Small firms, Listen Up: AI Layoffs Are Coming for You Too
think your job is AI proof? think again.
Those layoffs that happened this week: They’re different.
Many of those jobs are being closed permanently, replaced with AI.
We are at the start of the biggest, longest and most destructive layoffs in human history. This time, layoffs aren’t just coming for the rank-and-file in big companies. The evidence is everywhere.
Google took a $2.1 billion charge for severances of three, six, even twelve months. These are white-collar workers. MBAs. Highly skilled technical jobs. UPS just laid of 12,000 workers to save $1 billion, but none of the jobs are drivers. Again, managers, logisticians, health care, legal, marketing and advertising.
Your two-person law firm, your boutique benefits agency, your award-winning advertising agency: You don’t stand a chance unless you take steps now. This post is about what you’re facing, and hopefully opens your eyes before its too late. Subsequent posts will be about how you can prepare and adapt before you know how to.
so what? I run a small firm.
I survived recessions before. So what?
Are you proud of making it through the irrational exuberance of the dot-com bubble? I am. What about the Great Financial Crisis (GFC) of 2008? Lots of lessons learned. If you survived both of those then surviving the 2020 Covid-Pandemic recesssion was probably a no-brainer for someone as battle scarred as you.
2024 won’t be the same. For many reasons.
First, today we have AIs.
Today’s AIs have an IQ of 155, are fluent in nearly every language, has business analysis skills that exceed McKinsey consultants, passed the Bar exam, scored off the charts on the MCAT, and they never sleep.
This year AIs worked with me to design my business plan. I nurtured a custom GPT AI to sit with my son while he studies and help him by coaching him and challenging him to learn the steps to solve the problem, never solving the problem for him. My son’s AI coaches him fluently in English and Japanese.
My AI GPT helped me develop a complete monthly meal plan including shopping schedule, meal prep order and timing, and how to approach and include my family members as participants in the process. And it helped me master Coquille Saint-Jacques.
As I think back to the past 100 employees I hired, spent years training, and paid upwards of six figure salaries + benefits and taxes to employ, my AIs today are more skilled, competent, passionate and professional than 99 of them. When it comes to skill and competence, AI beats all 100.
My GPTs? $20 per month.
Second, a new generation is here.
And they have zero fucks to give.
In 2004 Tim Ferris’ 4-Hour Workweek popularized the idea of optimizing the ratio of human inputs (time and attention) to business outputs (money and profits). It was technology itself that enabled this, argued Kevin Kelley in his prophetic essay “1,000 true fans.” Both of these authors approached tweaking the economics of personal productivity with becoming time-rich as the goal.
This inspired an entire movement of productivity hackers, social network economists, and niche-down evangelists all focused on the same thing: Gaming a rigged system to be more successful leveraging personal technology, Internet and social media.
The problem is, there is no escape velocity fast enough for these makeshift 1-person escape pods to free oneself from the inevitable gravity of inflation. And the people in power know it.
The generation I’m referring to doesn’t give a crap about your ad agency. Or your law firm. Or your benefits or 401k or other program. They honestly don’t give a fuck. As soon as the power dynamic is disturbed just enough by inflation-gone-wild or whatever precession sets the economic flywheel jerking out of control, they will ditch your company’s services and products without even so much as crocodile tears.
Third, the macro environment couldn’t be more perfect for meltdown.
We all know that AI at its core represents labor replacement. So let’s play a game.
A kind of thought experiment. If labor replacement, job replacement, is the first domino, what kind of chain reaction can we reasonably predict? The dominos falling over likely cause a chain reaction, right?
Unless you break the rules. Let’s come back to this though.
So what are the dominos? For this experiment, let’s keep it simple:
Domino 1: Job replacement
Domino 2: Unemployment system collapse
Domino 3: Consumer economy upheaval
Domino 4: B2B upheaval and meltdown
Domino 5: Commercial real estate meltdown 2.0
Domino 6: Even more banks collapse
Domino 1 Job replacement
It’s estimated that over 40% of jobs in the world will be replaced by AI in the next few years.
In reality, the percentage is probably much higher.
AI is a labor replacement technology. This means that its one job is to replace labor that is related to thinking. Even if we do not ever achieve artificial general intelligence, AI in its current form should be able to replace between 75-95% of today’s jobs. However, 40% is still a massive impact on the economy, over 10X the current reported unemployment number of 3.7% or whatever the current BLS-amended number is.
What comes next may take only a matter of months to happen.
Domino 2 Unemployment system collapses
When jobs are replaced by AI, not only does the labor cost basis change, but so too does the tax base. For example, if 50% of people are laid off, or worse yet, simply not replaced as they quit over time, there is little impact to the business in terms of operations. In fact, the business will record enormous profits. But those profits are the result of reduced labor.
And reduced labor means reduced tax on labor. Employees’ paychecks have been the target of various taxes to fund programs like unemployment, sold and justified by various governments under the guise of protection from unemployment should it occur. Only now, unemployment is constant. And with no one paying into unemployment, while the masses rapidly join the unemployed, the system essentially collapses.
The primary source of unemployment benefits comes from taxes paid by organizations based on headcount, as well as a variety of other federal and state funding programs. A reduction and non-replacement of headcount this big, with equivalent or near-equivalent claims for unemployment happening simultaneously could result in a collapse of the unemployment system in its current form.
