The US economy is absolutely screaming. Late rent payments and loan delinquencies are skyrocketing, and the top 10 percent of earners account for nearly half of all consumer spending. In early September, the Bureau of Labor Statistics reported that the nation added over 900,000 fewer jobs than previously thought from March 2024 to 2025.
Yet, as bad as things might feel for common folk, financial markets have never looked better — the tech-dominated Nasdaq continues to reach record highs, and the country's GDP has grown by more than 50 percent since 2020.
The catch here is that this growth is largely due to a tiny handful of tech companies and their investor's lurid dreams of an AI-powered economic revolution, the likes of which the world has never seen.
Naturally, this has led many analysts to point to an "AI spending bubble," an unprecedented misallocation of resources propping up the economy, with potentially devastating consequences waiting when the bubble "pops."
However, there might be a bright side: one macroeconomic researcher, Dean Baker of the Center for Economic and Policy Research, says a bursting bubble might be just what we need to get things back on track.
In a summary of the situation, Baker agrees with the school of thought that says we're in an AI spending bubble, and that there are some nasty consequences — a recession, most likely — awaiting us when the music stops.
However bad that economic downturn might be, though, Baker says it will open the door for a potential recovery that makes life better for working people.
The economy, he explains, could be considered a bathtub with an open drain and two faucets, one labeled "rich people" and the other labeled "ordinary workers."
"The goal is to keep the tub filled but not overfilled. This would correspond to the labor market being at full employment and the economy operating at its capacity," Baker writes.
"If the water flows into the tub too slowly, we have unemployment and excess capacity," he continues. "If the water flows into the tub too quickly, the bathtub overflows and we get water all over the floor. This would be the inflation story."
Right now, the "rich people" faucet — the AI spending bubble — is gushing at full blast, while the other one barely trickles. When the bubble bursts and investors start pulling their money out of the tech companies selling the AI revolution, that faucet will also slow to a drip, dropping the water level in the tub.
While that is "bad news for everyone," as Baker puts it, the "lower water level in the tub means that we have the option to turn the flow from the ordinary workers faucet higher, without causing the tub to overflow."
The good news, he says, is "we do know how to turn the flow higher."
The simplest way to do this is to instruct the Federal Reserve to lower interest rates — something it's been extremely reluctant to consider given the likelihood it increases inflation, but that it finally did slightly this week.
Another strategy to increase the "ordinary worker" flow after a recession would be to increase government spending on social programs like healthcare, education, and childcare, giving workers room to breathe and spend their wages. It'd hopefully avert the worst consequences of a recession and stimulate the economy.
In sum, Baker posits that the "collapse of the AI bubble will create the room the economy needs for policies that would make the lives of tens of millions of people far better. This is why we should all be fans of the collapse and not worry that we are cheering against the home team."
Whether the current political climate in the US makes Baker's solutions tenable is another question entirely — but one thing seems certain: the gushing faucet is going to dry up sooner or later.
More on the AI bubble: There's a Stunning Financial Problem With AI Data Centers