Tech stocks suffered a massive, trillion-dollar sell-off late last week, which I would think would be a big deal. As I very crudely understand it, the tech giants have spent enormous amounts of money preparing for the AI takeovere or whatever it is they’re preparing for. The spending has squeezed their core profit margins and cash flows. Yet the expected profits still seem far away. I understand there has been an AI stock collapse in China as well.
Do see What the Economy Is Sacrificing to AI by Annie Lowrey at The Atlantic, which was written before the tech stock implosion. To mix metapors,, Big Tech putting all its chips on AI is sucking the air out of other parts of the economy.
Investors are more pumped about AI than they have been about any technology since the railroad. If they weren’t directing a torrent of money to the handful of firms finessing algorithms and constructing data centers, the country’s employment level and economic output might be lower. Then again, if they weren’t directing a torrent of money to the handful of firms finessing algorithms and constructing data centers, they might be directing it to everyone and everything else. So is AI fueling the American economy or siphoning gas from it? Is it “crowding out” investment in non-tech enterprises, as economists put it, or boosting investment in an otherwise lackluster expansion?
It’s still not clear to me how AI is eventually going to be monetized, other than by eliminating a lot of jobs. I assume the Tech Bros have some idea how that’s going to work. But I’m also skeptical that AI is going to ever live up to the hype and be as transformative as the Tech Bros assume it will be. We’ll see.
Certainly, AI is pushing up GDP—or, to be precise, the AI build-out is pushing up GDP. In 2020, American businesses spent $3.6 trillion, adjusting for inflation, on investments in durable assets, such as software, warehouses, and trucks. Last year, they spent $4.4 trillion. Oracle, Microsoft, Amazon, Meta, and Alphabet are shelling out $800 billion on capital expenditures just this year, a sum that has grown eightfold over the decade. It’s a Silicon Valley hard-hat stimulus, bigger than the one Washington passed to counter the Great Recession. And it is transforming national accounts.
The smart business guys are not always right. I remember for a time during the Reagan Administration my daily commute took me past a strip of land that was filling up with new office buildings. At the time there was a housing crisis and shortage caused by a massive rollback of federal housing programs, high interest rates, and a drop in construction of affordable housing. Which Reagan, of course, dismissed as a nonissue, since he could pick up a newspaper and see houses for sale in the classifieds. But anyway, in New Jersey the smart building money was going into office space. And sure enough, most of those snazzy new office buildings sat mostly empty for the next several years and were eventually bulldozed, although I haven’t been back to see what’s there now.
At the same time, the amount devoted to building housing and retail outlets has dropped 10 percent. Spending on the construction of education facilities is down 13 percent; offices, 14 percent; hotels, motels, and resorts, 15 percent; and manufacturing plants, 24 percent.
Tech enterprises are not merely making it more expensive for non-tech enterprises to finance construction projects. They’re bidding up the cost of labor, land, and materials. They’re spurring landlords and institutional investors to buy Treasuries or stocks instead of bothering with apartment buildings and retirement homes. They’re forcing families to pay more for home loans too. As a general point, high yields are “sucking all the money out of the mortgage market,” Daryl Fairweather, the chief economist at Redfin, told me.
Governments trying to build infrastructure are getting hit by the same increase in borrowing costs. So are families looking to buy a new car or renovate a property. So are young people looking to launch a small business or sign up for a training program.
True Believers in capitalism and free markets will tell you that the economy always adjusts to provide what people need. The famous invisible hand created by the buying decisions of self-interested individuals naturally promotes the general social and economic interests of everybody. If only. When most of the investment money is chasing after something that people really don’t need but which promises to make some rich people richer, what everybody needs gets shoved aside pretty efficiently. And given the pushback against data centers, it appears a lot of the everybodies have realized what’s going on.
Lowrey concludes her article with “But the more resources the country devotes to AI at the expense of other innovations, the more its future depends on that bet paying off.”
And if you need to be more depressed, see How Trump Is Dismantling America’s Scientific Research Machine at the New York Times.
Meanwhile, Trump continues to lose in court. Yesterday a federal judge ordered the Department of Justice to stop threatening state and local election officials with criminal prosecution. Another judge has dismissed, with prejudice, Trump’s lawsuit against the Wall Street Journal for publishing the story about the Epstein birthday card.
Virginia and the District of Columbia have filed suits to stop the construction of Trump ginormous Arch that will cast a shadow over Arlington, including over the grave of John F. Kennedy. Arlington County and a group of Vietnam veterans have also filed suits to stop the arch. I hope they succeed. If it’s built the thing will have to be demonlished sooner or later, anyway. And maybe a lot of data centers, too.