AI Investment Pushes Up Rates and Crowds Out Other Spending

The rapid expansion of artificial intelligence infrastructure is reshaping the US investment landscape, with rising data center spending putting pressure on financing costs and competing with investment in housing, factories, and other industries. In an October 6, 2026, analysis, economist Paul Krugman argued that the AI boom is already redirecting capital and resources across the economy, while a Fortune newsletter published October 9 raised questions about whether financial relationships with customers could prove as important as advances in chips in determining which companies lead the AI industry.

Krugman identified higher long-term interest rates as a central mechanism behind this shift. As technology companies commit substantial resources to data centers, semiconductors, equipment, and software, borrowing costs rise and financing becomes more difficult for businesses outside the AI sector.

The effects extend beyond construction. Krugman cited investment data showing that spending on information-processing equipment and software has increased sharply relative to other business investment since the beginning of 2023. His analysis, drawing on data from the Federal Reserve Economic Data database, compared changes in technology investment with changes in other forms of business investment.

Data center construction is also competing with housing, office buildings, and factories for resources. Krugman referenced charts from investor Steve Rattner to illustrate how the expansion of AI infrastructure may be diverting construction activity away from other parts of the economy.

Equipment and software account for much of the AI spending boom, rather than buildings alone. Krugman argued that this helps explain why AI-related investment has remained resilient despite higher interest rates: financing costs may carry less weight for rapidly depreciating assets such as graphics processing units than for buildings designed to last for decades.

Electricity demand and semiconductor shortages are creating additional pressures. Krugman said data centers are consuming scarce electricity, while increased demand for chips has contributed to sharply rising memory prices. These pressures affect industries beyond AI, including automobile manufacturing and personal computer production.

Krugman also contrasted the current investment cycle with the technology boom of the 1990s. His comparison found that the earlier expansion did not produce the same apparent displacement of nontechnology investment. He attributed much of that difference to substantial foreign investment inflows into the United States during the 1990s, which helped finance technology growth without a comparable decline in other investment.

He argued that similar foreign capital inflows have not materialized at the same scale during the current boom. Krugman also challenged claims by President Donald Trump about exceptionally large foreign investment commitments, saying balance-of-payments data do not show evidence of a corresponding surge.

Government tax policy is another factor in the allocation of capital. Krugman argued that tax provisions, particularly changes included in Trump's One Big Beautiful Bill, effectively subsidize data center expansion through taxpayer support. He questioned whether shifting investment toward AI and away from other economic activities necessarily benefits the country as a whole.

A separate question concerns competition among AI companies. Fortune's October 9 newsletter framed the industry's financing strategies as a potential determinant of market leadership alongside chip performance. Its central question was whether companies could gain an advantage by building financial ties that make customers less likely to switch providers, rather than relying exclusively on superior hardware.

Together, the analyses highlight two dimensions of the AI expansion: competition between technology companies for customers and capital, and the wider economic consequences of concentrating investment in computing infrastructure. Krugman's October 6 analysis focused on rising financing costs, resource constraints, and the apparent decline in investment outside technology, while Fortune's October 9 newsletter highlighted the strategic importance of customer relationships in the AI race.