Is There an A.I. Bubble? A Debate.

SPEAKER_1 (0:00)

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Ezra Klein (0:57)

Right now, AI is the driving force. Behind the gains in the US stock market, behind US economic growth, it is sucking up so many construction resources, it now appears to be crowding out housing, manufacturing facilities, basically everything else you might need to build. And the question, even just from a financial perspective, is, is this all worth it? Is all of this investment going to pay off or is AI a bubble? And one of these companies is going to miss an earnings target or get downgraded, and the whole thing is going to pop, taking all of our retirement portfolios with it. So I wanted to have two different perspectives on this.

Dr. Paul Kedrosky is a partner of the venture capital firm, SK Ventures. He's a fellow at MIT's Initiative on the Digital Economy. He's a popular newsletter at paulkedrosky.com, and he's been very vocal that he thinks we are in an AI bubble. Azeem Azhar is a British technology entrepreneur, an author and an analyst. He is a creator of the Exponential View, which is both a great sub-stack that I read often, and a research platform where, among other things, we've been creating these dashboards, tracking whether or not there's financial stress in the AI industry. And his view is somewhat more optimistic, I think it is fair to say, than Paul's. So I want to put the two of them into conversation together to try to see why you might think and why you might not think we are in an AI bubble.

Paul Kedrosky, Azeem Azhar, welcome to the show.

Paul Kedrosky (2:22)

Hey, Azhar, good to be here.

Azeem Azhar (2:23)

It's great to be here, thanks.

Ezra Klein (2:25)

Paul, make the case to me, this is a bubble. I mean, that's a big claim, right? You're saying that all these investors, all this money pouring in, all of these sophisticated analysts at BlackRock and Goldman and wherever, and the hyperscalers like Google and Meta, but they're all getting this wrong on some level, and you're not. So why do you think it's a bubble and they're all idiots?

Paul Kedrosky (2:48)

Well, I wouldn't go quite as far as they're all idiots. That may be true, though.

I'll step back on that one. So what's unusual about this? Let's just talk about really quickly what a bubble is. A bubble is whenever our asset prices detach from any semblance of economic reality. We have one of the largest competitive capex spending waves in history. So in Western economic history, there have been like eight or nine of these moments where we build out some general purpose technology, a GPT, but not the CHAT GPT kind, but a general purpose technology. And so when we're building it out, like we were the railroads, like we were electrification, like we were the canals, like we were the interstate highways.

And every one of those moments has led to overbuild. There isn't a major economic capex episode in Western economic history that didn't end in a rolling series of crises, vastly inflated asset prices, and vast oversupply of capacity for whatever the thing was, right? Railroads, fiber, take your pick. And so that's the bubble. The bubble is, once again, we're vastly oversupplying something because of the availability of capital and the eagerness of the suppliers of the capital to continue building out in anticipation of future demand. Now, none of this is to say that like AI is frivolous or it doesn't work or that there aren't incredibly useful cases for it. That's not the point any more than that was the point for railroads, right? Railroads are incredibly useful, but it still ended up where something like 50% of the track miles ever laid turned out to be useless, right? So the bubble is this vast oversupply of something largely fueled now by credit, which in turn will lead to massive business failures and write down of assets. And all of that credit has spread through the economy. It's inside of insurers, inside of private credit, it's inside of sovereign wealth funds. And we're on the order of trillions of dollars now. And it's probably going to hit 10 trillion before it's done.