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Tech is going through layoffs right now, and they are conducting them in the worst way possible. No communication, locked badges, broken email access - it’s a horrible way to treat people. I posted a TikTok about it and wanted to walk through some of the general responses and reasoning for the layoffs.

More than 40,000 people have been laid off at this point, which is absolutely devastating for multiple reasons. This piece is not meant to diminish that. The goal is to walk through why it might be happening and then to think about what it tells us about human behavior.
 

Tech Bloat

“Well, tech got what was coming for them! They overhired”

Sure, it seemed like there was an element of bloat in tech. There is an argument that they overhired during the pandemic, and now are just trimming some of that. Therefore, these layoffs “don’t matter”. I don’t think that’s true - they do matter. These are people.

Sure, the day in the life TikToks of some of the product managers were mind-boggling. It was a well-known non-secret that a lot of tech employees had amazing work-life balance (and of course, many did not!) The era of smoothie machines, three-catered meals, sleeping pods, etc is likely over.

But as Noah points out in his piece, these jobs seemed secure and safe and a good exit strategy at any point. That might not be sustainable for any industry. As the economy slows down, it will be interesting to see the reallocation of labor and capital to industries.
 

Ad Sales and Apple

“Ad sales have collapsed”

Some have speculated that there has been a big pullback in ad spending because of the worries about the economy plunging into a Recession. There was a really great and detailed piece from Eric Seufert on this:

The App Tracking Transparency Recession: Pain in the digital advertising sector seems concentrated in social media; the broader advertising market appears healthy currently. I propose that social media platforms are experiencing an ATT recession. (1/X) https://t.co/A46UmsThHk

— Eric Seufert (@eric_seufert) January 11, 2023

His point hinges on Apple’s App Tracking Transparency privacy policy creating “a recession within the social media advertising economy”. So it’s not necessarily an advertising slowdown, but a general collapse due to Apple’s moves on the digital advertising ecosystem, clearly impacting incumbents. A combination of a potential slowdown in ad sales as companies prepares for an economic downturn and the omnipotent force of Apple.
 

Non-Zero Rates

“They can’t survive in a world of higher interest rates”

This is also probably true. Big tech and growth-oriented firms are going to be the most rate sensitive. The Fed, as we know, has been on its hiking path and that’s popped the tech balloon a bit. Tech was the darling of the investment world for a long time, benefitted from the pandemic, and kept pounding on the treasure chest of growth - and that isn’t sustainable as the Fed climbs that mountain.

Higher interest rates are a storm cloud over the growth party (there are arguments that this isn’t quite the case, but the base argument of economy slowdown tech get hurt is there). Future profits aren’t looking as hot. It becomes harder to justify valuations. Treasuries have some beautiful yields for way less risk. So the tech party becomes a little less crowded.
 

Artificial Intelligence

“Labor is becoming outsourced and ChatGPT is taking over”

There is a lot of noise around ChatGPT passing certain tests which are like? If you had all the knowledge from prior to 2021, I would certainly hope you would start passing some tests eventually! It shows the incredible progress happening in the AI space, and there probably is some sort of argument to be made that AI will eat us all eventually.

I think that there is still a need for human gatekeepers in a lot of what we do with AI (and perhaps there isn’t) but AI is not perfect. It’s a complement to the human experience, not a substitute at this point.

In terms of labor being outsourced, OpenAI actually did that with ChatGPT, paying Kenyan workers $2/hr to look through horrific content. The moral quandary of that is outside the scope of this piece. Depending on the evolution of the price of labor here in the United States, we could see more and more companies choose to delegate work abroad.
 

Planned Obsolescence

“Big Tech WANTS a recession to happen”

Everyone knows about Apple’s planned obsolescence model. After a few years, you have to replace your phone and computer because it will start to become unusable (I am running into that right now, with both my 2019 phone and computer). Sam Ro asked a really good question -

To what degree are these tech layoffs about staying profitable vs. maintain profit margins and profit growth?

