Ryan Avent, author of In Good Faith and newsletter writer for the Financial Times, explains the economic concept of "crowding out" — a competition for scarce resources where borrowers outbid savers for claims on future economic productivity. Avent illustrates the mechanism through a café analogy involving jam portions, showing how future promises can displace current demand. The article applies this framework to current markets, noting a pronounced and sustained rise in borrowing driven by the AI sector.
The AI complex is described as going to markets and paying whatever it takes to secure capital, based on expectations of enormous future returns. This dynamic is causing firms in other parts of the economy to relinquish investment capacity to AI. Nobel laureate Paul Krugman has recently charted this phenomenon on his Substack, arguing it could pose a problem for the economy.
Krugman warns that if AI fails to deliver promised returns, the economy faces a double blow: lost productive capacity growth and the crowding out of other investments. The piece concludes that while AI executives are confident in future profits, the displacement of traditional investment capacity raises concerns about broader economic growth.
Source: Financial Times Markets · Summarized by HeadlinesBriefing