Dean Baker on the AI Bubble

Welcome to CounterSpin, your weekly look behind the headlines. I'm Janine Jackson. This week on CounterSpin, the way we hear about the stock market is quite different from the vision many people still hold, that businesses strive to serve people's needs or desires, and investors are rewarded by that metric, not by convincing people that they might make a lot of money in the future. or by conspiring with powerful entities to ensure that shareholders profit by whatever means. This longstanding confusion and conflict are being showcased right now in the unasked for push of artificial intelligence into so many aspects of our lives and the aggressive build-out of energy-gobbling data centers to serve it, whether communities want them or not. Now, questions are arising around whether the promises of endless growth of the AI industry actually make any sense. Is there an AI bubble? How would we know? And what happens and to whom when it bursts? A new project engages questions, not just about price-to-earnings ratios and historical comparisons. but about the predictable impacts on, for example, workers' retirement accounts when the AI exuberance falls to Earth. Dean Baker is co-founder and senior economist at the Center for Economic and Policy Research and the force behind their new project called the AI Bubble Monitor. He joins us this week on CounterSpin. That's coming up, but first we'll take a very quick look back at some recent press.

There's a lazy host thing where you're introducing someone who wrote about, say, freedom, and you say, I looked up freedom in the dictionary. But I did go ahead and ask the internet what the stock market is. And I was told that it operates like a giant virtual auction house that connects everyday investors who want to sell with investors who want to buy. A market bubble, I learned, is a rapid rise in the price of stocks or other assets that is not justified by fundamentals and is followed by a sharp fall in prices once investor enthusiasm wanes. Well, some of us don't feel comfortable talking about a market that trades things like chits when those things impact human beings having food or shelter or breathable air. But it is a system that we need to understand on its own terms, even as we keep trying to translate them to human needs. All of these questions are at the surface when we talk about AI and the current market infatuation with it. What exactly is happening? What does it have to do with your life? Does it make sense even in market talk? Here to shed some light on this is Dean Baker. He's co-founder and senior economist at the Center for Economic and Policy Research. He's author of, among other titles, Rigged, How Globalization and the Rules of the Modern Economy were structured to make the rich richer. His newest project is called the AI Bubble Monitor, and he joins us now to talk about the what and the why of that. Welcome back to counterspin, Dean Baker. Hi, Gene, thanks for having me on. Well, on AI and the infrastructure around it, it's the matter of factness that kind of kills me. This is happening. Get with it or die mad. But economic systems are political systems and choices. We shouldn't have to just silently accept that. Certain people are deciding what industries should survive based not on what people need, but on what some folks say should happen. So before we get into the specifics, I'd ask you to orient us a little bit here. AI and data centers, a large part of people's concern is just that it's come at us so fast and furious, you know, even if we aren't economists. We're not wrong to be concerned about this forced inevitability vibe, are we? It just doesn't sound like building a better mousetrap. Well, I think for the most part it's probably fair to say a lot of the people involved in a, I don't know what they're doing. And I'm saying that in all seriousness. So we get all these stories about AI models that you've probably heard the term, they hallucinate. They make things up. And again, I shouldn't assign human characteristics for that. They're not people. But the point is that they're ill-designed models. It's very problematic to say, we're going to turn things over to AI and it's going to do this, it's going to do that. Because, again, a lot of times...

