Ross Douthat had a good segment last week with Jason Furman, who had been the head of the Council of Economic Advisors under President Obama, and also a top advisor to Clinton, in addition to many other claims to fame. Furman was mostly laying out the argument that we are seeing an AI bubble drive the stock market and the economy, similar to what we saw with the tech bubble in the late 1990s. 

Furman made most of the points that I and others made. The price-to-earnings ratio of the overall market is at record highs by most measures. You also have the stock of huge well-established companies like Microsoft selling at price-to-earnings ratios that could make sense for a start-up but very hard to see for a well-established company.

But Furman, out of a desire to be balanced, also set out a case as to why there may not be a bubble. Furman’s both sides effort focused on the stock valuation side. He points out that people who held an S&P 500 index in the summer of 1996, when Fed Chair Alan Greenspan made his famous “irrational exuberance” comment would have done very well even after the crash in 2000-2002. 

This point is true, although that would not be the case for people buying near the peaks in 2000. But more importantly, there is a productivity and economic growth story that goes along with the non-bubble story. Real GDP growth averaged more than 3.9 percent from the second quarter of 1995 to the first quarter of 2001, when the bursting of the bubble brought on a recession.

This was at a time when the baseline projections of growth for this period were 2.6 percent. This meant that over that six-year period, the economy grew by roughly 8 percent more than had been projected. In today’s economy, 8 percent of GDP would be $2.4 trillion in additional annual output. That would come to a bit less than $20,000 per household, every year. Productivity growth also ran more than a full percentage point above prior projections for the decade from 1995 to 2005. 

This is worth giving some serious thought to for a few minutes. Suppose that in 2030 our GDP is 8 percent higher than what the Congressional Budget Office and most other analysts are currently projecting. That would mean we would be hugely richer than we are now, at least on average. (We do have the problem it could all go to Elon Musk and his friends, but we’ll leave that story aside for now.) 

Let’s take a problem like the government debt. We’re supposed to be terrified of projections showing that the debt will be close to 140 percent of GDP in 2030 and we will be paying more than $1.3 trillion in interest each year. But if the economy is 8 percent larger than we are now projecting it to be, why should we care? (Faster growth will mean lower deficits and lower debt, but let’s ignore those facts for now.)

There is a huge deficit hawk industry in Washington, with people getting paid good salaries to constantly yell about the deficits, so we might still hear the whining. But insofar as the deficit hawks are honest in their complaints, their story is supposed to be that deficits are undermining growth and jeopardizing future living standards. If we see an explosion in growth due to an AI boom, there is little reason to worry about whatever modest drag on growth we might see from large deficits. (Arguably, there is no drag on growth, but I’m happy to throw the deficit hawks this bone.)

The same story applies with the demographic crisis we are continually warned about. If no one has kids, then we won’t have any workers to care for us retired baby boomers. The Social Security Trustees project that in 2035 we will have just 2.3 workers for each retiree, compared to 2.7 workers today. That is supposed to be a really scary story. 

But if each worker is 10 percent more productive in 2035 than we now project, and they get that in their pay, then we could raise the Social Security tax by four full percentage points (way more than is actually needed) and still leave 2035 workers 6 percent better off in terms of after-tax pay than we are now projecting for them without the boom and no tax increase. 

I know the politics of a big tax increase are awful, although Trump seems to have done fine with his huge import taxes, but if we’re talking about a generational issue the question has to focus on living standards, not what people choose to whine over. And if there is anything like the economic boom that would justify current stock prices, then we have absolutely zero reason to worry about our children and grandchildren having worse living standards than we do. (We do still have to worry about global warming wrecking the planet, but we’ll leave that aside for now also.)

Anyhow, the basic point here is a simple one. If current valuations in the stock market actually make sense, and are not a bubble, then the future will look very different than the one most people now imagine. We have zero reason to fear budget deficits and debt, and the demographic scare stories many are pushing are complete nonsense. 

I am skeptical that we will see this sort of economic boom, but the math is irrefutable. It would take a huge uptick in economic growth to make sense of current stock prices and if we see that uptick then the economy and society in the near future will look hugely different than the one that the politicians and pundits are talking about.