The AI Growth Paradox: Why High Productivity Could Still Lead to a Crash

Foreign Affairs | Kenneth S. Rogoff

United States federal debt is set to reach $40 trillion as annual deficits add six percent of national income, prompting claims that rapid AI-driven productivity will generate unprecedented tax revenues to offset borrowing costs. However, rising real interest rates—now exceeding 2.4 percent—threaten to elevate federal debt servicing costs above total defense spending, severely destabilizing fiscal projections.

Historically, post-conflict periods like World War II relied on regulatory financial repression to artificially suppress interest rates, whereas modern structural conditions and the capital intensity of AI infrastructure, including massive data centers, actively bid borrowing rates upward. Furthermore, capital's growing share of national income complicates tax collection, while escalating social entitlements and strategic defense requirements drive baseline government outlays higher. Prematurely anticipating windfall productivity while relying on low interest rates risks precipitating a severe sovereign debt crisis, ultimately eroding global market confidence in U.S. Treasury securities and undermining the long-term international standing of the dollar.

Comment

Escalating debt servicing liabilities directly constrain force structure investments guided by the U.S. National Defense Strategy. As net interest outlays eclipse the primary defense appropriation, statutory budget caps force sharp trade-offs between technological modernisation and force posture sustainment. This structural fiscal crowding-out restricts long-term multi-year procurement authority for naval shipbuilding and munitions stockpiles, irrespective of macro-level productivity growth.

Strategic Question for Discussion

Which factor poses a greater risk to long-term implementation of the U.S. National Defense Strategy — sovereign debt servicing exceeding primary defense appropriations, or structural capital diversion toward commercial technology infrastructure?

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