"Trump's 'debt bomb', AI and the 'prize' for a degree: the main thing from economists' blogs

On the US Independence Day, July 4, President Donald Trump signed the "Big Beautiful" law. Most economists criticize the document for inflating the national debt and deficit, but there are those who hope for a positive effect from it. Another subject under discussion is AI and its impact on the labor market. Several top managers have predicted millions of job losses due to the development of artificial intelligence. Is this really the case?

The essence of the One Big Beautiful Bill Act (OBBBA), which was signed by the U.S. president, is large-scale tax cuts and budget spending revision.

The Congressional Budget Office (CBO) estimates that it would increase the U.S. budget deficit by $3.36 trillion over the next 10 years. If additional interest payments on the national debt are taken into account, the deficit would total more than $4.1 trillion. The White House, however, insists that the tax cuts envisioned in the document will trigger rapid economic growth, which will provide additional revenues to the budget and offset the deficit. According to projections by the Trump administration, the deficit will even end up shrinking by $2 trillion.

Many economists criticized the document in their blogs long before the vote and continue to do so now. The main complaints are related to the cuts in health care spending, the worsening situation of non-rich Americans and the inflated expectations for economic growth. Trump's harsh critic, Nobel Prize-winning economist Paul Krugman has called the OBBBA a "debt bomb," adding that it is based on "fantastic" economic projections. He explains why he himself favored a budget increase in 2011: "America needed it to recover from the 2008 financial crisis. But I didn't think it would cause problems in the future, because back then we were a serious country run by serious people."

The government debt-to-GDP ratio will rise from the 117% projected under previous legislation to 130% by 2034 after the OBBBA is enacted, and this in turn will drive up interest rates in the bond market, writes Kimberly Klausing, a senior fellow at the Peterson Institute for International Economics. 

In addition, the law will increase spending for most households: only the richest 10 percent of the population will benefit, and for 80 percent of the population, the cuts in Social Security and the effect of Trump's duties will outweigh the benefits of the tax cuts, Klausing continues. A study by the Yale University Budget Lab supports this thesis. Incomes for the lowest-income 20 percent of Americans would fall by 2.9 percent (about $700 a year), while the wealthy would rise by 1.9 percent - $30,000 by 2034, 

Trump continues the tradition of Republican presidents cutting taxes - George W. Bush did it in 2001 and Trump himself in 2017, notes former Bloomberg columnist Noah Smith. Each time, Republicans claim that tax cuts will spur economic growth. But experience shows that no major tax cut since the Reagan years has paid for itself, Smith writes. "If politicians continue to receive dividends for ballooning the deficit, increasing health care costs and tax breaks for the rich, the solvency of the U.S. government will eventually be called into question. We don't know exactly when that will happen, but the amount of fiscal irresponsibility that bond market investors will be willing to tolerate is not infinite," he wrote on the blog. 

Most critics of the "Big Beautiful" law themselves do not offer options for what spending should be cut to put the budget on a sustainable trajectory, notes Marginal Revolution blog author and economics professor at George Mason University Tyler Cowan. He suggests cutting health care spending, starting by reducing spending on the rich and elderly. He's in favor of bringing back the tip and overtime tax, which Trump has repealed. 

The additional investment from increased business activity will generate about $900 billion in the long run, but that will offset only 20% of the losses due to the tax cuts, writes Director of Tax Policy Studies at the Cato Institute Adam Michel. Among the positive measures in the law, he cites the elimination of about $517 billion in tax credits and subsidies for green energy. In his view, these are costly and inefficient subsidies that create distortions in the economy, forcing businesses and consumers to make decisions not based on real costs and benefits, but because of artificially created incentives.

In recent years, only a lazy person has not tried to predict how artificial intelligence will take jobs away from people. This week, several top executives from major companies spoke out on the subject. For example, Dario Amodei, head of Anthropic, stated that AI could wipe out up to 50 percent of entry-level positions among white-collar workers. And Ford CEO Jim Farley has predicted that half of all office workers, not just new hires, will be replaced by AI. 

For now, such predictions should be treated critically, accuses Brian Albrecht, chief economist at the International Center for Law and Economics. He suggests focusing on a different question - how exactly AI will change the structure of supply and demand in the labor market and, in particular, wage inequality.

Historically, higher education gave university graduates an advantage in the labor market - the education premium. It was expressed in the difference in earnings between people with higher and secondary education.

The size of the premium was determined by the ratio of supply and demand for credentials. For example, when in the 1970s baby boomers entered the labor market en masse with diplomas and supply grew faster than demand, the premium for a diploma fell. However, as early as the 1980s  growth in the number of graduates slowed and demand accelerated due to computerization, the premium rose.

But the rules of the game are changing: technology used to displace low-paid employees. Now artificial intelligence is taking on tasks that a bachelor's or master's degree used to be able to do, but now a person without a diploma can do them as well. On the other hand, AI may allow high school graduates to do things that used to require a degree: writing reports, analyzing spreadsheets, writing code, Albrecht notes. And the premium for a diploma may come down.

This article was AI-translated and verified by a human editor