The people design the systems don't know what they're doing. And that should be very troublesome. So we're getting this thing like, oh, we have to move ahead with AI. And I'm not particularly opposed to moving head with AI, but the idea that it has its own dynamic, that its own, you know, the AI is going to do it for us or something. We're going to decide what we want to, and I'll come back to who we is in a second, but we're going to have to decide what we want AI to do. And the we, as it is now, it's probably largely Elon Musk and Mark Zuckerberg and Sam Altman. But. As a practical, as a practical matter, as a political matter, we need to regulate it. We have to say, you know, what it can do? Who's responsible for when it messes up? And I'll guarantee you it will mess up. There was a case in Germany where they said Google's strictly liable for mistakes from its AI. If it's AI, it gives you the wrong answers and that causes people that do things, you know, to mess up. Google's responsible. I think that's a great ruling. You know, it should be very clear. You know, that's wonderful. You know, Anthropic, whoever, whichever big AI company, they designed the model, doesn't work right. Well, great. You pay the cost to anthropic. You pay the cost to Google. But these are rules that we have to put in place, and we've kind of gone the other way. So I was just reading that. I believe it was in Mississippi that the administration, the Trump administration is saying, oh, yeah, the environmental regulation is great, but we have AI, so that doesn't apply here to its national security. And, you know, I understand Trump doesn't care much about the law, but you don't throw you laws in the garbage because AI. I mean, that literally is just nonsense. Right, right. Well, let's get into some particulars here. Riding high after IPO, SpaceX will buy... AI startup for $60 billion. This is all the New York Times. Elon Musk's newly listed rocket maker has become one of the world's most valuable companies. Also, it could turn 4,400 employees into millionaires. Also, want to invest in SpaceX? Here's what to know. You know, I got all of this from the New York Times. It seems like there's a lot of confetti flying around. the SpaceX IPO. How grounded is that and how meaningful is that in this conversation? SpaceX, I mean, the market capitalization, this is just incredible. I think we're up to $2.7, $2.8 trillion. I should look at the market today, somewhere around there. It's going up a lot. This is an incredible amount of money, $2.7 trillion, almost 10% GDP. I mean, it's just incredible. And the other side of that, when we talk about stocks, you usually look at the price of the stock relative to corporate earnings. And 20 to 1, that ratio would be high, but...

reasonable. So if you tell me a normal company, you know, it's price and stock prices $100 and its annual earnings after profit, after taxes are $5. That makes sense, you know, without looking more carefully at what the company's doing, what's progress is, whatever. Okay, we have $2.7 trillion. So you go, well, let's see, 20 times annual earnings. So annual earnings must be somewhere in the neighborhood of $130 billion a year. No, it loses money. It's never made money. SpaceX has never made money. So people are placing a bet on this company turning around from losing money to being incredibly profitable. And I just backed out some numbers because it's not going to turn around tomorrow. You go, you know, 10 years out, you would have to have profits that are equal to about 20% of all U.S. after-tax corporate profits. No company has ever come close to that. So, okay, why would someone think that? Go, well, Elon Musk. You go, okay, Elon Musk. Well, Elon Musk lies all the time. He said 20 million dead people are getting Social Security. Total fantasy, you know, some number of dead people get Social Security, probably 1,000, 2,000, 3,000. That everyone who dies gets removed from the rolls. They're actually pretty good about that, but they're sure. There's some of me, not 20 million, nothing close to 20 million. He lies all the time. He was running Doge. He was going to save $2 trillion from the federal budget. He didn't save anything. So, I mean, it can go on. You know, the guy literally lies all the time. He's a neo-Nazi. We all-sized Nazi salute at the Republican Convention. He writes this, I mean, this I'm not looking for things to trash him on. He says it. He says, too many black people and brown people, you know, the great replacement. So this is who the guy is. Okay, well, what about his business as well? His businesses haven't done so well. Tesla's worth a lot of money. If you look at stock, its profits are very low. Most of its profits actually come from selling carbon credits, which, you know, is a green transition policy that his friend Donald Trump wants to get rid of. He's... invested big in something called the Boring Company that was supposed to have high-speed transit between major cities. It goes nowhere. It's been a total bomb. You know, I could go on. He does not have a great track record in business. He lies all the time. So people are betting $2.7 trillion on him turning around this massive money loser into some enormous moneymaker. And that's very hard to see. Could happen. Things happen. It's very hard to see that. It's very hard to see. And I want to stick with this just for a second because I very much appreciate the way that you connect issues. You know, we have, for example, the Congressional Budget Office and other folks saying, hey, this is going to happen. Economic growth is going to be sky high, you know, based on this kind of thinking. And at the same time, you know, out of the other side of their mouths, they're saying folks like Jason Furman.

