2/3: GDP: Booming on Paper, Crumbling Everywhere Else
AI Is Breaking the Link Between Growth and Prosperity
Growth Without Prosperity ~ Part II
This is the second part of three short essays. Essay 1 explains the disease. Essay 2 shows the symptoms mutating into something more extreme. Essay 3 provides a counter argument to balance the debate.
Part I, Why Workers Keep Losing Even When the Economy Grows
Labour loses bargaining power.
The economy becomes structurally imbalanced.
Part II, AI Is Breaking the Link Between Growth and Prosperity
GDP disconnects from prosperity.
The economy begins to “boom” while society weakens underneath it.
Part III, Will Artificial Intelligence Take Your Job?
Is AI eating the world?
Or does AI create a bigger pie to feed more mouths?
The AI Boom That’s Hiding Economic Decay
In the last essay, I explored how the balance between labour and capital slowly broke down over decades. AI may now be accelerating that process at extraordinary speed.
The economy is “booming” on paper and quietly crumbling everywhere else.
That’s the strange new world we live in.
In the first quarter of 2026, U.S. real Gross Domestic Product grew at an annualised rate of 2.0%. In nominal terms, the economy is now valued at roughly $31.86 trillion and is expected to exceed $32 trillion this year.
On paper, everything looks strong.
“If you just look at the nominal growth in the economy, particularly in the United States, it’s exceptionally strong.” - John Waldron, COO, Goldman Sachs
But every time I see headlines celebrating robust GDP growth, I feel increasingly uneasy.
When I look around, the prosperity supposedly reflected in those numbers feels strangely absent.
Wages feel stagnant. Job security feels weaker. Households look financially strained.
Small businesses look exhausted.
For most of modern history, economic growth translated into broader prosperity.
Factories opened. People got hired. Workers earned wages. Families bought homes.
Shopping centers filled up.
Growth reinforced itself.
Economist John Maynard Keynes described this dynamic through the multiplier effect. One person’s spending becomes another person’s income, which is then spent again, and again, rippling throughout the economy.
That dynamic is now beginning to fracture.
As the result of technology, particularly A.I., one worker can now do the job of five. The output still counts toward GDP, yet the missing pay-checks disappear from the economy.
That single sentence may explain much of what is coming.
A company becomes more productive. Margins improve. Profits rise. GDP increases.
But four incomes vanish from the economy.
That missing purchasing power matters more than most macroeconomic models currently acknowledge.
“In the last few months, there has been a step change function in the productivity of the AI toolkit... And I got to tell you, I went home one Friday actually fairly depressed by this because you could just see how this was going to have such a dramatic impact on society… what used to be man-years of work is being done in hours by machines.” - Citadel CEO, Ken Griffin
The layoffs are no longer theoretical.
A report from Challenger, Gray & Christmas found that more than 54,000 U.S. layoffs during 2025 were directly attributed to AI, representing roughly 5% of all job cuts that year. The trend has continued into 2026, with AI already cited as the reason for tens of thousands of additional layoffs.
Yet despite the employment market being decimated, stock markets continue hitting record highs.
Once again, economy looks healthy on paper.
AI is extraordinarily valuable for capital owners. The big question, however, is at what cost to the economy more generally.
For decades, rising productivity usually translated into rising living standards because workers remained embedded within the economic loop. Not any more.
We may be entering a period where GDP can grow without broad prosperity.
The problems may not stop there.
The global economy is already facing an inflationary shock driven by geo-political events impacting commodity prices and distribution networks.
Layered on top is the AI boom which is contributing directly to inflationary pressure.
The buildout of AI infrastructure is increasing demand across semiconductor and computing supply chains. What began as a scramble for advanced GPUs has expanded into broader demand for CPUs, memory products, networking hardware and data centre components.
Those costs ripple outward. These chips are ubiquitous in our lives. We find them in our cars, HVAC systems, smart phones, televisions, personal computers and so much more.
As the cost of chips increases, so too do the devices that contain them.
Those costs flow down to consumers.
Now consider how much power AI consumes. When demand for energy surges, electricity prices spike for everyone, adding fuel to the inflationary fire (pardon the pun).
“We see that coming through in consumers adjusting to higher prices driven by energy, elevated energy prices. They’re adjusting between discretionary and nondiscretionary spending.” - Michael Miebach, CEO, Mastercard
The inflationary effects are also spreading into software.
Large technology companies are aggressively integrating AI into existing products, spending enormous amounts of money on tokens, and increasingly passing those costs through via subscription price increases.
Microsoft has increased prices for Microsoft 365 business customers after bundling Copilot into subscriptions. Salesforce and Adobe have followed similar paths.
If consumption is falling because AI has taken a wrecking ball to the labour market, who pays these higher prices?
The long-term bullish case for AI rests on productivity gains eventually lowering costs across the economy, but that’s not what we are seeing right now. The theory isn’t playing out in practice.
This toxic situation is what economists label ‘Stagflation’.
Historically, stagflation tends to coincide with weak GDP growth.
But this time is different.
GDP may remain superficially strong because AI-driven productivity gains continue boosting measured output even while labour markets deteriorate underneath.
That creates the illusion of economic health. But GDP is not prosperity. GDP measures output. It does not measure distribution.
AI-generated productivity counts toward GDP. Missing pay-checks don’t figure in the calculation.
Those lost incomes are no longer spent on groceries, rent, restaurants, holidays or school supplies.
That is where the economic engine eventually begins to sputter.
Are we building our economic house on foundations of sand? How stable will it be? Can it endure?
If AI simultaneously weakens labour income while increasing returns to capital, then consumer purchasing power erodes precisely when the economy becomes more dependent on consumption to sustain itself.
The result could be deeply unstable.
Business leaders are beginning to feel uncomfortable with the way this is playing out:
“There’s a lot of exuberance out there. Yeah, right now it’s good. It wasn’t in 1972, 1986, 2000, or 2007. That doesn’t give me comfort.” - Jamie Dimon, CEO, JP Morgan
I’m not arguing that AI is inherently bad. Nor am I arguing that productivity growth is undesirable.
The problem is that the economic system surrounding AI may no longer distribute those gains broadly enough to preserve social and economic stability.
The old playbook increasingly looks obsolete. We can no longer assume that rising GDP automatically means rising prosperity. That assumption belonged to a different economic era.
Either societies find a way to recycle more of these AI-driven gains back into the hands of ordinary households through new policies, new ownership structures or entirely new social frameworks, or we may enter a deeply strange decade. One where the economy appears to boom on paper while slowly crumbling underneath.
We’ve opened a Pandora’s box. It’s efficient, it’s weird, and now that its open, it’s impossible to close it again.
Some people would disagree with that conclusion.
The counterargument is that AI won’t trigger a wave of mass unemployment at all. Instead, proponents believe it will unlock a new era of prosperity, raising productivity, creating new industries, and ultimately generating more jobs than it destroys.
That’s a compelling case, and one worth examining properly. I’ll explore it in the third and final essay in this series: “Will Artificial Intelligence Take Your Job?”
What do you think? Please leave a comment:
