AI Boom Crowds Out Other Investment, Pushing Up Interest Rates as Data Centers Absorb Capital
Updated
Updated · Paul Krugman | Substack · Oct 6
AI Boom Crowds Out Other Investment, Pushing Up Interest Rates as Data Centers Absorb Capital
3 articles · Updated · Paul Krugman | Substack · Oct 6
Summary
Massive AI spending is already diverting money from housing, offices, factories and other non-AI investment, with data-center construction and tech outlays leading the shift.
High interest rates are the main transmission channel: AI projects remain relatively insensitive to borrowing costs, while the rest of the economy faces tighter credit, scarcer electricity and higher chip prices.
Tech investment has risen sharply since early 2023 while other business investment has weakened, a pattern the report says contrasts with the 1990s tech boom, when foreign capital helped finance broader expansion.
The piece argues the reallocation may be distorted by tax subsidies in Trump's 'One Big Beautiful Bill' and warns that stress is already surfacing in commercial real estate, private credit and other lightly regulated finance.