Is there an AI bubble? And what could it mean for Wisconsin?

• Experts are divided on whether the massive investment in artificial intelligence constitutes an economic bubble.
• The true value and return on investment for AI technology remain uncertain as its societal impact is still unfolding. 
• Analysts express concern over "circular financing," where large tech companies invest in startups that then buy their services.
• Unlike the dot-com era, many AI companies are private, limiting public insight into their financial stability.

The amount of money flowing into artificial intelligence and building its infrastructure has some people wondering if it is the next economic bubble that could burst. So is the AI a bubble? Short answer: it seems like no one can say for sure.

"Honestly, nobody can probably tell you if we're in a bubble or not because the problem with bubbles is you don't necessarily know when you're in one," said Scott Hodek, chief economist with the Wisconsin Department of Workforce Development.

Dominic Ceci, chief investment officer for Johnson Financial Group, said there is a huge question on how this technology will deliver for everyday Americans. "Most people using AI today are using a massively subsidized version of AI," Ceci said. "If you pay for an AI subscription, you're not actually paying the going rate. If you're paying $20 a month or whatever, it costs those companies way more to actually run the stuff you're doing."

Will people pay more when AI gets more expensive? No one knows until the prices go up, if it goes up at all. Ceci said the current AI status does have "ingredients for a bubble” particularly because it seems like no one is totally sure on how this technology is going to change how society operates. "When you have uncertainty, it leads to a lot of guessing, in simple terms," Ceci said. "And this technology creates as much uncertainty as anything." Ann Miletti, head of equity investments at Allspring Global Investments, said society is still trying to figure out if the money that’s being spent will be worth it in the end.

"There are some things that make me nervous. Because if you look at the total spend, not all of that spend is going to be profitable," Miletti said. "But the unknown is, what pieces of it are going to see good ROI (return on investment) … and what other pieces are going to go 'Well that was a total waste of dollars.' So we're still early on in trying to figure that out." Currently AI has not delivered the return on the investment but that might not be a reason to worry.

"That's normal. It's more in the investment round,” Hodek said. “The dust will eventually settle; the technology will be established, and then you'll have your standard trend forward."

What is circular financing?

One area that does have analysts concerned is the “circular financing” that has come with the investment in the technology.

Circular financing is essentially company “A” loans money to company “B” so company “B” can buy from company “A.”

"What are the real commitments to that? How fast can something like that unravel," Miletti said. "What are all the details around it that we don't know? It's kind of new." But that circular financing has some built in protections for if some catastrophe happens; it could be limited to those companies directly connected to each other. It might not be widespread as the 2008 housing crisis.

"Let's say it is a bubble, the bubble might not happen as much in public markets as it happens in private markets, assuming if things stay where they're at today," Ceci said. Another difference in this tech era compared to the 2000s “Dot Com” era is it seems like fewer AI companies are going public.

"Most people don't have any visibility into what their financials really look like and what's really going on under the hood,” Ceci said.

Potential impact on Wisconsin

If there is an AI bubble and it bursts, the potential impact on the state is unclear. There are multiple data centers currently under construction which employs thousands of trade workers. Microsoft has completed construction on its first hyperscale data center and has more than 400 people working at the facility. And Microsoft is planning on building up to 15 more data centers. There's also data centers under construction in Port Washington with Vantage and Oracle, Beaver Dam with Meta and other places around the state. If there were to be a decline, what could the impact be for jobs in Wisconsin.

Hodek said during the Dot Com bubble, Wisconsin lost about 50,000 jobs.

"If you compared that to, say, like the Great Recession… Wisconsin lost about 143,000 jobs there,” Hodek said.

Hodek said even with the money and the uncertainty moving everywhere, there might not be a bubble.

"The AI companies, of course, are not going to tell you if they think you're in a bubble, but they're saying the costs of compute per token generation are dropping so quickly that eventually the return on investment will happen and the economics will sort itself out," Hodek said. "We've never seen that happen. But could it? Sure. Models work until they don't."

As seen in the Milwaukee Journal Sentinel