Last month, Congress sparred with the president over a partial budget, but with few real cuts, America’s slow march toward an epic debt crisis went on undeterred. With over $38 trillion in debt and interest payments exceeding defense or Medicare spending, one would expect lawmakers to confront reality and do the difficult work needed to restore fiscal sanity. But why would they? Cutting entitlements and increasing middle-class taxes rarely make for winning campaign slogans.
It’s no surprise, then, that some prefer to pin their hopes on AI as America’s fiscal savior. Vanguard’s chief economist Joe Davis argued there’s as high as a 50 percent chance AI will prevent a debt-driven economic malaise. Elon Musk voiced a similar conclusion late last year, claiming AI and robotics are “the only thing that’s going to solve the US debt crisis.”
The argument goes like this: an AI boom drives explosive economic growth and tax revenue, while, at the same time, productivity gains impressively offset any upward pressure on interest rates. The deficit becomes a surplus and the overall debt shrinks, possibly disappearing entirely.
If that sounds less like a policy plan and more like a retirement strategy built around winning the lottery, you’re not wrong. The entire scenario hinges on a massive if: that AI generates extraordinary revenue and does it quickly enough to outrun rising interest costs.
But even if the government hits the tax revenue jackpot before Congress drives us off a fiscal cliff, it would be naïve to assume lawmakers would pay down the debt.
The More the Government Gets, the More the Government Spends
For the sake of argument, suppose the tech optimists are right, and the federal government enjoys a massive AI-driven revenue windfall. Understanding what happens next requires understanding the incentives of politicians and their voters.
This is where public choice shines. Rather than assuming politicians and voters act in everyone’s best interest, this branch of economics recognizes that people don’t become angels once they interface with the government. Incentives matter, especially for politicians.
Incentives are why we have a deficit in the first place. The public isn’t particularly interested in financial restraint because high spending and low taxes benefit them now, and the resulting debt is some future generation’s problem. Politicians surely see the crisis brewing, but solving it is a sure way to get voted out of office. And so the incentive is to run constant deficits and grow the debt year after year, decade after decade.
Without changing incentives, it will be hard to avoid spending new revenue. Ballooning coffers mean voters will demand that the government dole out more goodies (especially if AI displaces workers along the way). Washington already excels at entertaining expensive ideas: healthcare subsidies for well-off families, a universal basic income, generous tax cuts, a fifty-percent increase in military spending, all despite the pushback the current deficit’s able to muster. Imagine the wish list after it drops even a little.
Expecting Congress to use a jolt of revenue to pay down debt is like expecting a compulsive gambler to save his winnings for retirement. There’s a reason nearly a third of lottery winners file for bankruptcy within five years of getting their windfall. Winners tend to be the ones who bought a lot of tickets, and people who buy a lot of tickets tend to be reckless with their money.
Not all lottery winners are reckless, and not all lawmakers are more interested in buying votes than paying off debts. The question is whether Congress is more likely to emulate the prudent winner or the reckless one.
This Has All Happened Before…
Public choice theory suggests we already know the answer, but maybe there’s some crucial detail we’re missing. Or maybe American politics is just different in some way. The good (or, depending on your position, bad) news is that we have a ready example from the last time a tech revolution balanced the government budget: the internet boom of the late 1990s.
Right before investors realized you couldn’t slap a ‘dot-com’ onto any English word and make a billion dollars selling pet food over what we laughingly called the information superhighway, a surge of investment handed the Treasury Department the biggest budget surplus since World War II demilitarization. It also arrived in time for a presidential election.
The 2000 election pitted Vice President Al Gore against Texas Governor George W. Bush, and the question of what to do with the surplus was a major campaign issue. Gore proposed using some of it to pay down the debt. Bush preferred spending it on tax cuts, Social Security, and “important projects.” Yes, the Democrat was more of a fiscal conservative than the Republican. Those were wild times.
Bush would go on to win that election.
It was incredibly close, and Gore could’ve easily won. And if not for something called a butterfly ballot, he would’ve won.
But he didn’t win, and all we knew at the time was that it was very, very close. It was so close that if Gore had promised some “important projects” in Florida instead of paying down a bill that wouldn’t have come due until some distant decade, the White House would’ve been his.
Losing by a hair’s breadth is every campaign’s nightmare. Mere oversights become colossal blunders, and every ill-fated gamble becomes a decisive mistake. The 2000 election made something crystal clear to anyone who hadn’t already gotten the memo: prudence is for losers.
The surplus proved to be transient anyway, vaporized in the aftermath of 9/11 and the bursting of the dot-com bubble. The US returned to familiar deficit territory two years later, and we never looked back.
…And It Will Happen Again.
The optimists might say that this time will be different. The looming deficit crisis is so bad that politicians will use any AI windfall to pay down the debt rather than spend it. This time they’ll do the responsible thing.
Be serious.
It’s of course possible that the political stars align and lawmakers will pay down the deficit instead of playing another round of “someone else’s problem.” It’s possible that the prudent thing will be done without a financial crisis to jar the public out of their “the future is never” fantasy.
But let’s get real. Though public concern about the debt is high, there’s so much disagreement about how to address the problem that politicians can safely ignore it. When President Trump threw his own eye-watering increase onto the debt last year, his approval rating didn’t budge. Voters say they care about the debt but they clearly care more about the things that have created it. The political incentives are the same as they ever were: if the government wins the AI lottery, lawmakers will behave as they always have. This time won’t be different.
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