This is a Brookings Economic Studies Program working paper.
Introduction
This paper examines whether AI-driven productivity growth can resolve the United States’ unsustainable fiscal trajectory, projected by CBO to push public debt to 175% of GDP by 2056. Building on historical evidence, the authors construct a fiscal and macroeconomic model identifying both conventional channels (higher GDP, elevated interest rates) and novel AI-specific channels (reduced mortality, shifting labor force participation, increased defense spending) through which an AI shock would affect the federal budget over a 10-year horizon. The model simulates four scenarios: a traditional, broad-based productivity shock; a labor-market-disrupting shock; a health-focused shock; and a composite scenario combining all three.
The authors find that a once-in-a-generation productivity shock could reduce annual deficits from roughly 6% to 2% of GDP. However, the idiosyncratic nature of an AI-driven shock might limit these gains through five channels: lower mortality expands the retirement-age population and entitlement spending; a shift from higher-taxed labor income to lower-taxed capital income narrows the tax base; reduced labor force participation increases income-support enrollment; higher interest rates raise debt-service costs; and a potential AI arms race accelerates defense spending. Together, these factors could recapture more than half the fiscal benefit of a conventional productivity shock, suggesting that while AI can materially improve the budget outlook, it is unlikely to fully resolve the nation’s fiscal imbalance on its own.
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Acknowledgements and disclosures
We thank Martin Baily, Marc Goldwein, Liam Marshall, Ryan Nunn, Mike O’Hanlon, and Sanjay Patnaik for helpful comments and suggestions. This working paper was made possible by support from Peterson G. Peterson Foundation. All errors are our own.
Benjamin H. Harris and William Overcash are with the Brookings Institution, and Neil Mehrotra is with the Federal Reserve Bank of Minneapolis. Their opinions are their own and do not necessarily represent the views of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the Brookings Institution.
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