The boom in the AI sector masks the disastrous economic consequences of US President Donald Trump's policies; it is also the reason why, despite the trade war, there has been no crash in stock markets, writes Nobel laureate Professor Paul Krugman on his blog on Wednesday.
“The vast majority of economists believe that Trump is pursuing destructive economic policies. The tariffs he implemented are negating the results of 90 years of international trade negotiations. The immigrant deportation campaign is already causing labor shortages in certain sectors. And drastic cuts in research spending will slow the development of American technologies,” explains the Nobel Prize winner.
Yet many people wonder why the stock market hasn't reacted to such policies with a bearish reaction, only briefly declining after Trump announced his plan to impose tariffs on most countries in early April. However, it's important to remember that stock prices “are not, and never have been, a useful predictor of economic cycles,” Krugman writes.
He further explains that the behavior of stock market investors is most significantly influenced by the dominant “narratives—positive or negative—of a given period. And the current narrative is full of optimism, fueled by the development of the AI sector in the markets. Only a “very significant shock” can trigger a change in the main narrative on Wall Street.
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“For now, however, the sudden increase in investment in the AI sector, which in the first half of 2025 accounted for half of US GDP growth, has probably saved the US economy from stagnation and a possible slide into recession,” the author says.
“So if we ask why Trumponomics (Trump's economics) didn't cause a stock market crash, one answer is that the AI boom masks the effects of Trump's policies,” the Nobel Prize winner concludes, emphasizing that the US will be paying for them for a very long time. (PAP)
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