An AI Bubble Could Pop Newsom
California Gov. Gavin Newsom is hedging his presidential hopes on a single bet: that there won’t be an AI crash this year.
Despite the ominous warnings from the Legislative Analyst’s Office that even a small crash in AI stocks would send California into total fiscal disaster, Newsom is going full-speed-ahead with his ginormous $349 billion budget. The Legislative Analyst’s Office predicts that Newsom’s planned spending will result in an $18 billion deficit this year, and then a $35 billion annual deficit beginning next fiscal year. Annual deficits of $35 billion are predicted to continue thereafter, owing to the massive spending increases Newsom has rolled out during his governorship.
The risk is so acute because the state’s revenues are highly dependent upon the income and capital gains of the wealthy, whose annual fortunes often hinge on the stock market. The Legislative Analyst’s Office’s prediction of a $18 billion deficit this fiscal year accounts for some risk of an AI stock crash, but if such a crash really does happen, the state would be much worse off.
It’s as though all Newsom cares about is being able to claim in his presidential campaign ads that he served up a whole plate of progressives’ dreams and wishes as governor.
It’s as though all Newsom cares about is being able to claim in his presidential campaign ads that he served up a whole plate of progressives’ dreams and wishes as governor. But when Gov. Katie Porter or Gov. Xavier Becerra takes office come January 2027, and starts slashing basic services and proclaiming the previous governor has left them in fiscal disaster, that will not play well.
If there is even a mild downturn in the stock market this year, Newsom himself will have to take disaster measures and start cutting funding for things like high schools. That will be a terrible look for his presidential campaign, given that the success of his campaign will depend on his ability to sell the job that he did as governor of California.
But really, whether there is a stock market crash or not, the disastrous fiscal position Newsom has left California in will play quite poorly as he attempts to win the White House.
So far, the artificial intelligence industry has actually been Newsom’s saving grace. Buoyed by the industry’s rapid growth, Newsom has been saved from having to make much more drastic cuts over the past three years and has been allowed to continue his runaway spending. Even with the huge revenues generated by AI’s growth, however, Newsom has already drained much of the state’s rainy day fund and taken all of the preliminary budget-saving measures. In the event that the AI bubble pops — and there are many indications that investment in the industry is overheated — Newsom will be left without those basic safeguards to turn to.
Democratic lawmakers in California are starting to get nervous. They are perhaps realizing that Newsom is spending as much as he can get away with, without regard for the inevitable long-term consequences he will leave Californians with when he runs off to the campaign trail.
Democratic Assembly Speaker Robert Rivas and Assembly Budget Chair Jesse Gabriel released a joint statement this month expressing concern that essential services could be endangered under the governor’s budget proposal.
“California’s budget calls for caution,” they said. “With Trump targeting our state, we must defend vulnerable communities and protect essential programs that help families put food on the table and see a doctor.”
The speaker and budget chair warned: “Today’s roaring tax revenues may not last, so this moment also should be used to strengthen schools and accelerate much-needed housing construction. Building more reserves now is key for the future, along with doubling-down on budget oversight to ensure responsible spending.”
Perhaps they are starting to agree with the treasury secretary’s assessment of Newsom’s economic wherewithal. At the World Economic Forum this week, Scott Bessent said, “Gov. Newsom, who strikes me as Patrick Bateman meets Sparkle Beach Ken, may be the only Californian who knows less about economics than Kamala Harris.”
Rivas and Gabriel aren’t the only ones who are nervous.
This week, a bipartisan group of state senators raised concerns over California’s impending budget deficits.
“It’s simply an irresponsible position to be putting ourselves in,” said Democratic state Sen. Catherine Blakespear of the predicted deficits. “And it does expose us to tremendous risks in the event and likelihood that we do have a downturn in our economy.”
Several other senators were blunt in voicing their reservations to Erika Li, a top Newsom budget official, during a hearing Wednesday. Democratic state Sen. Christopher Cabaldon told Li that “this is not a year” to have closed-door negotiations about the budget. “That is not the outcome, that’s not the standard we should be setting,” he said.
Democratic San Jose Mayor Matt Mahan also told Politico this week that he does not believe the state government is prepared for the AI bubble to pop. “Investment in AI and data centers and all of the build out we’ve seen cannot indefinitely continue,” said Mahan. “And I don’t currently believe that Sacramento is properly positioned for an inevitable slowdown in the economy.”
Newsom has spent his whole governorship increasing spending year after year and rolling out new program after new program. He doesn’t appear to have the capacity to stop. In his State of the State address earlier this month, he announced record per-student spending of $27,000 and funding for universal preschool for 4-year-olds.
When the true cost of these policies becomes clear, Newsom will be forced to defend the wreckage of his own making on the campaign trail. Americans, already wary of the Californication of America, will recoil even further from the idea.
And, if the AI bubble bursts, Newsom’s presidential ambitions may burst with it.
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