WHAT AI WILL DO TO THE ECONOMY (WILL BE WORSE THAN A DEPRESSION)

PICASSO, “LA VIE”

We’re going to discuss a scenario that already appears to be unfolding around us. A worst-case scenario of sorts. Incredibly bleak. What AI will do to the economy.

The head of the IMF, Kristalina Georgieva, recently announced its estimate: AI will take 40% of jobs. Let’s just round it up to 50% for a moment, since they’re guessing anyways, to make the math easier—it won’t matter much in the end, as you’ll see.

What does “AI will take 50% of jobs” mean for the economy? We can calculate the effects very easily, using what’s known as “the labor share of income.” That just means: how much of the economy is made up of wages and benefits. In America, that number’s about 50%, which is already very low (and it’s why people are always complaining about never having enough money—in Europe, it’s much higher.)

Now. If AI takes 50% of jobs, then of course, the number above halves. The labor share of income, or GDP, drops to just 25%. And that means that “the economy,” which we measure in GDP, drops by the missing 25%, since half of jobs are now gone.

With me so far? Easy math. But absolutely devastating results.

We’re already at something like the Great Depression. 25% or so is how much the economy, or GDP, fell, then.

But this is different. That was a depression. Meaning: it was caused by typical crisis of capital, or, overinvestment in the bubble that led to the 1929 crash. This isn’t looking like it’s going to be a depression.

It’s something else entirely. Those jobs aren’t coming back.

So what happens then?

Let’s do a little example. I make music for fun. It costs me maybe $2500—and that’s very conservative—to finish a song. I reach out to one of the incredibly talented singers I work with. They’re my friends, but of course I pay them. They hire a studio. The studio has an engineer. It’s bought microphones, amplifiers, computers. The engineer runs the session, providing expertise, tweaking the vocals, move back a little from the mic here, stand just there.

When all this works, the results are magic. There’s no experience, for me, anyways, like this. We are creating something special, and we all know it, when the song is good, and the singer can feel it, and they sing it like they mean it. A little miracle of the human soul.

Now. Are any of those “jobs” ever coming back? Not just jobs. Professions, careers, or maybe just life pursuits. We’ve had singers as long as we’ve had human civilization. But will we anymore? After all, AI can already do a pretty good job of “singing,“ if all you want is lackluster, machine-made stuff. It can even “write” the songs, by which we should all understand, steal the genius of actual people. I’ll come back to all that.

The point is: a lot of those jobs are never coming back. There will still be purists like me, who do it for the love of it. But we’ll be few and far between. By and large, a lot of those jobs, professions, careers, are gone. They’re already gone, maybe, and we just don’t know it yet.

This is different. Let me continue my example. When recording technology emerged—vinyl, tape, etcetera—it created entire new industries, fields, and professions. Audio engineer. Studio performer. The guys who fix the stuff, technicians. Running a music studio is an incredibly costly business as a result. But that’s OK—in this case, technology created new jobs, livelihoods, careers.

This time, it’s looking highly unlikely that it will. What does an “AI film director” do? He doesn’t need to hire anyone, really. There are no new jobs in this field, from camera people to art directors and so forth. What does an “AI music producer” do? He just tells AI what to do. And the entire value chain above, the entire industry—poof, it turns to dust.

A depression is temporary. And we know how to work our way out of one, too. But we have never really experienced something like this before. And here, I think the word “never” is entirely appropriate. A technology that will vaporize half of the jobs in an economy…for good.

There’s a sunny way of thinking that says: surely, AI will lead to new fields, professions, and domains. Will it? It’s hard to see how. And even if it does, how long will the adjustment period be? A decade? Three? A century? We don’t know. And I think it’s far too unproven a thesis to just say: technologies before created new fields, so this one will, too.

We can already see that happening before our eyes. The job market is fried. It is not working anymore. Layoffs are happening en masse, and last year, companies were afraid to announce that they were because of AI—but this year, they’re beginning to trumpet that very fact, in the hopes of juicing their share prices.

And even that’s not working.