Economic advisor under Clinton and Obama are saying Social Security is facing disaster, you know, and these things don't add up. They add up politically, but they don't add up. economically, you know, talk about that connection there. Yeah, well, to be fair, congressional budget office, they actually don't say that. They project very modest growth over the next decade, somewhere around 2% a year. And, you know, if you carry that through, it's really pretty much impossible to see these stocks, you know, we're talking about SpaceX, but you have Navidia, you have alphabet, you have... You know, we're going to see initial public offerings. I don't know the exact time. Very soon from Anthropic, the big AI company, Open AI. It's basically impossible to see how those stock prices can make sense. You'd have to have way more rapid growth than what they're assuming. And the point, you know, I was making it, you're referring to adjacent firm in Social Security. If we have that rapid growth, in other words, if these bubble prices make sense, if Elon Musk, you know, and I don't mean exactly, but if it's somewhere in the ballpark, if there's $2.7 trillion is anywhere close to making sense. And the price of the other big AI companies, if those are anywhere close to making sense, we're going to see way more growth than what the Congressional Budget Office, what the Social Security trustees, what's being projected for these programs. And if we actually get those growth, the idea that we should be at all worried about paying Social Security benefits is close to crazy. Now, I would argue we'd be close to crazy to be worried about it anyhow because we can afford paying Social Security benefits. I'm going on about that at grain length, probably out in your show other times. But certainly, if we have anything length of growth that would be implied by these incredible stock valuations. then Social Security is such a non-problem that it's not worth taking a minute to even talk about paying for it. And that's why I appreciate you're putting those things together because I think news media often, you know, they're on different pages of the paper. And I guess I would say also like, you know, like you're talking about Elon Musk saying he was going to cut trillions of dollars of waste from the government when that was just categorically absurd. Isn't that a place for reporting, you know, to just say whatever you want to think about him, those numbers are absurd? Yeah, and, you know, I think they have fallen down a lot. I mean, there have been some decent articles, and like I said, there's been no reporting. But, I mean, basically, Elon Musk is saying utter nonsense, you know, and it's kind of like if we found someone on the street drunk and they start rattling off, you know, Elvis Presley is still alive. And, you know, God knows what else. And they just reported that. Well, so-and-so says that Elvis Presley is still alive. You know, maybe he is. I don't know. They're of that nature.

And, you know, again, actually, I had mentioned this in the piece because I didn't know Elon Musk had said exactly this, but I was just playing around. Why not Google it? So it turns out even as Elon Musk is saying, oh, yes, AI is going to be all this wonderful stuff more of incredibly rapid growth and affluence. He just said earlier this year, there's a thousand percent chance the U.S. government will go bankrupt. How could those two go together? I mean, if we're going to have this incredible growth, then there's no plausible, I mean, it's not plausible says government's going to go bankrupt anyhow for reasons I could go into, but it certainly isn't going to go bankrupt if we're going to have this incredible growth that Elon Musk is telling us about what is great AI companies. It's so confusing. And I think as a reader, as just a regular person, you think, I must not understand this. You know, once I'm already at a thousand percent, like I'm like, wait, I was in fifth grade. I don't know how we get to a thousand percent, you know. But one thing I did want to say is so much of it is about futures, is about the betting. aspect of the stock market. And it's not about a company making money now because it's providing a service that people want now. It's the idea that in the future, this is going to work out. And then the same people who say, I'm investing in this company because it's going to do something, they then are the ones who get to set the terms and the terrain. of whether that actually happens. And I think that's why a lot of people feel like it's kind of just a scheme, you know, that doesn't include them and that doesn't have a foot in real life. Yeah, well, these are all based on future bets that are, you know, at best, very, very shaky, if not altogether absurd. But in the present, it gives them enormous power. I mean, it's unbelievable. Here's Elon Musk. His net worth is certainly well over a trillion now. I mean, people making big deal with that trillion, but it might be one, two, one three, and something like that. It gives them enormous power. You mentioned them buying up another company for $60 billion. Where are they getting the $60 billion? Well, from SpaceX. And there's actually precedent for this. So, again, people might think, well, Elon Musk is incredibly rich. Someone I'm stealing this line from someone. You know, if you're so rich, how can you're not smart? And, you know, I think that applies perfectly for Elon Musk. But there's precedent. We have the stock bubble in the 90s. We had the housing bubble in the zeros. And yet a lot of really rich people were supposed to be smart. I have no idea how smart or stupid they were, but they invested in really, really stupid things.

