{"id":879068,"date":"2026-10-11T23:46:19","date_gmt":"2026-10-11T23:46:19","guid":{"rendered":"https:\/\/www.newsbeep.com\/us\/879068\/"},"modified":"2026-10-11T23:46:19","modified_gmt":"2026-10-11T23:46:19","slug":"uss-reagan-era-economic-promises-return-as-trumps-ai-fueled-growth-fantasy-us-economy","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us\/879068\/","title":{"rendered":"US\u2019s Reagan-era economic promises return as Trump\u2019s AI-fueled growth fantasy | US economy"},"content":{"rendered":"

Back through political history to the age of Ronald Reagan<\/a>, Republicans have repeatedly promised the US public that tax cuts would pay for themselves, firing up economic growth and filling the government\u2019s coffers.<\/p>\n

The promise never really panned out. From the Gipper\u2019s day on, the Republicans\u2019 tax cuts inevitably increased the budget deficit. Despite its failure, though, the promise is back, coated in a fine new layer of artificial intelligence<\/a> pixie dust. It will fail again.<\/p>\n

The treasury secretary, Scott Bessent, is relying on an AI-laced economy when he promises to deliver annual economic growth of 3% \u2013 a rate that, except for the rebound from the Covid pandemic, has been achieved only twice<\/a> this century. Dreams of AI inflect Donald Trump\u2019s fantasy that \u201cwe\u2019re growing at a faster rate than we\u2019ve ever grown before,\u201d which will allow the government to \u201ctake care of the 40 trillion<\/a>\u201d in federal debt \u201cover a period of time\u201d.<\/p>\n

Financial markets, however, are not buying. Last week, the yield on the 10-year treasury bond<\/a> surged to its highest in almost a quarter century, more than a full percentage point higher than when Trump launched his misbegotten war against Iran.<\/p>\n

Line chart showing a recent upward trend in 10-year US treasury bond yields<\/a><\/p>\n

The war\u2019s inflationary impact is the most immediate cause of rising bond yields. It already persuaded the Fed to raise short-term interest rates. But the treasury market is also being walloped<\/a> by the US\u2019s unbalanced finances. There is no realistic path for economic growth to generate the tax revenues needed to fix the US\u2019s enormous and growing budget deficit. Investors are demanding more to cover the growing funding gap.<\/p>\n

Borrowing is likely to become more expensive still. Foreign central banks, which once reliably bought treasuries to build up foreign reserves and manage their exchange rates, have cut back<\/a> on their exposure to US government debt. The treasury now relies largely on private investors seeking to turn a profit. It finds itself competing for their money with the very AI superscalers on which it is pinning its future hopes, which are borrowing hand over fist to fund the buildout of datacenters to train their agents.<\/p>\n

Indeed, the US\u2019s finances find themselves in a bit of a negative spiral, as rising bond yields put additional pressure on the budget. Interest payments on the federal debt alone are consuming 3.3% of GDP, up from an average of 2.1% over the preceding 50 years.<\/p>\n

And Trump\u2019s fiscal management \u2013 his One Big Beautiful Bill Act is estimated to add $4.7tn<\/a> to the federal debt through 2035 \u2013 is not making the budget math easier. The deficit already hit 6% of GDP \u2013 twice the size Bessent once promised. The Congressional Budget Office projected<\/a> it will close in on 7% of GDP by 2033. And that was before Trump promised a $5,000 \u201cdividend\u201d to every US adult if the GOP kept control of Congress in the midterms. There is no realistic amount of growth that can fill the fiscal hole that Trump keeps digging.<\/p>\n

The Committee for a Responsible Federal Budget (CRFPB) sketched out a few scenarios<\/a>. Assuming the temporary tax cuts in Trump\u2019s 2025 law are made permanent by a future Congress \u2013 an assumption that fits the historical pattern \u2013 and that the government does not recover the revenue lost when the supreme court struck down its national security tariffs, achieving a budget deficit of 3% of GDP by 2036 would require annual growth of 4.4% over the next decade. Achieving a balanced budget by then would require the economy to expand 7.2% per year.<\/p>\n

It is not impossible for AI to deliver this kind of growth. Some economists are willing to contemplate scenarios<\/a> in which artificial intelligence boosts economic growth to 15% per year, by taking over much of the cognitive work usually performed by humans. But these scenarios do not appear likely.<\/p>\n

According to the CFRB, stabilizing the federal debt would require average growth in total factor productivity \u2013 a measure of how efficiently economic inputs are converted into goods and services \u2013 to hit 2.5% per year over the next decade. The US has only hit that<\/a> once since 1959. And that is despite massive productivity gains over the period from electrification, the completion of the federal highway system, the telecommunications revolution and the first wave of IT and automation.<\/p>\n

Even if AI supercharged the economy, its impact on the government\u2019s finances would be muted, for it would massively shift the fruits of growth from labor to capital, and the tax rate on capital today is only about half the tax rate on labor. Moreover, such a shift in the distribution of economic spoils would probably call for massive government spending<\/a> to sustain the livelihoods of the many workers left behind.<\/p>\n

What can we expect from the AI-pixie dust? At the moment people seem particularly worried about AI agents slipping their enclosures and killing us all. But even short of that, it is not a given that their impact will be inevitably positive for the economy, not to say the government\u2019s finances necessarily provide the money for the federal government to right its finances.<\/p>\n

For one, their massive debt-fuelled investments are pushing interest rates higher, complicating government financing. Their future promise, moreover, also comes with momentous risk.<\/p>\n

The Stanford economist Hanno Lustig estimates<\/a> that for the owners of datacenters to break even on their massive investments in AI \u2013 estimated to reach $1.43tn this year \u2013 their revenue would have to grow by 45% on average every year for the next seven years. By 2032, it would amount to roughly 9.2% of GDP.<\/p>\n

A similar analysis<\/a> by Jared Bernstein, former chair of Joe Biden\u2019s Council of Economic Advisers, and Stanford economist Ryan Cummings, concluded that the nation\u2019s six superscalers \u2013 Google, Meta, Microsoft, Oracle, SpaceX and Amazon \u2013 would need additional revenues of $13.1tn to $18.7tn over the next 10 years just to pay for their massive investments in AI. That is roughly the same as their total revenues over the last 10 years.<\/p>\n

It\u2019s hard to forecast precisely what would happen to financial markets were these targets to be missed. But it\u2019s safe to say that it might complicate the task of trimming the budget deficit and financing the US\u2019s vast public debt.<\/p>\n

Eduardo Porter is a journalist focused on economics and politics. He writes the newsletter Being There<\/a> on Substack<\/p>\n","protected":false},"excerpt":{"rendered":"Back through political history to the age of Ronald Reagan, Republicans have repeatedly promised the US public that…\n","protected":false},"author":2,"featured_media":879069,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[45],"tags":[182,181,507,74],"class_list":["post-879068","post","type-post","status-publish","format-standard","has-post-thumbnail","category-artificial-intelligence","tag-ai","tag-artificial-intelligence","tag-artificialintelligence","tag-technology"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/879068","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=879068"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/879068\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/879069"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=879068"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=879068"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=879068"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}