Let’s continue with the economic effects now. If AI’s going to take 50% of jobs, for good, or at least for the rest of our lifetimes, which is “for good” for us, then what does that to do to the financial economy?

It rips it apart.

25% of the economy turning to dust is probably a pretty good analogue for what’s on the cards for stocks. And you can already see that happening. Sector after sector’s being hit by the fear that AI will just…eliminate it. Now, in weirder and weirder ways. Trucking. Logistics. Insurance. Not just software. When we say, “AI will take half the jobs,” we should also understand: that means a very big chunk of the stock market, too, because those companies are no longer viable.

And that will produce a series of crashes. The stock market is incredibly sensitive to profitability. A sudden decline in it to the tune of “AI will wipe you out” will have disproportionately large effects. And what we’re seeing already is that it’s not enough to say, anymore, that “AI will replace a hundred thousands workers, so our share price should go up.” Why should it? Do you even have a business model anymore, when someone can use AI to replace your entire enterprise in a few hours flat? These are the questions being asked now.

But the stock market isn’t just the stock market. It’s America’s only functioning safety net. You don’t get a pension in America, you get a “401K,” which means your money’s automatically put into the stock market. Should it be, if this is one the cards? So if AI’s going to take half of jobs with it, which means the stock market’s going to crater, too, then of course the ramifications are dire, because Americans use their stock market winnings to do everything now, from financing homes, to cars, to paying for their kids’ educations, and so on.

Bang. There goes the intergenerational wealth transfer. When the Boomers’ bulging stock portfolios are wiped out, how do the Millennials afford houses, now that their inheritance has been slashed apart? Nobody much under the age of 40 in America, LOL, is “standing on their own two feet.” The Bank of Mom and Dad are propping up entire generations. But when AI wipes out what they have? Curtains.

All of this means that a massive hole in consumption will emerge. And it’s not enough here to say “AI can do it cheaper!” So what, if nobody much has money to spend in the first place? And what if that just goes…on? Because those jobs never come back? Nor is saying: well, I’ll work in the trades much of an answer. If the only thing being built in the economy, now that people can’t afford homes or offices and there’s little point to starting a business, are data centers and billionaire’s bunkers, the demand even for trades will shrink to infinitesimal.

As people lose their livelihoods, the effect will be a vicious wave of deflation. And while that might sound like a relief from the point of view of today’s inflation, it isn’t. Deflation makes it hard if not impossible to pay back debts, and Americans are highly indebted, as is America.

Meanwhile, how will any remnant of a social contract function? It’s nice to say something naive like, but we’ll just have Universal Basic Income—but precisely how? A massive hole will have been blown through society’s finances, and it won’t be able to afford a UBI. Its tax base will have shrunk radically and dramatically. Nor will it be able to come from just “taxing the AI companies,” either. Remember, people won’t have money to spend in the first place. I suppose societies can try taxing billionaires, but let’s be real, in America, that’s about as likely as angels descending tomorrow.

Now. America’s very good at sort of cooking the books, which is putting forth economic indicators that don’t mean much anymore. So probably, the economy will be said to “grow.” It’s growing now. Booming, apparently. Why doesn’t it feel like it, to anyone not named Bezos? Because for 99% of people, their economy is shrinking, Incomes are at 1930s levels—yes, really—while prices are astronomical, and continue to rise.

This sleight-of-hand will continue. America’s establishment, both sides of it, depend on manufacturing the illusion of growth. It’s an easy enough trick. Just don’t count the real costs of all the dysfunction, chaos, and impoverishment. So likely, it’ll be said that there is no depression, even as tens of millions are thrown out of work, for good.

When people lose their livelihoods for good, social problems emerge. The analogues that we have are post-collapse societies. Think of the former Soviet republics. They went through very, very difficult periods post-collapse. And in them we saw the emergence of vice economies. That means: women turned in despair to sex work, men to crime, mafias emerged, and oligarchs plundered. Society broke down as a modern set of institutions, and the rule of law ceased to exist, as vice economies became perhaps the last way left to make a living, when currency, markets, and investment were all in free fall.

