Robert Rubin Warns AI Boom Carries Risks for US Economy, Markets

Former Treasury Secretary Robert Rubin warned that the artificial-intelligence investment boom could bring major productivity gains but also create financial and social risks that markets may not be fully pricing.

Rubin, who served as Treasury chief during the internet boom in the late 1990s, said he’s particularly concerned about “circularity risk” in the AI ecosystem. The term refers to the overlapping of commitments among suppliers, customers and investors — such as between chipmakers and software firms.

“Some of these very big AI companies have enormous commitments, and then there are a lot of suppliers, and a lot of suppliers have borrowed against those commitments,” Rubin said in an interview at the Greenwich Economic Forum Tuesday. “What happens if they can’t fulfill those commitments or all those borrowed against them? It’s called circularity risk.”

The risk of some disruption — where one party breaks its commitments, causing cascading failures — is meaningful, according to Rubin. The former Goldman Sachs co-chairman described it as not “near zero.”

The scale of debt issuance this year by firms building data centers and developing AI software has been such that many market participants say it’s contributed to an increase in borrowing costs globally. Benchmark government bond yields have climbed further this week, with 10-year Treasury rates hitting their highest level since 2002.

That’s in turn propelling government debt servicing costs, stoking concerns about fiscal sustainability in the US, France and elsewhere. Rubin, who joined President Bill Clinton’s administration at a time when worries over budget deficits were widely shared, said angst over the scale of borrowing is beginning to be evident.

“I think what’s happening right now is some realization about our fiscal situation beginning to affect markets in a way it hasn’t for a long time,” he said.

He also pointed to inflation and a broader loss of confidence in the government’s ability to address fiscal problems. “When you have adverse or unstable fiscal conditions, it can affect confidence more broadly in the ability of your government to deal with this problem,” he said.

That dynamic could ultimately matter for equity markets as well, he said — because uncertainty tends to weigh on investment and productivity.

Productivity Doubts

Rubin pushed back against the argument that AI-driven productivity growth could allow the US to effectively grow its way out of its fiscal problems. While it’s possible that a productivity acceleration boosts GDP gains, the benefits could be accompanied by substantial job losses, particularly among white-collar workers, according to the former Treasury chief.

“This is going to hit knowledge workers very hard,” he predicted. Lawyers, accountants and television workers could all face displacement, he said, raising difficult questions about how people transition into new roles. The US currently lacks effective programs to deal with such disruptions, he said.

“So could we have higher growth from AI? We could — we probably could well,” he said. “But I don’t think it’s going to do what we need to do to zero-off fiscal problem.”

He also questioned whether the massive investment in AI will ultimately generate sufficient returns. “Will it pay off, will it not? I don’t know, but neither does anybody else,” Rubin said. “Some of this will turn out to be terrific and some companies will do great, and a bunch of other companies are going to do badly.”

AI Safety Concerns

Rubin said his concerns extend beyond markets and the economy to the potential safety risks posed by increasingly powerful AI systems.

He said he sees AI safety and climate change as “two massive existential risks” unlike anything humanity has previously faced. Rubin also pointed to the dual challenge of attempting to put safeguards on AI but also keeping an eye on competition with China. If Beijing doesn’t impose comparable constraints, the US could be left behind, he noted.

“The US is still the best place to invest,” Rubin also said. But he argued that maintaining that advantage depends on the country’s political system becoming effective enough to address its fiscal, technological and other long-term challenges.

“Our political system has to become effective enough, again, — which it’s not now,” Rubin said. “It doesn’t have to be terrific. It wants to be effective enough to deal with our issues.”