Economist Jared Bernstein, who chaired President Joe Biden’s Council of Economic Advisers, argues we are in bubble territory. I invited him on FP Live to make the case and hear out some of the counterpoints. Subscribers can watch the full discussion on the video box atop this page or on the FP Live podcast. What follows here is a lightly edited and condensed transcript.

Is the artificial intelligence boom a bubble? There are growing reasons to argue it is: Valuations of AI companies dwarf their revenues, the cost of investment in chips and data centers remains exorbitant, and there are fears that some firms are self-dealing and artificially pumping the growth of the industry. On the other hand, the companies investing in AI are by far the world’s most profitable, and their advocates argue that those firms will transform our economies and how we think about the internet and payments.

Is the artificial intelligence boom a bubble? There are growing reasons to argue it is: Valuations of AI companies dwarf their revenues, the cost of investment in chips and data centers remains exorbitant, and there are fears that some firms are self-dealing and artificially pumping the growth of the industry. On the other hand, the companies investing in AI are by far the world’s most profitable, and their advocates argue that those firms will transform our economies and how we think about the internet and payments.

Economist Jared Bernstein, who chaired President Joe Biden’s Council of Economic Advisers, argues we are in bubble territory. I invited him on FP Live to make the case and hear out some of the counterpoints. Subscribers can watch the full discussion on the video box atop this page or on the FP Live podcast. What follows here is a lightly edited and condensed transcript.

Ravi Agrawal: We’ve had two bubbles this century: the dot-com bust in 2001 and the housing crisis in 2008. Tell us why you think AI might become the third one.

Jared Bernstein: First of all, thank you for saying “might,” because one has to hedge such predictions. What Ryan Cummings and I argued in a recent New York Times op-ed was that AI certainly has a lot of bubbly characteristics. A bubble occurs when the level of investment in an asset is so high that investors stop believing they can get an adequate return on that investment in a reasonable time frame. So they pull out, and the highly elevated valuations start to deflate.

The evidence, to answer your question, is that the valuation of the firms involved, often referred to as the “Magnificent 7” or “Mag 7,” is north of $20 trillion. [Ed: The Mag 7 includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.] These are very high, very quick valuations. More to the point, the price-to-earnings ratio—meaning how the valuations of these companies are relative to their earnings—is quite bubbly and excessive. So that’s often a sign.

A concrete example is that OpenAI, one of the premier AI firms in the Mag 7, said it’s going to invest a trillion dollars this year. Its revenue is something like $13 billion—very low revenue. Now obviously that’s one year, and one of the key points we make is that these returns are expected over many years. So if investors have the patience to wait it out, then perhaps the bubble will disinflate without causing much damage.

But with the dot-com bubble, you had precisely what we’re describing: very high price-to-earnings ratios—higher than they are now, by some measures, but not that much higher—and investors got quite impatient. You started seeing some bankruptcies among the firms.