Post #2126 by PucksFool on the Macroeconomic Trends and Risks board

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Krugman says it's fear based.

https://paulkrugman.substack.com/p/why-arent-we-pa...

Economic reality has a habit of throwing you curveballs — events you didn’t anticipate when making your predictions. Specifically, most economists, myself included, expected tariffs to be the big economic story of 2025. After all, in just a few months Donald Trump has reversed 90 years of pro-trade U.S. policy, sending average tariffs to their highest level since 1934. Predictably, supply chains have been disrupted, consumers face higher inflation, and farmers can’t sell their crops abroad.

Yet the economic consequences of the radically self-destructive turn in U.S. trade policy have been matched, perhaps even overshadowed, by a development that has nothing to do with policy: An enormous surge in spending on “AI.” Scare quotes because ChatGPT and its rivals aren’t really artificial intelligence. But they are impressive, routinely doing things that would have seemed impossible just a few years ago.

And the surge in AI investment — a tech boom the likes of which we haven’t seen since the 1990s — has buoyed the economy in the short run, offsetting the drag from Trump’s tariffs. Without the data center boom, we’d probably be in a recession. But hundreds of billions in spending on data centers have boosted investment, while soaring stock prices have supported consumer spending by the wealthy even as demand from lower and middle-income Americans weakens.

However, unlike the tech boom of the 1990s, the current AI boom isn’t translating into widespread economic optimism. In fact, Americans are remarkably downbeat about the economy and the future in general. And I think it’s worth trying to understand why.

[snip]

The current AI boom resembles the 1990s tech boom in other ways besides the tidal wave of spending. To those of us of a certain age, the hype — this will change everything! — is distinctly familiar. Now as then, the feverishness of the hype is a good reason to suspect that we’re in the midst of a huge speculative bubble. Reinforcing this suspicion is the fact that big tech companies, which generate billions in cash flow, are spending more on AI than their gushers of dollars can support. So now they’re taking on lots of debt.

While the 1990s and today are alike in their bubble mentality, however, they differ in an important way: today we lack the pervasive optimism of the late 1990s. It’s hard to convey to people under the age of 50 just how upbeat Americans in the late 1990s were feeling about the economy and the future in general. In fact, I believe the Bill Clinton-era boom led Americans to take prosperity for granted, resulting in their willingness to switch their presidential votes to a Republican – the ill-fated George W. Bush.

Today corporations are, once again, pouring vast sums into technology, but they’re doing it against a background of extraordinary pessimism. And the question I want to ask is why we’re seeing 90s-type hype without a return of 90s-type hope. Why aren’t we partying like it’s 1999?

Much more at the link.

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