Data Center Paradox

It’s easy to fear and hate a giant windowless warehouse full of computers, sucking up electricity and destroying jobs. Data centers sound at best like a bad deal for the communities that host them. At worst, they could be an existential threat to the human race.

People are always uneasy when new technology disrupts the old ways of working. At the start of the Industrial Revolution, textile workers feared that machines would replace them and used their wooden shoes (sabot) to break the gears. That may be how we got the term “sabotage.”

Over time, machines improved productivity and safety, increased incomes and living standards. The AI boom will be no different. It is disruptive like all previous innovations. And, as with previous changes, tomorrow’s benefits will vastly outweigh today’s costs.

What about those utility bills? The higher demand will surely put a nasty dent in your family budget, right? Economics often produces counterintuitive answers. Sometimes, adding a gigantic new customer can lower the average cost of electricity for everyone else.

For a couple of decades, electricity demand in the USA was basically flat. We built infrastructure for a certain capacity and then spread those costs across all users. Data centers can utilize the grid more efficiently. Your bill can go down because the average fixed cost declines.

Higher consumption can lower the cost per unit consumed. Between 2015 and 2024, the arrival of data centers was associated with a modest decline in average retail electricity rates. The explanation is economies of scale in generation, transmission, and distribution.

Data centers can also shift computing workloads from expensive peak hours to cheaper off-peak periods. That reduces total grid costs by flattening demand and making better use of the existing infrastructure. The AI boom could make the system more efficient, benefiting everyone.

Here’s where the economist adds, “On the other hand…” Yes, the opposite can also happen. If a data center arrives where the grid is already under strain and the government intentionally sabotages the construction of new power plants, the result will be high bills and shortages.

Rather than imagining a post-apocalyptic world ruined by AI, we should focus on restraining politicians with a knack for making things worse. Our public servants should neither block nor subsidize the development of new data centers. The market can handle that one if left alone.

Unfortunately, at least 38 states compete desperately for data centers with their residents’ money. They waive or reduce sales taxes on essential tech equipment. They offer sales tax exemptions on the electricity consumed. And they grant long-term property tax reductions or abatements.

Data centers are extraordinarily capital-intensive. They also create very few local jobs once construction is over. If governments subsidize them while customers and taxpayers fund the new infrastructure, we are transferring wealth to some of the world’s richest investors.

Of course, a data center isn’t just a building. It is a gigantic piece of infrastructure linked to a vast global network, supporting cloud computing, artificial intelligence, and many industries. Most of the economic benefits accrue elsewhere. And they register much later.

Judging a data center solely by the number of people employed inside its walls is like judging a railroad by the number of people working at the local station. Still, instead of speculating about the net effect of the externalities involved, let the investors pay their costs as the rest of us do.

The data-center boom may turn out to be a terrific economic opportunity. It may also produce some spectacularly bad government deals. If a new facility requires a $500 million transmission upgrade that wouldn’t otherwise be needed, don’t make retirees and small businesses finance it.

It’s a terrible idea to craft our policies based on what Keynes called the “animal spirits”—the public’s overconfidence or anxieties. Current evidence suggests that data centers are neither the economic disaster their critics fear nor an automatic windfall for the communities that host them.

States and counties must end the costly competition to attract businesses at the expense of their taxpayers. A coordinated repeal of all direct and indirect subsidies is a step toward refocusing government action on promoting the general welfare rather than special corporate interests.

Free enterprise means that producers are free to compete for the customers’ money on the value they create, not on how much “free” money they can extract through politics.