We may be in an AI bubble. What does that mean?

0:00Hey, before we get to today's Consider This, we have heard from listeners who say that Consider This has become part of their daily routine, a way to make sense of things. If that is true for you too, take a couple minutes and leave us a review. It's a small thing, but it really does help people find the show. Thank you. And now to today's episode.

0:30This partnership, I mean, this is, you know, monumental in size. That is the CEO of NVIDIA, Jensen Wong. His company makes advanced computer chips, and he went on CNBC to talk about NVIDIA's plans to invest up to$100 billion in open AI. That's the creator of ChatGPT. There's no question that AI is transformational for every industry, but the important thing is the AI infrastructure will be everywhere and will power computing experiences for everyone every day. $100 billion is a whole lot of money, but it's only one fraction of big tech's recent spending spree on artificial intelligence. In fact, the Financial Times reports that OpenAI has already announced about$1 trillion worth of deals with other companies this year alone.

1:22Right now, a lot of big names in tech are all in on AI. The biggest impact that AI is going to have is it is going to affect every company in the world. It is going to make their quality go up and their productivity go up. That's Amazon founder Jeff Bezos speaking at Italian Tech Week earlier this month, where he also said... The second thing that happens when people get very excited, as they are today about artificial intelligence, for example, is every experiment gets funded. Every company gets funded. The good ideas and the bad ideas. And investors have a hard time in the middle of this excitement distinguishing between the good ideas and the bad ideas.

2:08Bezos said that AI was in a, quote, industrial bubble. That right now, AI stock prices were, quote, disconnected from the fundamentals of their businesses. So how is it that AI could change the world and is also maybe in a bubble? I think it's almost a crisis moment for AI companies because the capital expenditure required to build these massive models is astonishingly large. Cal Newport is a computer science professor at Georgetown University and a contributing writer to The New Yorker. And he says that sooner or later, the AI companies are going to need to produce some big returns on their big investments.

2:46And in order to make a huge amount of money from these technologies, you need hugely lucrative applications. How are we going to make enough revenue to justify hundreds of billions of dollars of capital expenditures that's required to train these models?

3:03Consider this. On Wall Street and in Silicon Valley, even people who fully believe in the potential of AI are now warning that right now the AI market may be in a bubble of overinflated expectations. What if we are in a bubble? And what if that bubble bursts?

3:27From NPR, I'm Elsa Chang.

3:38It's Consider This from NPR. So is the AI boom actually more of a bubble? Because Wall Street is increasingly afraid of that. In fact, this week, J.P. Morgan CEO Jamie Dimon said, quote, a lot of assets appear to be entering bubble territory. And Bank of America's monthly survey finds that more than half of global fund managers now do believe that AI stocks are in a bubble. So what would happen if that bubble bursts? Well, to talk more about that, I'm joined now by Jared Bernstein. He's a policy fellow at the Stanford Institute for Economic Policy Research. He was also the former chairman of the Council of Economic Advisors under President Biden.

4:21Welcome. Thank you for having me. Thanks for being with us. OK, so bubble or not, it still feels like gazillions of dollars are going into AI companies right now. And we keep hearing how incredibly profitable the chipmaker NVIDIA is. So just to confirm, there is still tremendous amounts of investment going into AI at the moment, yeah? Yeah. And there's tremendous amount of investments going into all the past bubbles we've had starting in the 1600s with the tulip bubble. Right. So one of the characteristics of a bubble is that the level of the investment becomes detached, lastingly or persistently detached from the amount of return or profit that that asset, be it housing or internet, could plausibly generate.

5:05So the idea that you have a lot of investment flowing in is consistent with a potential bubble. Got you. Let's talk more about that because you have recently written an op-ed in the New York Times, which you wrote with Ryan Cummings, a fellow economist. And your op-ed, it's literally titled, AI sure looks like a bubble. Watch out when it pops. OK, so first, generally, what defines a bubble? It's what I was just saying. Every time you buy a stock, you're speculating on its future earnings, of course. Sure. What happens here is that large swaths of investors just continuously pour more investment into this asset without a ton of regard for how much it could reasonably pay back and by when.

5:49So let me just make sure I understand. When we call something a bubble, the implication is more about that thing being overhyped in its ability to make money, not necessarily being overhyped as a technology, correct? Critically important distinction you've just made because I wouldn't want anyone listening to this or reading our piece to think that we are disparaging AI's potential innovative or economically transformational impact, which could be huge. One bubble we haven't talked about is the railroads back in the 1800s. And same thing, huge investment bubble. It burst. It created tremendous economic havoc.

6:31And then it productively transformed the economies that were building it out. What we're talking about is very specifically whether the financing, the level of financing, is justified given the amount of returns that it implies. And if it's not, if investors start to get worried about this particular bet, they can unwind that bet. And if enough of them do that at the same time, then you have a bursting bubble. Okay. Well, if this AI bubble is indeed a bubble and it bursts, how could that bursting potentially affect all of us? I mean, could it trigger a recession, you think? There's no question it could trigger a recession.

7:12And in fact, past bubbles have clearly done so. When the internet bubble burst, the unemployment rate went up a couple of points. That was not as bad as the housing bubble, which led to a shutdown of global credit markets and an unemployment rate in this country that went up over five points. What we worry about in the case of the AI bubble is something called the wealth effect. And that means that if the stock market tumbles enough so that people feel and in fact are a lot less wealthy, they're going to spend less. And real consumer spending has been driving this economic recovery. Should that retrench because of a bursting in the AI bubble and this wealth effect, it's potentially recessionary.

7:58Well, then is there some kind of course correction to be done here in order to avoid a burst of a bubble or to mitigate whatever damage results from the bubble bursting? The mitigation typically takes the form of fiscal policy, unemployment insurance, the usual kinds of programs that we implement when the economy takes a hit. there's not that much you can do to deflate a bubble or at least not much that you can do safely except what we're doing right now which is to try to talk about it to raise consciousness among investors so that the numbers and risks are more transparent versus more opaque i've always thought that opacity is really your enemy when you're talking about this kind of finance so i think the more we can be transparent about the valuations that are in place, about the expected returns, about the potential economic impacts of AI, the better chance we have of rationalizing some of this potential irrationality.

9:02Jared Bernstein is a policy fellow at the Stanford Institute for Economic Policy Research. Thank you so much for joining us today. My pleasure. This episode was produced by Brianna Scott. It was edited by Patrick Jaron Watanon. Our executive producer is Sammy Yenigan.

9:23It's Consider This from NPR. I'm Elsa Chang.