The AI boom is consuming electricity, water, land, and capital at extraordinary rates. Governments should resist the temptation to stop it before its productivity dividend arrives. Artificial intelligence is reshaping markets and corporate earnings at a pace that has surprised even the most bullish investors. Higher demand for some things is making them more expensive.
Investors are bidding aggressively for memory chips, server processors, construction equipment, and skilled labor. But don’t blame your country’s inflation on the new data centers. When competition for a scarce resource intensifies, its price rises. If the money supply does not rise faster than the real output of the economy, other prices will drop. Inflation will be zero.
The International Energy Agency estimates that capital expenditure in 2025 for five major tech companies was around $400 billion. And that could increase by another 75 percent in 2026. Data centers’ impacts on markets are so huge that they’ve become economic policy issues in their own right. But the cost of new equipment must be weighed against the value of its output.
Capital expenditure is not consumption; it’s an investment meant to boost future productive capacity. That’s economic growth, and it’s deflationary—money now chases more goods. AI requires enormous amounts of resources today. The question is whether the infrastructure we build now will enable us to produce additional goods and services more efficiently tomorrow. The National Bureau of Economic Research studied nearly 750 corporate executives. It found positive productivity effects from AI adoption, expecting those gains to strengthen during 2026.
Another NBER survey, covering nearly 6,000 firms, found that 69 percent were already using AI. Productivity was up 2.2 percent from a year earlier, way ahead of the rise in labor costs. That is how technological progress defeats inflation. Imagine a restaurant whose cooks suddenly become twice as productive.
The restaurant can serve twice as many customers without using additional resources. It has several choices: lower prices, raise wages, increase profits, or some combination of all three. AI will lower prices if entrepreneurs are not hindered by restrictions. Competitors should be free to challenge the incumbents. Consumers should be free to switch to better alternatives. The American Economic Association estimates that AI could add 0.9 percent to annual productivity growth over the next decade. That’s huge by the standards of mature economies.
The temptation to squash this progress is visible. Governments ponder imposing licensing regimes and other barriers to protect incumbent businesses affected by AI’s disruption. Those policies may be well-intentioned. They can also be economically destructive. The IMF estimates that new restrictions could reduce the potential gains by more than 30 percent.
Sensible regulation may be beneficial. Markets need rules against fraud, theft, and genuine harm. But sometimes too much safety can be worse than too little. Just ask the FDA.
The answer to scarcity is more freedom, not government edicts, subsidies, and price controls. We have huge, untapped potential to generate more wealth if we let the markets price all resources. Prices are information. They tell entrepreneurs what consumers need and where profits can be made. The free-market mechanism attracts investment, expands supply, and pushes prices down.
Sometimes progress comes too quickly or frustratingly slow. We must resist any voices that urge us to control the process. Voluntary mechanisms are vastly more reliable than central planning. Some fear that AI will eliminate the need to use human labor. It will create new jobs, making productive capabilities more abundant. And abundance is the ultimate inflation slayer.
Currently, West Virginia is setting an example with its plans to become the nation’s data-center capital. New investors will pay market prices for electricity, water, and infrastructure upgrades. West Virginia is turning its advantages—energy, land, labor, and business-friendly public servants—into a growth strategy. And additional tax revenue could eliminate the state income tax.
We are investing today in expensive productive capacity that will reduce costs tomorrow. The right policy is to remove the bottlenecks preventing supply from catching up with demand. The outcome depends on promoting market competition, rewarding private investment, and unleashing energy production. Above all, it depends on restraining government interventions.
