Economist Alex Tabarrok: Data Center Investment Is Not Crowding Out Other Investment—AI Is a Bright Spot Against Headwinds
Alex Tabarrok, co-author of the economics textbook Modern Principles, systematically refutes the claim by Paul Krugman and others that data center investment is crowding out other investment: in the standard loanable-funds model, crowding out is less than 1:1; Krugman's GDP-share graph suggests crowding out, but GDP itself is growing, so one share rising while another falls cannot be equated with crowding out; in real-dollar terms, other real investment still grew about 3% from Q2 2023 to Q2 2026; the rise in US 10-year TIPS real rates occurred largely before the AI investment boom; and real rates rose across all advanced economies, not just the US, undermining a US-specific crowding-out explanation. Tabarrok argues a more plausible narrative: tariffs, policy uncertainty, and the fading of Biden-era CHIPS and IRA subsidies weakened non-AI investment, while AI investment served as a bright spot amid overall investment weakness.
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Paul Krugman and several economists recently advanced the claim that massive capital spending on data centers is crowding out investment in all other sectors of the US economy. Alex Tabarrok, co-author of the economics textbook Modern Principles, systematically refuted this argument on his Marginal Revolution blog.
The first problem is arithmetic. Tabarrok pointed out that Rattner's chart shows data center construction spending rising by $51 billion, while the so-called 'crowded-out' other investment allegedly fell by $120 billion. In the standard loanable-funds model, the crowding-out effect is generically less than 1:1—$51 billion of additional borrowing will crowd out less than $51 billion of other investment spending, and cannot explain a $120 billion decline.
The second problem is how to read the graph. Krugman uses a comparison of 'tech investment as a share of GDP' versus 'other investment as a share of GDP' to suggest crowding out. Tabarrok noted that when GDP itself is growing, one share rising while another falls is a natural outcome and cannot be directly equated with crowding out. He proposed regraphing the same data in real dollars: from Q2 2023 to Q2 2026, real tech investment rose about 46%, while other real investment rose about 3%. Other investment has weakened since its 2024 peak but remains above its starting level.