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What if an AI bubble burst, triggering a recession, and that recession ended up accelerating the replacement of workers by AI? Call it the double whammy of AI.
I know. Dark thoughts.
I have long been skeptical of sweeping claims about how AI will transform the world. I still am. We don’t really know. But as this technology advances, I’ve found myself worrying more about what it could mean for our livelihoods.
Two streams of economic research have given me reason to take this double whammy seriously. One concerns the history of financial bubbles. The other concerns a surprising relationship between recessions and automation, when companies use technology to perform tasks that were previously done by humans.
When revolutionary technology fuels a bubble
First, the bubbles. In 1978, economist Charles Kindleberger published an influential book called Crazes, panics and crashes: a history of financial crises. Drawing on the theoretical work of economist Hyman Minsky, Kindleberger looked back through centuries of economic history and saw a recurring trend.
Often, the bubble begins with a significant potential change in the economy. A revolutionary new technology, for example, that promises to transform industries and create enormous wealth. Investors have good reason to rejoice. But they are too excited. During the recovery, they bet tons of money expecting everything to be unlimited. And they often rack up debt as they do so, borrowing money to make even bigger bets and helping to further fuel the boom. This debt can become a time bomb. When reality sets in, asset prices fall, but those debts remain. Borrowers struggle to repay, lenders suffer losses, and a stock market crash can escalate into a financial crisis and painful recession.
A crucial idea is that a technology can be truly revolutionary, while still fueling a bubble that will end in a financial crash. For example, railways. I wrote about this bubble in a previous Planet Money newsletter – and how its collapse triggered “the Panic of 1873”. The economic crisis that followed helped foment a populist uprising and the first major immigration crackdown in American history.
AI now essentially underpins the US stock market. A JP Morgan analysis Earlier this month, it was found that just 42 AI-related companies accounted for about two-thirds of the S&P 500’s stock price gains since the start of 2024. Meanwhile, AI-related companies are loan hundreds of billions of dollars to help finance data centers and the energy infrastructure to power them.
None of this proves that we are seeing a bubble or that this debt is a ticking time bomb for the financial system. The bursting of the dot-com bubble helped trigger a relatively mild recession. Debt played a lesser role in this boom, helping to limit the financial fallout. Its collapse did not trigger a systemic financial crisis like the one that followed the housing market collapse around 2008.
Even without a financial crisis, reckoning could be painful. Will all of these companies ultimately make enough money to justify all of their borrowing and spending? Will each does the business survive? Benedict Evans, technology analyst warned that fierce competition between companies offering AI models with similar capabilities could drive down the prices they can charge and leave little margin for profit – even if they spend ungodly amounts of money to develop and run these models.
When recessions accelerate automation
If an AI collapse triggers a recession, that would be painful enough. But it’s here A little studies adds to my anxieties. Because they suggest that recessions may be the very time when companies turn to new technologies to replace their workers.
We tend to think of automation as a gradual process. Technology improves, businesses adopt it, and jobs slowly change or disappear, in theory, while new jobs appear in other sectors of the economy. But this research suggests that automation can come in spurts, and that those surges tend to cluster around busts.
A studyby economists Nir Jaimovich and Henry Siu, found that jobs vulnerable to previous waves of automation saw most of their decline during recessions. Between 1990 and 2017, 88% of the decline in the share of Americans employed in these jobs occurred during recessions or in the months immediately before or after them.
And here’s the troubling irony: Fierce price competition could prevent AI companies from generating the profits investors expect, while making their technology cheaper so other companies can use it to replace their workers. If the AI collapse triggers a recession, that slowdown could accelerate worker replacement. Investors could lose their money and workers could still lose their jobs.
It’s a nightmare scenario. First, the crisis is taking a toll on our retirement savings. Then, as companies work to cut costs, many of our jobs are lost forever.
Of course, we still don’t know whether AI will generate enough profit to justify all the borrowing and spending, whether a collapse would trigger a painful recession, or whether the automation patterns seen in past recessions will be repeated with AI. A slowdown could leave companies with less money to invest in AI. And AI could still prove more useful in helping workers become more productive than in outright replacing them.
Whether AI brings one or two woes or none, there are policies that can limit the damage when workers lose their jobs. Obviously, unemployment insurance and other policies like that. And people like Bill Gates propose that we tax AI and robotsmaking it more economical to continue employing humans while generating revenue that the government can spend to strengthen the safety net. This idea is something we might explore in an upcoming newsletter.
So yes, there are reasons why this nightmare might never come true, and there are ways to limit the damage if it does. However, that didn’t stop me from worrying about it.
But it was cathartic to write this – to get these worries out of my head and onto the page.
LIVE VIRTUAL EVENT FOR NPR+ SUPPORTERS
Wondering what AI could mean for your livelihood? Join Adrian and his friends at The Planet Money indicator on Wednesday, October 28, for a virtual Ask an Economist event on AI and jobs. It will feature Daron Acemoglu, a Nobel Prize-winning professor at MIT who has criticized AI companies, and Ronnie Chatterji, a professor at Duke and chief economist at OpenAI. This is for our NPR+ supporters, join hereand fFind more details about the event here.
PS The life of Charles Kindleberger was extremely fascinating. As we have already writtenhe worked for the CIA’s wartime predecessor and helped design the Marshall Plan. Someone should probably make a Hollywood movie about him.
Gn bussni
