Can AI really fix America's $39 trillion debt problem?

**SPEAKER_1** (0:00)
Hello, folks, you're tuned in Finshots Daily. In today's episode, we explore whether the AI boom can actually solve the US debt crisis.
But before we begin, here's a quick note from Team Ditto. This weekend, we're hosting a free two-day insurance masterclass that helps you build real financial security by understanding health and life insurance the right way. Well, the masterclass is completely free, and you can head to the link in the description to register while you see its last. Okay, let's start with the story.
When a government spends more than it earns in taxes and other revenue, it runs a deficit. To plug that gap, it borrows money by selling bonds to investors, banks, other countries, and even its own central bank. In return, it promises to pay them interest every year and repay the full amount when the bonds mature. Over time, all that borrowing, along with the unpaid debt that's rolled over year after year, adds up to what we call the national debt. And for the US., that debt crossed a staggering $39 trillion just a couple of months ago. To put that in perspective, it took the US nearly 200 years to accumulate its first $1 trillion in debt, a milestone it reached only in 1981 Three years later, that figure had doubled, but jumping from $38 trillion to $39 trillion took just about six months.
A big reason is that America's debt has kept snowballing over the years, and the COVID-19 pandemic alone added more than $4 trillion in a single year, as the government spent aggressively to keep the economy afloat. Today, the consequences are becoming hard to ignore. The US now spends over $1 trillion every year just on interest payments. That's more than what it spends on Medicare or national defense. And for the first time since the years following World War II, the country's debt has grown larger than the entire economy that supports it. And if current projections hold, US debt could climb to roughly 120% of GDP over the next decade. Now, while all of this sounds alarming, America's debt problem isn't exactly new. The US has been living with a growing debt pile for decades. And year after year, it has managed by simply borrowing more. It has continued to issue fresh bonds to repay old ones, has raised the debt ceiling, which is the limit on how much debt is allowed to take on, and has kept the economy strong enough that investors around the world remain willing to keep lending its money. That strategy has worked so far, but it comes with a cost. As interest payments keep rising, they eat into the government's budget, leaving less money for things that can actually boost future growth, like education, research, and infrastructure, which is why the US needs more than just a way to keep borrowing. The obvious way out would be to cut spending, raise taxes, or do a bit of both to shrink the annual deficit. But what if there was another way? What if AI made workers and businesses so much more productive that the economy simply grew its way out of the problem? Just think about it. If companies produce more profits rice, workers earn more, and without changing tax rates, the government automatically collects more tax revenues. That's why some people, including Elon Musk and economists like Joe Davis, believe an AI-driven productivity boom could help the US outgrow its debt burden. But can AI actually solve America's debt crisis? Well, let's start with the optimistic side of the argument. Economists generally agree that faster productivity growth can genuinely improve government finances, and history offers a good example. During the internet boom of the late 1990s, the US economy became much more productive. As businesses expanded and incomes rose, the government collected more tax revenues without raising tax rates. The end result was that between 1992 and 2002, the US shrank its budget deficit by roughly 60%.
And many believe that AI could trigger a similar way. In fact, a research paper published by Brookings just last week estimates that an AI-driven productivity boom of a similar scale could reduce annual deficits from about 6% of GDP to just 2%.
That's more than $2.2 trillion in deficit reduction over the next decade. The OECD backs this up too. It says that if AI meaningfully boosts productivity and employment, public debt across wealthy economies could fall by around 10% by the mid 2030s. So at the first glance, the idea sounds pretty convincing. But there's a catch because it's not quite that simple. Sure, AI can make workers more productive and help the economy grow faster, but it can also create new costs that chip away at those gains. And the Brookings paper points to a few important ones. Take health care, for instance. If AI helps people live longer and healthier lives, that's undoubtedly good news. But it also means that the government has to keep paying social security and Medicare for more years. And then there's the labor market. If AI ends up replacing some workers, the government may also have to spend more on unemployment benefits and other forms of income support. And then there's another issue. AI could shift more income from workers to company owners because only a handful of companies are driving and profiting from the AI boom. But business income and corporate profits are generally taxed less heavily than wages. To give you some context, payroll taxes which apply only to wages make up about 33% of US federal revenue. Income taxes account for another 52%, but only a small share of those taxes come from capital income. And the tax rates themselves aren't equal either. Top-page earners can face effective marginal tax rates exceeding 40%, while much business income is taxed below 30%.