— Sam Ro 📈 (@SamRo) January 23, 2023

And the discussion that followed in the comments was about trimming fat versus not being able to afford workers. Big Tech companies are still very, very profitable. To make the stock price go up, trim costs and those costs happen to be people. The companies are fine. It’s a form of planned obsolescence because the number can’t go up forever. There has to be a restart button and some sort of reversion to the mean has to happen eventually.
 

Peer Pressure

“Elon showed you can cut staff and still run the company well”

Everyone is giving in to peer pressure and copying each other as Derek Thompson highlights in Plain English. As Paul wrote, people are going to be paying attention to this. Now, you might look bad if you don’t do layoffs (which is completely backward). The hedgies and private equity guys will be paying attention to this - and we could see more copycat behavior down the road in a wild sort of feedback loop.

Not a fan of the guy who owns this place, but it is worth pointing out that despite having lost 80% of its employees, and being down to 550 engineers or so, it is still (mostly) running. If you think buyout firms like Thomas Bravo aren't noticing, you don't know your capitalism.

— Paul Kedrosky (@pkedrosky) January 22, 2023

Teach Us a Lesson

“It's to send a message to the market that the end of profligacy is here.”

The Federal Reserve has made it very clear that they want everything to chill out. Big Tech has been the absolute party boat of the economy, and now that it’s coming back to shore, it’s sending a big message to the rest of the market. If Big Tech, the darling of so many investors, has to come back to reality, what does that mean for everyone else?
 

What’s Next?

In terms of the next steps for tech, one could argue here that tech has always existed above some threshold of what is real. Over the next few years, we could evolve from focusing on bits to refocusing on atoms. We’ve spent a lot of time optimizing for social media, and now, it might be time to optimize for the real world.
 

The Rest of the Labor Market

To make all of this weirder, it’s contrasted against a record-low unemployment rate and a relatively strong labor market. Now, the question is - when will things spread to the rest of the economy? Surely, tech and finance can’t be a layoff island, surely, these weaknesses will spread to other parts of the labor force?

We have seen a slowdown in jobs metrics and it’s taking people longer to find work, but most parts are still moving and grooving okay. But as Nick Reece highlights, we could be in a “rolling recession” - basically, where things are terrible in different pockets of the economy, but not terrible enough to be labeled a capital-R-Recession.

Even the Fed themselves are like “hm, we should figure this Recession stuff out more.” A new paper from Michael Kiley ties together both recession signals and business cycle dynamics to really sort through what a Recession *is* because it’s clear no one really knows except the NBER overlords, and even then - not really.

As I’ve written in the past three newsletters (sorry) and as many others have highlighted, we are entering a slowdown. That much is clear. We are sort of in a wait-and-see period with the Fed - what will happen at the next meeting? 25 bps? 50 bps? 75 bps? A complete pause?

All of that will be important for how we move forward. The economy is a force within itself too. It’s questionable if the Fed rate hikes have even worked their way through yet, or if this is just business cycle gravity swinging the pendulum in the other direction.
 

An Exercise in Empathy

The good thing about this (if there is a good thing) is that it allows us to evolve. There is a passage from Ursula Le Guin in Tales from the Earthsea

What does too long unchanged destroys itself. The forest is forever because it dies and dies and so lives.

It’s all similar. The economy is a function of people, people need change to evolve, and so on and so forth. If things become stagnant, they eventually disintegrate into nothingness because they become unrooted.

Most things exist within the shadows of another. Joy, grief, anger, wonder, and love are all functions of a root, of a choice that we end up making. Stagnation is something with no shadows, it’s a pool with no ripples, an empty abyss - a lack of choice.

Of course, it gets complicated. Stagnation is the closest we can get to that nothingness. It contains a sliver of something which allows it to stand between two extremes. Take music and noise, for example. Music is repetition and rhythm and rhyme, noise is all of that, but without intention. Stagnation is not trying for either music or noise as it tries for nothing.

