Silicon Valley has a new pitch for Washington: Artificial intelligence will solve all your budget problems. Industry leaders claim the technology will turbocharge productivity growth, generate a flood of new tax revenue, slash the cost of delivering government services, and perhaps even bend the curve on Medicare and Medicaid spending. Deficits will shrink. The likelihood of a debt crisis will melt away, as technology accomplishes what politicians couldn't. In the words of Elon Musk , AI and robotics are "the only thing that can solve for the debt situation."
Politicians, desperate for any exit from their self-imposed fiscal catastrophe, are listening. The "easy answers" of simply cutting waste, defunding immigrants and foreigners, taxing the rich, or slashing defense spending are woefully insufficient to address budget deficits on track to hit 9 percent of GDP within a decade and 14 percent of GDP within three decades under current policies. Closing deficits of this magnitude would require an aggressive combination of Social Security and Medicare reforms with new broad-based taxes—unless Silicon Valley can produce an AI-based economic miracle that lets Americans continue collecting exorbitant government benefits at relatively low tax rates.
Unfortunately, like all the other "easy solutions" to budget deficits, AI is highly unlikely to produce the trillions of dollars in annual fiscal savings necessary to avert the hard decisions . Betting America's fiscal future on AI is wishful thinking.
To analyze the prospects, we can examine the fiscal and economic categories AI is most likely to affect.
A Productivity Miracle Still Leaves a Massive Deficit
The late 1990s technology boom drove annual productivity growth roughly 1 percentage point above its long-run trend from 1995 through 2005. That extra growth generated healthy tax revenue and broadly raised living standards. If AI delivers a comparable shock—and some credible economists believe it could deliver more—the revenue windfall would be real and substantial. A sustained 1-point boost to annual productivity growth rates would raise tax revenues by $143 billion annually in 2028, rising to $834 billion (1.8 percent of GDP) annually by 2036.
While such revenues are significant, they would shave only a fifth off the $4.4 trillion projected budget deficit under current policies. As exciting as it may be to nearly double productivity growth rates, this would barely offset the economic growth declines already occurring due to labor force reductions driven by falling fertility rates, retiring baby boomers, and immigration restrictions.
Yes, some AI enthusiasts may suggest that long-term productivity growth could leap by 2 or 3 percentage points (or more) — essentially doubling or tripling its baseline annual growth rate. This would provide additional deficit reduction but still not come close to balancing the budget. Moreover, the productivity-to-wages-to-tax-revenue chain can weaken. If AI gains accrue disproportionately to capital owners rather than boosting worker wages, added income and payroll taxes may not grow as quickly. On the other hand, AI could help the IRS identify tax cheats and collect unpaid taxes.
All together, even an optimistic scenario delivers only $1 trillion annually in new net revenues by 2036.
The Hidden Price Tag of Automation
The more AI revolutionizes work and expands economic productivity, the more disruptive it will likely be to the workforce. AI is highly unlikely to permanently raise jobless rates—the economy has evolved from hunting and gathering to mass agriculture, the industrial revolution, and the information revolution without that occurring, because there are always new consumer demands to satisfy with new industries and jobs. But a full AI workforce revolution without significant and expensive job displacement costs is highly unlikely, and the adjustment costs for existing workers could be painful and expensive.
Economists have identified two potential job displacement scenarios. The first scenario, which has not borne out so far, involves significant layoffs in AI-heavy industries, bringing long spells of unemployment for mid-career professionals. The second scenario, which is beginning to play out , is a significant reduction in entry-level job openings for younger workers in selected industries. The first scenario produces perhaps 2 million to 3 million jobless workers at a given time requiring unemployment benefits, Medicaid, food assistance, and job-retraining assistance. The second scenario suggests perhaps 4 million to 5 million younger workers entering the labor force in lower-skill jobs at lower wages (or not at all) and thus reducing tax revenues and pushing up low-income benefit costs.
Depending on which scenario ultimately plays out, and to what degree, the total displacement costs could consume anywhere from 15 percent to 40 percent of all new tax revenues (or more than 100 percent if accompanied by a…
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