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What happens if an AI bubble bursts, triggering a recession, and that recession ends up accelerating the replacement of workers with AI? Call it the double whammy of AI.
I know. Dark thoughts.
I have long been skeptical of widespread claims about how AI will transform the world. I still am. We really don’t know. But as this technology advances, I become increasingly concerned about what it could mean for our livelihoods.
Two streams of economic research have given me reason to take this double whammy seriously. One refers to 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 performed by humans.
When revolutionary technology fuels a bubble
First, the bubbles. In 1978, economist Charles Kindleberger published an influential book titled Manias, panics and crises: 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 pattern.
Often the bubble begins with some big 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 be excited about this. But they get too excited. During the boom, they bet tons of money basically hoping the sky is the limit. And they often rack up debt in the process, borrowing money to make even bigger bets and thus helping fuel the boom even further. That debt can become a time bomb. When reality sets in, asset prices fall, but those debts remain. Borrowers struggle to pay, lenders suffer losses, and a market crash can lead to a financial crisis and a painful recession.
A crucial idea is that a technology can be truly revolutionary and still fuel a bubble that ends in a financial crisis. For example, railways. I wrote about that bubble in a previous Planet Money fact sheet — and how its collapse triggered “The Panic of 1873.” The ensuing economic turmoil helped fuel a populist uprising and the first major immigration crackdown in American history.
AI is now basically propping up the US stock market. A JP Morgan analysis earlier this month found that just 42 AI-related companies accounted for about two-thirds of the S&P 500’s stock price gains since the beginning 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 what we are witnessing is a bubble or that this debt is a time bomb for the financial system. The bursting of the dot-com bubble helped usher in a relatively mild recession. Debt played a minor role in that boom, helping to limit the financial fallout. Its collapse did not trigger a systemic financial crisis like the one that followed the housing market crash around 2008.
However, even without a financial crisis, there could be a painful reckoning. Will all of these companies finally make enough money to justify all their loans and expenses? Willpower each Does the company survive? Technology analyst Benedict Evans has warned that fierce competition between companies offering AI models with similar capabilities could drive down the prices they can charge and leave little room for profit, even when they are spending ungodly amounts of money to develop and run these models.
When recessions accelerate automation
If an AI crash triggers a recession, that would be pretty painful. But this is where to few studies increase my anxieties. Because they suggest that recessions may be the precise moment when companies turn to new technologies to replace workers.
We tend to imagine automation as a gradual process. Technology improves, companies adopt it, and jobs change or slowly disappear, in theory, while new jobs appear in other parts of the economy. But this research suggests that automation can occur in bursts, and those bursts tend to cluster around recessions.
One studyby economists Nir Jaimovich and Henry Siu, found that jobs vulnerable to previous waves of automation experienced most of their decline around 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 disturbing irony: Fierce price competition could prevent AI companies from generating the profits investors expect, while making their technology cheaper for other companies to use to replace workers. If an AI downturn triggers a recession, that slowdown could accelerate the replacement of workers. Investors could lose their money and workers could still lose their jobs.
It’s a nightmare scenario. First of all, the crisis hits our retirement savings. Then, as companies struggle to cut costs, many of our jobs are permanently lost.
Of course, we don’t yet know whether AI will generate enough profits to justify all the borrowing and spending, whether a downturn would trigger a painful recession, or whether the automation patterns found in past recessions will repeat themselves with AI. A recession could leave companies with less money to invest in AI. And AI could still prove more useful in helping workers be more productive than replacing them entirely.
Whether AI causes one, two, 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 should tax AI and robotsmaking it more economical to continue employing humans while generating revenue that the government can spend to improve the safety net. That idea is something we might explore in a future newsletter.
So, yes, there are reasons why this nightmare may never come true, and there are ways to limit the damage if it does. That, however, hasn’t stopped me from worrying about it.
But it was cathartic to write this: to get these worries out of my head and onto paper.
LIVE VIRTUAL EVENT FOR NPR+ SUPPORTERS
Wondering what AI could mean for your livelihood? Join Adrian and friends of The money planet 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 MIT professor who has been critical of AI companies, and Ronnie Chatterji, a Duke professor and chief economist at OpenAI. This is for our NPR+ followers, join hereyfFind more details about the event here..
PS: The life of Charles Kindleberger was super fascinating. As we have written beforeHe worked for the CIA’s wartime predecessor and helped design the Marshall Plan. Someone should probably make a Hollywood movie about him.
