AI Could Destroy US Economy

Quick Read

• AI could drive US unemployment from 4% to 15%, gutting the 80% of federal tax revenue that comes from individual income taxes.

• Goldman Sachs estimates 15 million AI-driven layoffs, pushing unemployment halfway between the Great Recession and Great Depression peaks.

• Even hundreds of billions in AI company profits cannot offset the federal revenue shortfall needed to fund a $7 trillion government.

It’s a novel idea, but it is gaining supporters. AI does not take over the world from humans. It does destroy jobs, but over time, they are replaced by new jobs that complement AI’s strengths. Most of those that remain are service jobs, such as medical personnel, athletes, and musicians. In the meantime, unemployment is rising in many job categories, including bank tellers, divers, and software programmers.

What happens when AI rejiggers the job market? There is a period during which unemployment rises, if only temporarily. The US tax base falls apart. Tax revenue from individuals is 80% of the income collected by the IRS and Social Security. The $7 trillion needed to run the federal government takes a hit that is beyond imagination. Social security falls apart as payouts become a fraction of what they are today. The US’s inability to pay off its debt triggers a default. US borrowing costs soar.

The antidote to this tax apocalypse is that AI companies pay a large percentage of their profits to the government to cover the cost of lost jobs. However, that does not necessarily cover the loss of tax revenue. Even if AI revenue runs into the hundreds of billions of dollars, its profits will likely not be large enough to offset the plunge in federal tax revenue.

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AI giant Anthropic has estimated that US unemployment could temporarily rise from the current 4% to 13%. It may have a reason to keep the number fairly low, given the risk that the government would throttle back its activity, which might hurt the job market.

Yale released a research paper about job loss. “The Real Job Destruction from AI Is Hitting Before Careers Can Start.” In the analysis, it cited several examples of how unemployment rates could be at the high end of most estimates. Among these is one from Goldman Sachs, which puts U.S. AI-based layoffs at 15 million. The US workforce is 167 million people. The Goldman figure is not unlike Anthropic’s.

A 15% unemployment rate is halfway between the peak 10% level of the Great Recession and the Great Depression’s peak of 24.9% in 1933. At 15%, both the stock market and housing market suffer. The core of American individual net worth gets damaged.

The US federal government deficit will be about $2 trillion this year. If the government deficit rises very rapidly and much higher than that, the financial strain starts to become unimaginable.

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