We Asked Vanguard’s Chief Economist Why AI Has Two Huge Tails — And Which One Wins

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**Joe Davis** (0:58)
There has never been a great technology that has not had a significant drawdown in stock prices, which is code word for saying what some would say, there's a bubble forms. We're having economic growth projections that are 50 percent above the consensus. Our projections are, AI is going to affect 80 percent of the occupations at twice the rate of the personal computer in four years, the personal computer took 15 Either the trend for growth is going material higher because of the innovation of AI that overcomes the demographics and the debt levels we have. That is by far our most likely outcome.
But if AI only manifests along certain technology, if it only automates, which means it has not become a general purpose technology. We use it all, but it's like the farm tractor. That would be disappointing and then that sets in the motion this eventually, not today, not tomorrow, but you get fiscal pressures because they're already high.

**Matt Zeigler** (2:01)
You're watching Excess Returns, a channel that makes complex investing ideas simple enough to actually use where better questions lead to better decisions. I'm Matt Zeigler, Justin Carbonneau is co-hosting with me today our guest, Global Chief Economist and Global Head of the Investment Strategy Group at Vanguard down the street from me in Pennsylvania, author of the 2025 Best Seller. Coming in to view how AI and other megatrends will shape your investments, Joe Davis, welcome to Excess Returns.

**Joe Davis** (2:27)
Thanks for having me. Pleasure to be here.

**Matt Zeigler** (2:29)
I was telling you before we started recording, it's worth saying it, if you haven't seen a copy of this book, make sure you check it out. I think of the books that my team at Sunpoint or RIA, like all held up and said, this is really, really cool.
This book is one of them. Thank you for writing it.

**Joe Davis** (2:45)
Well, again, we didn't aim to write a book, at least that wasn't the goal. Our goal is to try to get a handle on where AI could go several years ago and how that would compete with some other serious trends, which we're going to probably talk about today. And again, all the proceeds from the book go to charity. But if it's helpful for audiences, really smart audiences, but perhaps not reading economic white papers every day, that was the goal is to make it as accessible as possible for a really smart and savvy investment audience.

**Matt Zeigler** (3:19)
Succeeding on all rounds. So I'm taking you right here first, which is basically one thing I love about your work is the embracing of quantitative frameworks, and not in the way that loses touch with reality. So how should investors think maybe differently about macro when they zoom out to that long term lens? Because you see it kind of in a unique way, and a lot of professionals, they just underweight the slow moving nature of the way you purchase.

**Joe Davis** (3:46)
I think that was even a learning to myself, and I've been in the business over 20 years. I think there's a standard approach which looks at the near term economic contours of the data. You can think of GDP or the inflation rate, what the federal funds rate may be doing. And then, of course, there's an implicit mapping or explicit to the bond market and the stock market. We do all that, but what we've added and what we spent some time, which is behind the book and the analysis, is looking at the evolution of these longer-term trends, too. And what I found fascinating is that when those trends start to change, which can happen on a regular basis, they themselves affect the near-term, not just some long-term assumption that say, hey, I'll worry about that 10 or 15 years from now. It affects the business cycle.