America's AI Productivity Miracle May Come Too Late to Solve Its Debt Crisis

"Something quite extraordinary is happening in the realm of AI that most of us are only just beginning to pick up," warns renowned historian Niall Ferguson. "But it's not clear that it happens tomorrow—it's more likely that it takes something like 5 to 10 years for all of the efficiencies to permeate their way through the entire economy."

This critical time gap between America's worsening fiscal position and the potential economic salvation of AI-driven productivity gains represents a dangerous vulnerability in the global power balance, reports End of Miles.

The race against fiscal collapse

Ferguson, the Milbank Family Senior Fellow at Stanford's Hoover Institution, points to what he calls "Ferguson's Law"—named after Scottish Enlightenment figure Adam Ferguson, not himself—which holds that "any great power that spends more on debt service than on defense risks ceasing to be a great power."

"The United States of America began spending more on debt service than on defense last year. It happened to the Spanish Empire, which ceased to be an empire. It happened to the British Empire, which ceased to be an empire," Ferguson explains.

The economic historian doesn't mince words about America's fiscal trajectory, noting that "not only are we spending more on interest payments than on defense, our whole budget is massively out of kilter." He points out that the current deficit exceeds revenues—a position he calls "indefensible and unsustainable."

AI's promise and limitations

While the Harvard-educated scholar acknowledges that artificial intelligence offers genuine economic transformation, he cautions against expecting immediate results. The technology's implementation across sectors will be uneven, with financial services likely seeing productivity gains first.

"You're going to see big improvements in productivity in financial services. Back offices are going to get much more efficient. That's happening. But I struggle to imagine as an economic historian that it's happening fast enough to impact our GDP and our productivity overall." Ferguson

More concerning, the Oxford graduate highlights a crucial aspect of AI development that few discuss: "AI requires massive amounts of compute, that requires massive amounts of electricity, and that requires massive amounts of capex."

The trillion-dollar infrastructure bill

Unlike previous technological revolutions, the AI transformation comes with a staggering price tag that has received little attention in public discourse.

"The hyperscalers—the big tech companies—are spending a quarter of a trillion dollars, I'll say it again, a quarter of a trillion dollars a year on capex to build the necessary infrastructure for this productivity miracle to happen. It won't be a free lunch." The Hoover Institution fellow

Ferguson contrasts this with earlier technological shifts: "A lot of what happened with the internet was a really low capex free lunch. This is different."

The political timing problem

The mismatch between political and economic timelines creates a particularly dangerous window, according to Ferguson. While politics operates in short electoral cycles with immediate concerns, economic transformations play out over years.

"The time scale of politics and foreign policy is quite short. The Trump Administration will be worrying about the midterms next week. People are already talking about their presidential runs in 2028. Politics happens so fast... but meanwhile the economics plays out over multiple years and decades." Ferguson

This temporal disconnect means that even if the AI productivity miracle materializes, its benefits "may benefit President Trump's successor, or maybe even his successor's successor." The question remains whether America's fiscal position can remain stable long enough for these gains to materialize.