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AI productivity could shrink the economy
The spending loop
Citrini Research laid out this scenario in a blog post. The wages of one person become the spending in the economy, which becomes the wages of the next person. Fewer employees means fewer wages, which means less spending and less revenue for companies, and companies then tighten their belts and cut more staff. The cycle repeats and spirals downward.
The post's argument
A three-sentence summary of the post: if the bulls are right and AI works exactly as everyone predicts, that is precisely what breaks the economy. White-collar jobs get gutted, displaced workers earn far less, and consumer spending collapses. The productivity gains flow entirely to the owners of compute rather than circulating through households.
The sell-off
A large stock market sell-off hit around the same time the post circulated. People who agreed with the conclusion and people who disagreed were both angry at the firm.
How much of the economy is consumer spending?
According to the US Bureau of Economic Analysis, personal consumption makes up roughly two thirds of US gross domestic product. Households pay for food, housing, health care, and services out of their paychecks. A drop in wages across a large group of workers therefore reduces demand for nearly every business. The pattern is why economists watch employment and spending numbers together.
Have new machines destroyed jobs before?
Economist James Bessen found that the number of bank tellers in the United States grew for decades after automated teller machines spread. Machines cut the cost of running a branch, so banks opened more branches and hired tellers for other tasks. Similar stories come from earlier waves, such as spinning machines in the nineteenth century, where some occupations shrank while others grew. Economists still argue over whether each new wave will follow that history.
Why can falling demand feed on itself?
Economist John Maynard Keynes described this loop in the 1930s. One person's spending is another person's income, so a cut in spending by some reduces incomes for others, who then cut theirs. The size of the total effect is called the multiplier. During the Great Depression, US output fell by about a quarter between 1929 and 1933.
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