AILSA CHANG, HOST:
So is the AI boom actually more of a bubble? Because Wall Street is increasingly afraid of that. In fact, this week, JPMorgan's 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 Advisers under President Biden. Welcome.
JARED BERNSTEIN: Thank you for having me.
CHANG: 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?
BERNSTEIN: Yeah. And there's tremendous amount of investments going into all the past bubbles we've had...
CHANG: (Laughter).
BERNSTEIN: ...Starting in the 1600s with the tulip bubble.
CHANG: Right.
BERNSTEIN: 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. So the idea that you have a lot of investment flowing in is consistent with a potential bubble.
CHANG: 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?
BERNSTEIN: It's what I was just saying. Every time you buy a stock, you're speculating on its future earnings, of course.
CHANG: Sure.
BERNSTEIN: 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.
CHANG: So 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?
BERNSTEIN: 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. And 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.
CHANG: OK, 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?
BERNSTEIN: There's no question it could trigger a recession. And 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.
CHANG: Well, 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?
BERNSTEIN: The mitigation typically takes the form of fiscal policy, unemployment insurance, the usual kind 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.
CHANG: Jared Bernstein is a policy fellow at the Stanford Institute for Economic Policy Research. Thank you so much for joining us today.
BERNSTEIN: My pleasure.
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