Technology companies shaping our AI future are singing a siren song to Congress to convince the government to lay a light regulatory hand on the industry.
"Artificial intelligence will solve all your budget problems," the pitch goes. "Industry leaders claim the technology will turbocharge productivity growth, generate a flood of new tax revenue, slash the cost of delivering government services, and perhaps even bend the curve on Medicare and Medicaid spending," writes Jessica Riedl in Reason.
Deficits will be erased, we'll never face a debt crisis, and AI will bring us to a new paradise. Or something.
The sad fact is that it will never matter how much AI cash, or any other revenue stream, is poured into government coffers. It never has and never will. Remember the "Peace Dividend" at the end of the Cold War or the massive jump in productivity as a result of the dot-com revolution?
All that money was spent before it was even collected. And that's what's going to happen to any gains in revenue we get from AI. Congress will see to that.
"The 'easy answers' of simply cutting waste, defunding immigrants and foreigners, taxing the rich, or slashing defense spending are woefully insufficient to address budget deficits on track to hit 9 percent of GDP within a decade and 14 percent of GDP within three decades under current policies," writes Riedl. Simply put, there's no escape now. Joe Biden sealed the deal with massive spending on pandemic "recovery" — more than $5 trillion in giveaways to unions, teachers, bureaucrats, and other Biden supporters in the largest campaign payback scheme in history.
Eventually, the piper will have to be paid. Or executed. Social Security and Medicare will have to be trimmed, and new taxes will be imposed. It may be another sovereign debt crisis that triggers the emergency. It could be a severe recession. We can't continue to run $2 trillion budget deficits forever and expect there to be no consequences.
What about that massive spike in productivity? Can't we just grow our way out of a $2 trillion deficit and $37 trillion national debt, you might ask?
To give a serious answer to that question, I need to be smoking whatever it is you're toking on right now.
The late 1990s technology boom drove annual productivity growth roughly 1 percentage point above its long-run trend from 1995 through 2005. That extra growth generated healthy tax revenue and broadly raised living standards. If AI delivers a comparable shock—and some credible economists believe it could deliver more—the revenue windfall would be real and substantial. A sustained 1-point boost to annual productivity growth rates would raise tax revenues by $143 billion annually in 2028, rising to $834 billion (1.8 percent of GDP) annually by 2036.
While such revenues are significant, they would shave only a fifth off the $4.4 trillion projected budget deficit under current policies. As exciting as it may be to nearly double productivity growth rates, this would barely offset the economic growth declines already occurring due to labor force reductions driven by falling fertility rates, retiring baby boomers, and immigration restrictions.
"Altogether, even an optimistic scenario delivers only $1 trillion annually in new net revenues by 2036," writes Riedl. That's a lot of cash that Congress will be able to spend on anything except deficit reduction.
At least some of that $1 trillion will be spent dealing with the fallout from the massive increase in automation. Even if unions try to put the brakes on job loss, some industries are going to be hard hit. "A full AI workforce revolution without significant and expensive job displacement costs is highly unlikely, and the adjustment costs for existing workers could be painful and expensive," writes Riedl.
How much? Displacement costs could eat up anywhere from 15% to 40% of all new tax revenues. At that midpoint, labor displacement would total $250 billion annually by 2036.
There's a lot of uncertainty, of course. Healthcare costs may come down substantially as a result of AI-generated savings in administration. But people may live longer, taxing the Social Security System even more as AI assists in finding cures for diseases. Paradoxes like this abound in trying to determine the benefits and problems with AI as it relates to the federal budget.
The only thing we can really count on is that Congress is unlikely to get serious about reducing the budget deficit and addressing the long-term debt crisis unless there's a gun to its head. Unfortunately, Congress is likely to point the gun at us if it can help it.
