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."
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