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The AI productivity boom will soon make America richer, say Treasury Secretary Scott Bessent and Federal Reserve Chairman Kevin Warsh. However, analysts are concerned about who benefits from this growth. Workers’ share of U.S. income has already fallen to its lowest level on record, while corporate profit margins continue to rise at unprecedented rates.
According to Gregory Daco, chief economist at EY-Parthenon, the productivity gains driving this divergence predate the AI boom. "Productivity growth protects margins, not income," Daco wrote. Economic output grew by 1.7% in the second quarter, driven almost entirely by a 0.3% increase in hours worked, while compensation rose by 2.6%.
After accounting for inflation, real wages are effectively flat to slightly declining. Margins reached a record 14.9% of GDP, while the labor share dropped to 52.8%, the lowest since 1947. Daco notes that 50% isn’t a floor, warning that labor’s share could keep falling if capital gains remain concentrated among a few firms.
The productivity gains behind these numbers stem from decades of automation, cost discipline, and capital spending—not AI. "You tend to have greater concentration and a winner-takes-all environment with technological advances," Daco says. Historical revolutions, like the railroad boom or the dot-com era, initially benefit large firms, leaving smaller ones struggling with persistent costs and policy uncertainty.
In the 1990s, early adopters of technology reaped capital gains, but productivity growth later spread broadly, eventually supporting wage growth. However, AI’s capital intensity means its benefits may not follow the same pattern. Data center investment is expected to reach $31 trillion by 2050, nearly matching current GDP, but much of this equipment is imported.
Imports of large computers used in AI servers have surged to $450 billion annually, up from $50 billion in 2023. While capital spending is booming, productivity gains are modest, corporate margins are high, and hiring remains weak. Housing struggles under tight mortgage rates, and the share of income going to workers continues to shrink.
"Growth isn’t the same as broadly distributed income," former Wall Street Journal Fed reporter Jon Hilsenrath notes. If AI-driven wealth concentrates among data center owners or shareholders, the fiscal and political impact could be limited. Policymakers face a dilemma: let the AI boom proceed or intervene to ensure broader benefits.
The investment carries risks, with higher borrowing costs suppressing homebuilding and increasing mortgage expenses. "I don’t think there’s a floor," Daco concludes, meaning labor’s share may not rebound quickly from current lows.
Source: Fortune