It’s easy to fall into stagnation because both music and noise are scary. Terrifying, even. Stagnation is safe and easy and simple. But it is not enough. We have to experience the sharpness of pain to understand the delightful nature of softness. Within kindness, we find sorrow. Within love, we find grief. Within joy, we find anger. However, there are entire landscapes, entire universes between these that we can get stuck in.

Life demands that we continue, that we carry it, that we carry each other, and sometimes, that we let go. Sometimes moving forward requires moving backward, a grocery bag spilling to the ground as the glass bottle inside cracks. Progress is the only thing that makes sense anymore.

It is a terrifying thing, to watch those glass fragments scattered across the ground. The pain they could cause. The necessity to clean them up. It requires slowing down, an element of vulnerability, to overcome any sort of cynicism with the goal to make the world a bit better. Stagnation demands the opposite. It demands numbness, skepticism, and half-closed eyes.

But the world asks more of us. It asks us, kindly, despite the pain, despite the anger, despite the self-inflicted shame that we carry for just being human, to hope. We all know that there are no promises, there are no certainties, but there is a possibility.

As Viktor Franki said, “what is to give light must endure burning”.

The reason I went on this long philosophical note is we have an empathy deficit. We have a debt ceiling and an empathy deficit. With the debt ceiling, we think it will work out because it always does. With our empathy deficit, we think no one will care because it feels like they never do. And of course, we feel this way. The tech layoffs are just one example of a this-is-how-it-is-ism and that, to me, is stagnation.

We're stuck with weird bad institutions, because on some not particularly well thought-out actions of people generations ago. A typo or bad day or stupid idea of one single policymaker can lead to large welfare losses over countless future generations

— Anthony Lee Zhang (@AnthonyLeeZhang) January 24, 2023

And to be clear, there is an intense amount of struggle for many of our people that end up in a unimodal distribution. The gap between the wealthy and the not-wealthy continues to grow. The Big Tech layoffs sometimes feel removed from reality because so many are struggling to make ends meet. We can’t ask people to give themselves to the pain of others if they are bogged by their own.

But we struggle with perspective. We struggle with a base level of care. The younger generation is exceptionally lonely and sad, and most interaction takes place behind a screen, which removes a sense of humanity. Arendt is extreme here but

“The death of human empathy is one of the earliest and most telling signs of a culture about to fall into barbarism”

But just like music and noise exist on a spectrum, so does empathy. Empathy asks us to “suspend our egos and live in another’s world”. Compassion is a complement to that, as we ask how we can help within that world.

From Mary Oliver:

“Teach the children. We don't matter so much, but the children do. Show them daisies and the pale hepatica. Teach them the taste of sassafras and wintergreen. The lives of the blue sailors, mallow, sunbursts, the moccasin flowers. And the frisky ones – inkberry, lamb's-quarters, blueberries. And the aromatic ones – rosemary, oregano. Give them peppermint to put in their pockets as they go to school. Give them the fields and the woods and the possibility of the world salvaged from the lords of profit. Stand them in the stream, head them upstream, rejoice as they learn to love this space they live in, its sticks and leaves and then the silent, beautiful blossoms.

Attention is the beginning of devotion.”.

And Barbara Alice Mann:

“Westerners are fond of the saying ‘Life isn’t fair.’ Then, they end in snide triumphant: ‘So get used to it!’ What a cruel, sadistic notion to revel in! What a terrible, patriarchal response to a child’s budding sense of ethics. Announce to an Iroquois, ‘Life isn’t fair,’ and her response will be: ‘Then make it fair!”

I’ve written about empathy and kindness before, and I do apologize if it ever becomes repetitive. I just chafe at financial markets at times, maybe a function of my own naivety and immaturity. There isn’t anything you can really say to placate pain, other than “I will be here for you, always.” And perhaps that is enough.
 

Other Things

U.S. fiscal stimulus contributed to excess inflation of about 2.6% domestically. Federal Reserve Vice Chair Lael Brainard has emerged as a top contender as the next head of the National Economic Council. What If Inflation Comes Down Quickly? Coinbase’s chief product officer will leave with a $105 million payday. Secular stagnation is not over. No one knows anything. Oh, Binance.

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