Post collapse is a model for where we’re headed now. Vice economies are precursors to serfdom, servitude, and peasantry. Epstein’s sex trafficking networked preyed very much on vulnerable young women from such parts of the world. Vice economies can be temporary. When the damage is permanent, then social structure changes.

What does the social structure look like, of places eviscerated in this way by AI? We don’t know. To even call it “serfdom” may be generous. If half of people don’t have jobs, and never will again, and yet there’s no way to support them, because the dreams of UBI are themselves unaffordable now—are they serfs? Even serfs had fields to till. It’s more likely that such dynamics portend the mass breakdown of social order, and people will fight viciously for whatever crumbs they can get, through crime, violence, intimidation, mafias, and so on. These are plagues of modernity. Serfdom was a relatively stable institution, precisely because at least serfs had fields to till.

What is left of people after this, which will take anywhere from half a decade to two to three decades to play out, is a thing for which we have no name. The Useless. The Discarded. The Abandoned. The Nothings. The No Ones. Like all such social classes, vice economies will play a large role. Black markets will emerge for everything from drugs to food. People will be reduced to sell what they can, their bodies, possessions, maybe even organs, though perhaps now I get a little too bleak. Or do I? Selling blood is already a “side hustle” in today’s America.

What is before us now is a nightmare. We aren’t fully grasping or understanding the scale of it. The bunkers are being built for a reason. Those behind this know what’s ahead, and they don’t want to stick around for it. The rest appear to be at the mercy of all this.

(It’s not enough, by the way, to crow, “but AI will raise productivity!” Will it? We just discussed how productivity is only productive if it’s valuable. If nobody can or will pay for a million billion more widgets, AI-made songs, movies, posts, dreck, slop—that’s not productivity. It’s just dreck.)

Now. All that’s a scenario. I think it’s already emerging before us, so let me shade it in now. America will be devastated by what’s to come. In it, there is no such thing, really, as regulation, or even resistance, at the level of people’s choices and attitudes. Give Americans a shiny new thing, and they can’t resist it. But the world, or parts of it, may well be different. It’s hard to see Europe and Canada letting this happen to themselves, or more to the point, their far stronger institutions, from unions to governments to intellectuals, allowing it to happen as an “inevitability.”

None of the above is inevitable.

It depends on us. Americans are a little childlike. They don’t understand they have the power to shape their society. It’s hard for me to imagine that Europeans or Canadians would ever want, as a simple example, robo-baristas. LOL, can you imagine what’d happen in Paris or Florence? Riots, go ahead and chuckle. And so parts of the world will reject all the above. They will choose the human over the machine, as they’ve done for a long time. It’s not a coincidence that France and Italy’s top exports are all handmade things.

It’s America that’s at most risk. Because in America, the human in us stopped being valued long ago, over the machine, the algorithm, the disposable, the entity, the thing. In America, I imagine we’ll see AI’s having rights that supersede those of people very shortly. In the rest of the world, this battle will be resolved much more sensibly.

Now. All that has dire implications. What are the Havens in economies like those? I’ve given you some hints already. In America, I think, the devastation will be inescapable. I don’t think America will recover from what AI is about to do to it, which is something for which we don’t have a name. A permanent depression, which creates a caste society, in which even serfdom is too generous a word.

Maybe in some distant future, AI will create all kinds of magical and wonderful things, that’ll be shared equally amongst humanity. I doubt that America’s part of that future, and I doubt that future exists. Doing something cheaper is not doing it better. They are distinct outcomes, and the tragedy in all this is that the mythology of AI conflates the two. The artistry and science in a thing is what gives it value. Always has. How much does a Louis Vuitton handbag cost? How much would anyone pay for one designed and made by AI? Why is it that people don’t admit they use AI on dates? Because it cheats them of the very thing they’re trying to prove to the other person: they’re someone worth investing in.

That’s going to be true for economies, too.

Perhaps you see my point.

That’s a lot to chew on. Probably too much. Maybe I should’ve just asked AI to write this. Maybe, if you’re American, you can’t be bothered reading it, and you need an AI summary. Are you the future, or is the machine? Who chooses it, and which is even which anymore?

Love,

Umair (and Snowy!)