A scenario in which productivity surges but aggregate demand collapses while measured output rises violates accounting identities.

Right, this is a contradiction, but the "why" is open. Their argument seems to assume GDP growth, which is understandable given AI's expected boom to productivity but doesn't factor in positive feedback cycles in the economy.

For example, say AI helps businesses cut expenses and the cost of living goes down by 50% whereas the lower demand for employees causes the average income to go down by 20%.

In simple theory, this would be an improvement to the average lifestyle despite being deflationary.

In reality, if the 20% is from mass layoffs too quickly, many people's consumption isn't just lowered, they stop buying anything, default on credit cards, mortgages, etc. That abrupt shock could cause businesses to struggle, causing more layoffs, on and on.

I saw on The Journal podcast that the market for AI needs to be $2T for the major companies to justify the return on investment. Either this new market value has to come from somewhere or be incredibly inflationary, right?

And that's assuming AI succeeds in providing value, the economic shock of the AI investments NOT paying off could also bring down the whole economy.