This article first appeared in the Planet Money newsletter.You can sign up here.What if an AI bubble bursts, triggering a recession, and that recession ends up accelerating the replacement of workers with AI? Call it the AI double whammy.I know.
Dark thoughts.I've 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 strands 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 businesses use technology to do tasks that were previously done by humans.First, the bubbles.
In 1978, the economist Charles Kindleberger published an influential book titled Manias, Panics, and Crashes: A History of Financial Crises.Drawing on the theoretical work of economist Hyman Minsky, Kindleberger went through centuries of economic history and saw a recurring pattern.Often the bubble starts with some big potential change to the economy.
A revolutionary new technology, for example, that promises to transform industries and create enormous wealth.Investors have a good reason to be excited by it.
But they get overly excited.During the upswing, they bet tons of money expecting basically that the sky is the limit.
And they often build up debt in the process, borrowing money to make even bigger bets and thereby helping to further fuel the boom.That debt can become a ticking time bomb.
When reality sets in, asset prices fall, but those debts remain.Borrowers struggle to repay, lenders suffer losses, and a market crash can spiral into a financial crisis and a painful recession.One crucial insight is that a technology can truly be revolutionary, yet still fuel a bubble that ends in a financial crash.
For example, the railroads.I wrote about that bubble in a previo...