A recurring theme in both of Donald Trump’s terms as president has been a reasonably strong economy, at least in terms of growth. Memories of the Trump economy of the first term were one of the biggest things that drove voters back to him in 2024, when the economy was suffering from high inflation. And although inflation has not come quite as far back down to Earth as Americans would wish, growth has remained fairly steady in Trump’s second term as well.
As is usually the case with economic growth, this has mostly been nothing to do with the decisions made by the president. In his first term, Trump was just riding out the tail end of the period of growth that had begun in the aftermath of the global financial crisis. In his second term, Trump has benefited from a boom brought about by the development of artificial intelligence. American companies are investing huge amounts of cash into building out infrastructure to host and power AI, and that alone is accounting for a lot of recent growth.
I think it’s fair to say that throughout all of this, Trump has been pretty lucky. Many of his policies are actively bad for economic growth. His trade tariffs make products more expensive for consumers and inputs more expensive for American factories. His immigration raids restrict the labor supply and make hiring workers more difficult and expensive. And his general crony capitalist approach to relations with business leaders means that regulatory agencies seem to be making decisions more on the basis of what CEOs have done for Trump lately, rather than what’s best for the economy and society.
Still, whatever damage Trump does to it, the U.S. economy is an incredibly resilient thing. Even though it certainly doesn’t ensure that the fruits of growth are shared equally, it is really good at generating growth. You can throw a lot of stuff its way and it will still power on.
But the economy also currently sits on an unstable foundation. One of the features of the American style of economic growth is that it is also subject to frequent busts. When the market is allowed free rein and there is a lot of capital sloshing around, mistakes get made. When the quantity of mistakes gets big enough, that threatens the stability of the whole system.
The big unanswered question facing the American economy right now is whether or not a new disaster is looming. Over the past few years, investment has become very skewed towards AI, with a handful of companies competing to build and acquire as much compute as possible. They’re making a huge amount of capital investment without it yet being clear if they have a way to one day make a profit for it. At the same time, the stock market valuation of AI companies is also going through the roof, again without it really being clear that there is a stable profit at the end of the rainbow.
It’s difficult to “debate” this question because at the end of the day, everybody is just guessing. AI is such a radically new thing, and how it’s going to influence the broader economy is unclear. As a result, it often feels like this discussion just becomes a proxy for whether people think AI is a good or a bad thing for society. Personally, I’m amazed by the technological progress of AI, very worried about its societal effects, and agnostic about its impact on the economy. That puts me in a weird middle ground where my only real contribution to the debate is to say “wait and see”.
But one thing I am sure about is that not everybody who is currently plowing insanely large amounts of investment into AI is going to make a profit from it. Even when new technologies have a transformative impact on the economy - think about railroads or the internet - their emergence in the United States has still been marked by recurrent financial crises. That’s because the rush to develop and deploy a new technology inevitably leads to at least some speculation and poor investments.
There’s a very familiar Wild West feeling to the AI boom right now, and the only question for me is how big the let-down is going to be when it comes. Maybe most of this investment in data centers will turn out to be money well spent, but maybe a large chunk of it will not. The emergence of cheaper Chinese AI models which do not rely on massive data centers to run certainly suggests that there is at least one possible future in which this investment does not pay off.
And this brings me back to Trump. If he is president when the music stops, is he going to be able to handle the crisis? Although it’s a general rule that presidents have less influence over the economy than people think, moments of crisis are an exception.
In financial crises you need Congress to put together rescue packages and the Federal Reserve to make smart interventions in the financial markets. You need a president with his head screwed on straight, an appreciation for the longer-term, and without a tendency to try to line his own pockets at every opportunity. What worries me about Trump is that he completely lacks the qualities that are helpful for dealing with a situation like that.
So on the one hand, we just have to hope that Trump stays lucky, and no crisis emerges. But on the other hand, the longer a bubble spends growing, the bigger the shock when it bursts.
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