So housing, you know, mortgages, going back to the housing bubble, I remember arguing with economists. They were saying, oh, you know, it was old-fashioned to think we needed collateral on loans and we had to make sure that people could pay them back. Well, now we have all this new technology. Well, that's what. You did need that. In the prior decade with the tech bubble, one of the amazing stories, I mean, people could look it out because I think I'm saying that or nonsense. Time Warner was one of the biggest men and the biggest media company in the world. It basically sold itself for nothing. It served itself for AOL stock. And AOL stock plummeted the next year. So it had been worth a lot of money. The next year was worth almost nothing. So here you had the biggest media company in the world or one of the biggest that was absolutely the biggest. And they gave away all their stock to a company that was pretty much worthless a year later. So you have ostensibly smart people that are very wealthy and they do really stupid things. And, you know, I think that's likely the story of what we're seeing with this AI bubble. They give a lot of people, again, I don't do intelligence testing, but, you know, ostensibly is supposed to be smart and looks like they're doing some really dumb things. And then we know that when elephants fight, it's the grass that gets trampled, right? So, yes, this is rich people betting against one another and maybe something won't pan out. And that's an oopsie for them. But it can mean something much more for a lot of other people. What do we understand? can happen. And I know you're not trying to predict a time of a bubble bursting. It's not a prediction. But what does history tell us can happen when bubbles like this do in fact burst? Well, it's almost a very bad story. So we had the tech bubble bursting in 2000. We got a recession that was pretty bad from the standpoint of the labor market. We had no job creation from 2001 to 2005. We hadn't seen that since the Great Depression, which also, I should say, was started by a bubble bursting and stock bubble bursting. And the worst bubble, at least certainly in my lifetime or recent memory, was the housing bubble collapsed. 2008, 2009, 2010, which caused massive unemployment and millions of people lost their homes. So that's a pretty bad story. So, you know, we could say, and, you know, I'm happy to see Elon Musk lose much of his wealth, which would happen. But, you know, he's still going to be incredibly rich. If he loses 90% of his wealth, he's going to have more money than any of us will ever see. But, you know, see a lot of people pay a really big price for that. So, I mean, to be clear, I think it would be great if the bubble would burst tomorrow, the sooner the better. But it's not going to be a pretty story.

