies ACTUALLY increase economic growth?

Wishful thinking and “starve the beast” ideology do not increase the growth rate of a national economy. There are some things that do, according to people who study the evidence (known as economists, although to be fair, some of them are also influenced by ideology if not wishful thinking). According to this Planet Money episode, policies that have been shown by evidence to increase economic growth include:

  • Building housing in cities with numerous and increasing jobs. I always thought of housing as more of a quality of life issue and not something that actually constrains growth, but this makes logical sense. Urban areas (central cities and their suburbs) are where most of the national economy’s growth happens, because they are where most of the workers and innovative ideas are. Available jobs attract people who want jobs, and this can happen faster than the housing market can grow, pushing up prices. At some point, constraints on housing can actually become constraints on growth. People seem to be focusing mostly on the federal government tail trying to wag the municipal government dog in terms of zoning codes, but I have a couple more thoughts to add. First, excellent transportation infrastructure effectively enlarges the housing market that provides access to a given job market. If I could buy a fixer-upper row house in Baltimore and take a bullet train to Manhattan, I would effectively be part of the Manhattan housing market. Our country does not have this (although Baltimore and New York City are connected by some of the best rail our country has to offer, the time and expense of that commute would not be reasonable.) Excellent communication infrastructure also helps, since many professional jobs are now remote or hybrid. Finally, there are technological advances to be made in the construction industry, which has been dead in terms of productivity growth for decades. The big one being talked about is much more factory manufacturing of modular components. Get this figured out, and you can either move some U.S. construction workers to much more productive factory floors, or you can consider allowing immigrant workers in to do these jobs at lower wages, or you can invest in factories in Central and South American economies, thereby relieving some immigration pressure on our borders. Then move it all by electrified freight rail. These are different political choices, but all economic wins. Beyond this technology, I think there are huge gains to be made on construction sites in more efficient risk-based scheduling and logistics, technology-assisted inspections of progress (with drones and cameras), and project controls (AI watching videos of the progress and comparing exactly what is happening on the ground to exactly what was planned, then advising humans on real-time adjustments to the schedule and logistics to manage risk and keep the project on track).
  • Cutting taxes on corporations generally increases growth, because the corporations will invest at least some of the savings in capital goods, work force training, and research and development. But my thought is, why not give them the tax breaks ONLY if they invest the savings in these things, which are also investments in our national economy.
  • Similar to housing, I have always thought of health care as more of a quality of life service and basic human right a benevolent government overseeing a growing economy should be providing to its citizens. But the podcast points out hard evidence that health care investments, particularly for children and low income people, have an economic payoff in terms of reduced health care costs and increased earning (and tax-paying) potential later in life.
  • Allowing in highly skilled immigrants benefits the economy.
  • Investing in the electric grid yields a greater payout in terms of lower energy costs than whatever is invested.
  • Research and development, in things OTHER THAN weapons and war, yields a big return to the economy. Investing in weapons and war crowds out more productive investments the government could be making.
  • The particular webpage covering the podcast doesn’t talk about education, but I know I have seen elsewhere that investments in childcare and education yield big benefits, particularly early childhood education.

So: housing and construction productivity; health care; childcare and education; research and development; incentives for corporate R&D, capital investment, and work force development; transportation and telecommunications infrastructure. Raise $1 in taxes, invest it in these areas, get back more than $1, and you could theoretically give the dividend back to the person who gave you the dollar, and everybody wins. Way too rational for our so-called political economy. And this doesn’t include rational risk management, like making sure those urban areas where most of the economic activity and housing are do not get destroyed by floods and fires.

March 2025 in Review

Most frightening and/or depressing story: The U.S. might be headed for recession. Recessions happen, but this would be the first one where the U.S. government obviously and counter to all competent advice throws a monkey wrench in a perfectly healthy economy, that I know of anyway. Lest we think GDP growth is only a statistic that does not affect real people, the U.S. poverty rate among children was 5% in 2021 and rose to over 13% in 2023, when the economy was doing relatively well as measured by GDP growth and employment, but Congress forced the end of Biden’s tax credits for parents. So pop quiz: force a completely unnecessary recession by choice and will more or less children suffer? Shame shame shame on the Trump administration and Congress you stupid assholes.

Most hopeful story: Trump seems to have some anti-nuclear (weapons) instincts. We will see if his actions bear any relation to his words.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: Prospera is a weird quasi-autonomous city-state nominally inside Honduras run by crypto-currency weirdos.

total factor productivity

This is mostly a review for yours truly, partly as I am pondering whether there is any economic theory or strategy that could justify the Trump federal budget cuts and tariffs. My verdict: no, I don’t think so, I think they are based on simplistic ideas: linear, short-term, misguided thinking about the national debt and trade deficits. Anyway, here are a few quotes from the IMF:

It’s a measure of an economy’s ability to generate income from inputs—to do more with less. The inputs in question are the economy’s factors of production, primarily the labor supplied by its people (“labor” for short) and its land, machinery, and infrastructure (“capital”). If an economy increases its total income without using more inputs, or if the economy maintains its income level while using fewer inputs, it is said to enjoy higher TFP…

Recent IMF research shows that TFP growth has slowed around the world since the global financial crisis. In low-income developing countries, it has come to a virtual standstill in recent years…

TFP is higher in countries where the average worker has more years of schooling, the quality of education and training is better, and the workforce is healthier. These advantages enable the average hour of work to generate more economic value added—in addition to improving the quality of life more broadly…

So what can advanced economies do? First, they should “do no harm,” by avoiding policy mistakes, such as permitting a decline in market competition, with powerful firms using their monopoly positions to stifle entry and innovation, or reverting to costly trade protectionism. Beyond this, policymakers should craft regulations that tap the possible productivity benefits of recent innovations in green technology, information and communications technology, and artificial intelligence. They should also tackle remaining barriers restricting the opportunity for women and minorities to bring their talents and innovative potential to all sectors of the economy.    

So, a long-term strategy to boost productivity and national wealth could be to invest in childcare and education (the people who will come up with tomorrow’s innovations, and also their parents who can’t come up with today’s innovations because they are too busy), research and development. The current U.S. administration is cutting all these things. Investing in infrastructure and physical capital also helps if you have underinvested in it in the past – there is a diminishing return to these investments, but the U.S. can’t be anywhere near the diminishing return. It also makes sense to invest in a counter-cyclical strategy – more when private sector unemployment is higher and less when it is lower.