Policymakers Have to Prepare Now for When the AI Bubble Bursts
In chapter 12 of his 1936 groundbreaking treatise, The General Theory of Employment, Interest, and Money, economist John Maynard Keynes wrote, “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” Commentators have begun to recycle (such as here and here) this famous indictment of casino capitalism in discussions of today’s AI bubble.
Policymakers are not going to tell the private sector what investment decisions to make. Casino capitalism is safe. Institutions and individuals with money will continue to put their assets to work on their favorite projects — and to lose their investment if they guess wrong.
But there is no longer any serious question about whether the casino economy has produced an AI bubble. By almost any measure, investment in AI infrastructure far exceeds any foreseeable returns. JP Morgan estimates that the projected $5 trillion global investment in AI infrastructure will require revenue of $650 billion a year from AI products, indefinitely, to give investors a reasonable 10% annual return. That’s not going to happen. The real questions are when will the bubble burst, how severe will the consequences be and what should policymakers do now to prepare for the inevitable downturn.
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