Well, and let's come back to journalism just for a minute because, you know, the things that you've just said to me, I'm not saying I'm not seeing any critical reporting or thoughtful reporting. Certainly I am. But I'm seeing a lot of, hey, this is happening. How can I get in on it? You know, or just isn't it okay that these people are in charge of everything, you know? And I just wonder, like, what would actual critical reporting... include day-to-day that would help us understand this better. Well, I think certainly trying to put the pieces together, as we just did, you know, talking about, well, if these prices make sense, then we're going to have way more rapid growth. And that's just a fact. I mean, that's not my personal opinion. I mean, you just, you know, you can't tell a story where Elon Musk's, you know, well, his market capitalization of SpaceX and the other companies make sense. And the growth projections we're looking at from the Congressional Budget Office makes sense. Those are contradictory. So I think it would be helpful when they talk about one, they talk about the other saying, you know, these prices, unless we see way more rapid growth and is being, you know, projected for budget purposes and other purposes, they don't make sense. And vice versa, you know, say that, you know, oh, Jason Furman. Jason's not a bad guy. You know, he was out there in New York Times. We should worry about Social Security and their children. Well, if... You know, the AI stories are right. We don't have to worry at all. Again, I don't think we should worry about it even if they weren't right. But, you know, if they are right, I mean, it's just wound-tuned stuff. It's like we're worried we don't have enough water in the middle of Lake Michigan. So, you know, just putting the pieces together. I mean, that should be a standard part of reporting, just to, you know, to remind people, put the context in there. And again, it doesn't take a long time. They're really not disputable points, again. So I'm not saying something that... You know, if I brought Jason here, I know him, he's not a stupid guy. He'd go, yeah, of course that's true. He wouldn't, you know, I suspect he would agree that these prices don't make sense. But he would agree if they made sense, then, you know, we're going to see way more rapid growth. Those go together. So putting that into the stories, putting the context in there so people can understand. Because, you know, again, this is something I've harped on, you guys have harped on this, that you talk about these things, you know, a typical person, if they're, you know, even someone who's more educated and they spend time. They don't know all these things. I mean, they might know them in some sense, but it's not right in front of them. So they need to have it put there when they're reading about AI or they're reading about the budget, see how these things relate to each other. Well, okay, the AI bubble monitor, your new project. I want to say the real timeness of it, you know, because... Maybe less so than with the dot-com bubble or the housing bubble. But we do know that pundits and folks are going to say, no one saw it coming. We didn't know what was happening. We all thought, you know, so for me, a big part of the meaning of your new project is just that it is existing in real time.

Yeah, that's, I mean, that's the idea. We want to get the information out there. And I'm trying to put down real information. If people think that still makes sense, again, I'm not going to put in anything that I'm not pretty confident. It's true. I'm getting it all from the liable sources. Again, I'm not making them out there, from the industry, from government data. Again, if you want to say, oh, yeah, you know, you're on most SpaceX, you know, okay, it's 10% of that contract corporate profits. Well, you know, again, I can't say it's impossible. I wouldn't put my money on that. Right, right. That's what you're doing if you're buying up SpaceX. It could happen, yeah. But the idea is that you're watching it in real time and asking questions in real time so no one can say these questions weren't asked or nobody was thinking about it. Yes, exactly. Well, finally, when we talked last time, probably when we talk every time, we say that we want journalists to separate people and systems. It's not enough to say Elon Musk is weird or Trump is weird without naming the structures that they are able to use to enact their ideas. Otherwise, how do we know what needs to change? besides the president, right? So there are structures and systems that we should also be asking questions about. Yeah, and you guys are obviously around the middle of this. And, you know, I think the media is. And particularly when we talk about Elon Musk, it's very much that because the guy owns. Actually, I don't know where that stands. It had been, I think, the largest social media site that may no longer, I'm sure it's no longer true. I know the usage is down. But, you know, we create a media infrastructure that has an enormous impact on what politics looks like and, you know, what issues get called attention to and how those are covered. And that was never great. I mean, we both have been in this game a long time. It's never great. So like I say, we're good old days, you know, 30 years ago, 40 years ago. But it's gotten a lot worse. And when you have Larry Ellison as a trumper who, I guess this kid actually, David Ellison, they own CBS. And now they're looking to take over Warner Brothers, which he gives them control of CNN. These are really big issues because this matters in terms of, you know, how people see the world because they need information. And those are sources of information for an awful lot of people. And people need to be aware of who owns the media and how that affects basically everything, but certainly politics. We've been speaking with economist Dean Baker. His new project AI bubble monitor can be found on the website of the Center for Economic and Policy Research. That's seeper.net. Thank you so much, Dean Baker, for joining us this week on CounterSpin. Thanks, Gene. I really appreciate being on. And that's it for CounterSpin for this week. CounterSpin is produced by Fair, the National Media Watch Group based in New York. The show is engineered by Michael Cherry. I'm Janine Jackson. Thanks for listening to CounterSpin.