“Yes, AI Is a Bubble. There Is No Question.”

In the following excerpt, Derek talks to Paul Kedrosky about the similarity between AI growth and the build-out of the transcontinental railroad.

Derek Thompson: In September, you came on this show, and you explained to me why you think AI is a bubble and you utterly convinced me. And I talked about this interview so often, I drove people completely crazy. And then we didn’t talk for a while, and then I changed my mind a little bit. And I recently thought, “Maybe I’m getting a little bit too optimistic about this technology. Maybe it’s time to bring Paul back into my life.”

Paul Kedrosky: I need a new dose.

Thompson: I need a new dose to set me straight on AI. Before we go back and forth on who’s right and who’s wrong, let’s wind back the clock a little bit. I would love, for my own sake and for listeners’ sake, and maybe for yours, too, remind me what is, in a nutshell, the Paul Kedrosky thesis for why AI is a bubble?

Kedrosky: AI is a bubble because it’s one of the probably five largest CapEx bubbles, meaning that we’re at this moment where we’re building out infrastructure like canals, like railroads, like rural electrification, like fiber optics. We’re building out this huge new substrate on top of which a lot of economic activity happens. And this is a particularly large example of that, to the point that it’s—and this is part of what got me interested—where it’s a material fraction of GDP growth, like 50 to 80 percent, depending on the quarter and whose numbers you use. And inevitably, and with a series of rotating crashes as the assets themselves, we overbuild. And the assets become, well, they might be useful in the long run, [but] they are unable to pay their way with respect to the debt that’s used often to finance them. And then there’s a big reset, and then we maybe find another use for them.

This happened with fiber, this happened with rural electricity, this happened with railroads, this happened with canals. And if it didn’t happen this time, it would truly be the first time in modern economic history. Which isn’t the same thing as saying that AI itself is somehow frivolous, useless, or anything else. No, AI is an incredibly important technology. And I really have to drive this point home with people: Saying that we’re in an infrastructure bubble that will have a whole series of consequences is not the same thing as saying, “These whole large language model things, you may think they work, but they don’t work or they’re just auto-complete,” or whatever else. These are two very different arguments. So that’s my argument. And in particular, this particular moment is unique because it combines all of the things that we found in prior bubbles, meaning loose credit, real estate, technology, government policy.

We’ve never had a moment like this, with a huge infrastructure build-out where we were at the intersection of all four of the things that have caused the most consequential infrastructure bubbles in U.S. history. So you have all these independent actors in each of these spaces all feeling like, “I don’t know what those guys are doing in technology, but we here in real estate, we know what we’re doing. So whenever we sign a lease contract to a hyper-scaler, we know we’re looking at a prime credit who’s good for the debt and whatever else.” So every one of the actors feels like they’re acting in a rational way. And the consequence of that is what the finance theorists call a “rational bubble,” where the intersection of all these rational actors is something that’s economically indefensible. That’s basically the core of my argument, that if we didn’t have something like this happen now, it would be the first time in economic history, and this particular moment is particularly fragile because it’s at the intersection of all of these impulses.

Thompson: And the analogy that you’ve given so often is the railroads. That’s not the only infrastructure bubble that you listed. There are the canals in the 1820s, 1830s. There’s the fiber optic build-out in the 1990s, early 2000s. But it’s the railroads that I feel like you keep coming back to, not only because the transcontinentals were such an enormous infrastructure project, but also because it’s an infrastructure project that utterly transformed American politics and economics in the back half of the 19th century. Can you, before we zoom up to 2026, just pause a little bit? What was the lesson, to your mind, of the railroads?

Kedrosky: That you can have an entirely defensible infrastructure build-out. Railroads were a very good idea. They were not ephemeral. They weren’t like Beanie Babies. They weren’t some kind of strange and transient thing. They were really important and on top of which we did a lot of important economic activity, not least of which was settling the western United States. But that didn’t prevent people from overfunding startup, if you will, railroads, such that track miles that were built in the peak periods in the mid-19th century, roughly half of those track miles were eventually abandoned. Does that mean that railroads were a bad idea? No, we just wildly overbuilt because the impulse to build was so imperative that everyone who was building railroads felt like there’s an opportunity to be an oligopolist here. There’s an opportunity that when all of this shakes out, I’ll be the consolidator, which is very similar to—jump forward for one second—the impulse we hear today.

Dario Amodei said this the other day, that we think there will only be one or two, maybe three players at the end of all of this. Same impulse. And it leads to this misaligned incentive with respect to, “I don’t mind that what I’m doing right now isn’t paying off, because over time I plan to be the consolidator and the oligopolist.” So that’s lesson no. 1. And the other lesson, and I think it’s particularly striking, is people have forgotten two things about the railroad build-out: not just that there was all this redundancy, but it led to a series of financial crashes in the 1870s, crash of ’73, crash of ’78, crash of ’87, a whole series of crashes, each of which killed off a significant number of companies, financial institutions, and others. So it had financial consequences, not just 50 years later, but in the period after the build-out.

But nevertheless, in 1900, the railroads were roughly 60, 62 percent of the index market capitalization in the United States. They were the technology company of their time. So building out that platform was rewarded but was also consequential in terms of leading to various financial crises. And it also played a secondary role in the Great Depression itself. None of these things mean that railroads were a bad idea. Railroads were a tremendous idea, but the carnage along the way was dramatic. So the metaphor for me is that you can have a hugely valuable build-out, but it is really consequential for decades in terms of both the productivity consequences and the economic and financial carnage. Strikingly, today, technology, writ large, is around 60 percent of all U.S. index, so the MSCI. So you’re kind of in a similar situation, which is striking that this industry has grown to remarkable dominance of the broader equity indices, much like the railroads did.

And much like the railroads did at the time, it’s become increasingly capital intensive, which has consequences in terms of how investors are looking at technology companies now versus how they looked at them in the halcyon days of the 1970s. So that’s kind of the bridge for me. It’s a platform. Many of the impulses are the same, many of the consequences are the same, and I feel it would be very hard, historically, not to think it will play out in a similar fashion.

This excerpt has been edited and condensed.

Host: Derek Thompson
Guest: Paul Kedrosky
Producer: Devon Baroldi