I recently read a paper titled "The Pitfall of Artificial Intelligence Layoffs." 📑

I recently read a paper titled "The Traps of AI Layoffs," which makes one shiver. This paper was co-authored by two researchers from the University of Pennsylvania and Boston University, and it should keep those CEOs who are crazily pushing for AI layoffs awake at night.

The core logic is actually quite simple: large companies replace human labor with #AI, appearing to save costs, but at the same time, they are killing off their future customers. Layoff employees don't consume, and the more people are laid off, the weaker the overall market's consumption ability becomes. In the end, companies will find that products are made, but no one can afford to buy them.

This reasoning is something every corporate executive understands, and the logic of economics is not complex. But here comes the question: why is no one stopping?

The paper describes this prisoner’s dilemma:

• If you don’t automate, your competitors will

• They lower costs, cut prices, and capture market share

• If you don’t act, you can expect to be eliminated

• So, knowing that collective destruction awaits, every company can only bite the bullet and proceed

The researchers proved that this is indeed a real-time prisoner’s dilemma game.

Let’s look at the actual data presented📊 to see how crazy it is:

• Block has laid off nearly half its employees (almost 5,000 people) this year; Jack Dorsey directly stated that AI has made these positions unnecessary, and it is expected that most companies will reach the same conclusion next year.

• Salesforce replaced 4,000 customer service positions with AI.

• Goldman Sachs deployed programming tools so that one engineer can do the work of five people.

• By 2025, over 100,000 tech workers are expected to be laid off, with more than half explicitly due to AI.

• 80% of jobs in the United States could be automated by AI.

The research team tested all common solutions, but they all ultimately led to failure!

• Universal Basic Income (UBI)? It doesn’t change the incentives for any company to automate.

• Capital gains tax? It adjusts profit levels, but does not change decisions on replacing workers at the task level.

• Collective bargaining? It can’t be maintained because automation is always the dominant strategy.

What’s even scarier is that they discovered a "Red Queen Effect." Better AI won’t solve the problem; it will only accelerate it. Every company is pursuing faster automation to capture market share, but in the end, everyone has automated, and the advantages offset each other, leaving only destroyed demand.

The only potentially effective solution suggested by the research is to "impose a Pigovian tax." An automation tax based on tasks charged to companies for every demand destroyed by replacing workers.

From an economic perspective, this could trigger a more fatal chain reaction: a deflationary spiral. Let’s look at this chain of logic:

Step one: wage income declines

• AI replaces workers, and unemployment rises

• Remaining employees worry about being laid off, so they don’t dare ask for raises

• Total wage income in society continues to decline

Step two: effective demand collapses

• Keynes said long ago that the core of economic growth is effective demand

• Wage decline = consumption ability decline = businesses can’t sell products

• Business revenues decrease, leading to further layoffs and cost-cutting

Step three: price-wage deflationary spiral

• Businesses are forced to lower prices to clear inventory

• Price cuts lead to shrinking profits, which leads to more layoffs

• Wages further decline, and consumption becomes even weaker

• This creates a self-reinforcing death spiral

Step four: overcapacity and liquidity trap

• Production efficiency greatly improves due to AI, but no one is buying

• Companies even refuse to expand production, even with zero-interest loans

• Central bank rate cuts become ineffective, and the monetary policy transmission mechanism breaks down

• The economy falls into a Japanese-style lost 30 years

The frightening aspect of this logic chain is that almost all traditional economic tools become ineffective:

• Lower interest rates? Companies don’t lack money; they lack demand

• Fiscal stimulus? The government gives out money, but companies continue to lay off, so money doesn’t reach the real economy

• Quantitative easing? All the money goes into the asset market, making it even harder for ordinary people to afford things

• Trade wars? Everyone is in deflation; protectionism only speeds up the decline

The above situation closely mirrors the current Chinese economy. We can see the state of the current domestic economy: severe overcapacity in manufacturing, continuous negative growth in PPI, and CPI close to zero. It's not that there’s a lack of desire to stimulate consumption, but rather that ordinary people have no money, and companies are still cutting costs and laying off workers. This is a typical deflationary situation.

🧐 And AI is accelerating the world towards this process:

• Unlike past technological revolutions that created new jobs, AI directly replaces intellectual labor

• The replaced white-collar workers are the mainstay of consumption; their collapse in consumption ability has a significant impact

• The speed at which AI enhances efficiency far exceeds the speed at which new demand is created

• The end result: overproduction + insufficient demand = long-term deflation

The only historical scenario similar to this was the Great Depression in 1929. At that time, it was also due to increased production efficiency because of the electrification revolution, but workers' wages did not keep pace, leading to a final collapse in demand. It took ten years for the New Deal to recover, and they ultimately relied on World War II demands to truly come out of it.

This AI revolution, as the paper warns⚠️, may be more perilous than the Great Depression. Because:

• Replacement occurs faster and to a wider extent

• Globalization prevents countries from isolating themselves

• Central banks' tools have already been emptied by 2008 and 2020

• Debt levels are much higher than in 1929, and fiscal space is limited

The final conclusion is sobering: this AI revolution is not just a simple transfer of wealth from workers to owners. Both sides lose. Workers lose income, and companies lose customers. This is a pointless loss that the market mechanism itself cannot prevent.

What’s more fatal is that this could trigger systemic economic deflation, and once deflation expectations form, it becomes nearly impossible to reverse, like a black hole. Japan's lessons are right in front of us.

I believe this logic applies equally to the cryptocurrency industry. When AI begins to massively replace developers, operations, and community management, Web3 project parties may also need to think: can your token economic model withstand this wave of demand collapse? If users have no money, who will buy the market tokens? 🧐

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