Domino 3 Consumer economy upheaval
Imagine the shock to the American economy that is based on consumption as significant numbers of people are unemployed.
Because of such a significant macro trend toward unemployment, the market of customers stresses and fractures under the feet of businesses everywhere, because wave after wave of possible customers can no longer afford services they once bought. What are these customers doing? They’re just at home. No longer buying $20 burritos at Chipotle, etc.
Even without sufficient reduction in sales to drive collapse, the impact of radically reduced income will be met with aggressive expense reduction. This will likely trigger more layoffs in marketing and IT and other departments, most of which jobs will surely be able to be replaced with generative AI boosts to existing employee productivity without a commensurate increase in expenses.
Domino 4 B2B upheaval and meltdown
A second major area of expense reduction will be termination of the outsourced advertising agencies, marketing departments, and a variety of consultant terminations as their functions are brought in-house to be satisfied by the remaining employees within the company.
Over time, usually very fast (1-2 months, maybe at worst 1-2 years) an entire ecosystem of businesses that thrived on supporting the businesses that suffered or died in domino 3 begin to reel.
The next in line to fall are B2B. Ad agencies, small marketing firms. Benefits firms. Insurance agencies. Attorneys and accountants and commercial realtors are just a few of the outside professionals whose work will be eliminated as their work is largely performed in-house with generative AI.
Domino 5 Commercial real estate meltdown 2.0
Commercial real estate, already reeling from the past three years, will be hit with the perfect storm. The next wave of business collapses will leave more offices empty, and the overall economic shock to all businesses will result in an even bigger incentive for companies to leave the office once and for all.
Commercial Real Estate collapse accelerates. Next comes the banks that hold the loans.
Domino 6 Even more banks collapse
With most zombie commercial real estate already at record vacancies, the waves of companies not renewing leases, those walking away from expensive leases combined with no new companies interested in leases will leave a record number of commercial real estate owners with no choice but to default on their bank loans for the real estate they no longer have income to support. The commercial real estate Rentier business model suddenly stops producing value for owners everywhere, which forces a choice: Take the action that will result in the least amount of loss. This could lead to giving the buildings back to the bank. This, in turn, could lead to massive bank losses and potentially more bank collapses.
Is this a doomer dystopia, or a very real possibility?
It’s fair to say we are already seeing many parts of the above thought experiment scenario play out.
Layoffs will lead to more layoffs will lead to more layoffs. In parallel with this AI will lead to more AI to more AI. It’s not bad. It just is. We had almost 100 years to prevent this.
1930, John Maynard Keynes, a prominent British economist, made a notable prediction in his essay titled "Economic Possibilities for our Grandchildren." He forecasted that within a century, the standard of living in progressive countries would be significantly higher, to the extent that economic scarcity would be eliminated, and people would work far fewer hours, possibly as few as 15 hours a week.
Keynes believed that the growth in wealth and productivity would enable people to focus more on leisure and personal fulfillment rather than on continuous economic struggle and labor. His vision was rooted in the belief that technological advancements and improvements in efficiency would drive economic growth, allowing society to focus more on the arts, personal relationships, and the pursuit of leisure.
Ninety-four years later, it’s 2024, and people are working more than ever, the value of relative wages hasn’t gone up in decades, and our business leaders are even still arguing about the merits of remote work, despite the overwhelming evidence of its asymmetric benefits to the company and employees. Tension is rising between the owners of capital and labor. From wages to benefits and tenure, to training and development, the mere existence of workers is considered a costly nuisance to be tolerated until something else comes along that’s better.
Until now, every technology was powerful enough to destroy another device, another supply chain or whatever because it drove prices to the marginal cost of production. The iPhone more than anything erased Sharper Image from malls across the US. Email erased the fax machine. Only now, for the first time, we have the perfect storm:
A technology that replaces human labor for job replacement and near-free, limitless labor
A national economic and political and business environment dependent on growth at all costs, with the sensibility of a cocaine addict just checked into rehab
Layoffs are increasing and commercial real estate is experiencing record vacancies. The defaults have just started, and even Japanese banks are reporting billions of dollars in losses on American commercial real estate.
What’s the point of this mental exercise?
There are a few key points to consider when doing this exercise.
First, the foundation of our current consumer economy is labor, and for the first time in human history we have a mass labor replacement technology currently being adopted at a blistering pace. It becomes extremely, painfully clear that everything is connected.
It’s even more clear that breakdowns in the American economic system are further incentivizing and accelerating the pace of labor replacement, which in turn exacerbates the breakdowns in the economy.
While this economic doom loop is very real and is accelerating as you read this, the value of this exercise comes from visualizing a system in a state of change as well as visualizing what the system looks like (to the best degree possible) after the change, in order to determine what steps you can take to prepare your business for the change.
Those who have a vision for what’s on the other side can take steps now to prepare their businesses for the new economy that’s coming. An economy powered by AI and one in which prices fall to the marginal cost of production. This means nothing will look like what you think it will. Not your products. Not your prices. Not your people.
AI is a double-edged sword, though. Even in an economy and situation as screwed up as the one we’re in. For those that get this and invest in their own transformation early, it could be a once in a lifetime opportunity.
I’ll make this the subject of my next post.
