Three Harvard University faculty members said they believe fears of the artificial intelligence bubble bursting (stock prices collapsing in the wake of a surge in investment in AI companies) are overblown and that a recession is unlikely.
Paulo Calvin, a senior fellow at HKS who specializes in AI regulation, said he had been warning of an AI bubble “before it became a thing” and believes the market is now showing signs of a “bubble situation.”
The value of many AI and technology companies soared last year as hopes grew that new AI technologies could double corporate profits. However, many experts are concerned that the company's valuation is too high, as many investors are betting eye-popping sums on companies that are still far from generating significant returns.
There are two possible scenarios for an AI bubble, Calvin said. One is a scenario in which the bubble “bursts'' and the economy declines sharply, and the other is a scenario in which the bubble “deflates.''
“A balloon explosion can have devastating effects,” Calvin said. “The other thing is to slowly let the air out of the balloon so it has time to adjust.”
The second case is more likely, he said.
“That doesn't mean there won't be some failures. It doesn't mean that there can't be small corrections in the stock market, but these are normal events and can be overcome without major economic impact,” he added.
What happens in the coming months will determine which of these two scenarios the economy faces, Calvin said. However, he believes a deflationary scenario is more likely, with risks concentrated on individual companies such as OpenAI rather than the industry as a whole.
Calvin argued that “accelerating demand” from businesses, governments and consumers for AI products is the best way to avoid bubbles and foster economic growth. He pointed to the Trump administration's push for AI research at national labs and said modernizing government platforms and investing in high-tech defense contracts could help sustain the AI economy.
But if demand doesn't increase, the data centers and other infrastructure that AI companies are currently investing heavily in may go unused, leading to a situation similar to the one that led to the bursting of the dot-com bubble at the beginning of this century, Calvin said.
Economics professor David I. Laibson '88 said he is concerned about the profitability of AI companies.
“If you take a company like OpenAI, which currently has $13 billion in revenue, they have committed capital investments over the next eight years that currently amount to $1.4 trillion,” he said.
“Therefore, some may worry that in the future the benefits they are expecting may not be large enough to justify the large expenditures they are currently undertaking.”
Given these industry-wide numbers, Leibson worries that slowing growth in AI stocks, which continue to account for an increasing share of the S&P 500's value, could weigh on the market.
But much of the investment in AI infrastructure is coming from private equity, as venture capitalists pour huge amounts of money into technology companies. Laibson said a broader failure is unlikely unless banks become a “primary source of funding” for AI companies and take on more AI-related debt, which would create a closer link between the financial system and company performance.
“I would be even more concerned if banks became more and more directly involved in financing these investments, which could lead to a systemic financial crisis,” he said.
“We're not there yet, but I'm watching closely. The vulnerabilities in the banking sector are growing week by week,” Laibson added.
Economics professor Jason Furman '92 was more optimistic: “We're not betting on a bubble.” Furman said that even if the value of AI stocks soars, the economic impact of a crash could be relatively muted.
“These stocks don't make up a significant portion of the wealth of most people in the economy,” he said. “It’s not the same, even though the value of the house has gone down significantly.”
“I don't think it's likely to lead to a financial crisis or a deep recession,” Furman added.
—Staff writer Evan HC Epstein can be reached at: [email protected]. Follow @Evan_HC_Epstein on X.
—Staff writer Graham W. Lee can be reached at: [email protected]. X Follow him at @grahamwonlee.
