Former NEC Director Gary Cohn: The economy's more divided today than it has been in a very long time

Key Concepts:

• K-shaped economy: An economic model where different segments of the population experience vastly different outcomes, with one segment (the "top leg") experiencing growth and prosperity, while another segment (the "bottom leg") stagnates or declines.
• Resist mentality: A political strategy characterized by opposition to the current administration's policies and actions, often leading to government shutdowns or other forms of obstruction.
• Trade deals: Agreements between countries to reduce or eliminate tariffs and other trade barriers, aiming to promote economic growth and cooperation.
• Input prices: The cost of raw materials, components, and other resources used in the production of goods and services.
• Labor cost: The expense incurred by employers for compensating their workforce, including wages, salaries, and benefits.
• Artificial Intelligence (AI): A field of computer science focused on creating systems that can perform tasks typically requiring human intelligence, such as learning, problem-solving, and decision-making.
• Quantum computing: A type of computation that harnesses quantum-mechanical phenomena, such as superposition and entanglement, to perform calculations.

Economic Disparities and Government Shutdowns

Gary Cohn, former Director of the National Economic Council under President Trump, expresses shock at the current level of division in the United States, despite positive economic indicators such as a closed border, record-high markets, favorable trade deals, and low unemployment. He attributes the government shutdown to the "resist mentality" of Democrats, arguing that it is a manifestation of their opposition to the administration's success. Cohn highlights the stark contrast between the high-end consumer, who has significant disposable income, and low-end workers, including government employees, who may be facing financial hardship and relying on food banks. He notes that the government shutdown, while detrimental, can paradoxically act as a short-term economic stimulant when workers receive back pay and subsequently increase spending.

Corporate Earnings and Layoffs

Despite strong corporate earnings, Cohn points to a significant increase in layoffs, with over 160,000 jobs lost in a recent period. He contrasts this with the private payroll data, which suggests a much lower rate of job creation. Specific examples of companies implementing layoffs include UPS (nearly 50,000, attributed to reduced freight volume due to trade issues) and Nestle (16,000, linked to high chocolate prices and decreased consumer demand). Cohn explains that rising input prices and labor costs, coupled with an inability to significantly increase consumer prices, force companies to cut costs, primarily through labor reductions, to meet quarterly financial targets.

Policy Solutions and Economic Cycles

When asked about policy solutions, Cohn suggests that trade deals with countries like China, Japan, and Canada are crucial for stabilizing input costs and providing manufacturers with greater clarity on pricing and labor needs. He acknowledges the role of Artificial Intelligence (AI) as both a reality and an excuse for layoffs, noting that companies often see stock price increases following announcements of operational rationalization or layoffs.

Cohn describes the current situation as a natural economic cycle, contrasting it with the COVID-19 era when companies were "hoarding workers" due to labor shortages. He explains that the shift from hoarding to efficiency-driven layoffs is a response to the ability to rehire workers if needed. He clarifies that while AI plays a role, many current layoffs, such as those at UPS, are due to traditional factors like reduced volume.

The Evolution of AI and its Impact

Cohn anticipates an ongoing evolution of AI, rather than a sudden tipping point. He foresees companies increasingly integrating AI to achieve synergistic cost savings. This evolution will likely lead to the automation of tasks that people dislike, potentially without necessarily reducing the overall size of companies.

He provides specific examples of AI's impact:

• Software Development: AI code-assist programs are becoming so advanced that they will reduce the need for large teams of engineers, with a smaller number of highly skilled engineers leveraging AI tools.
• Human Resources (HR): AI-powered HR tools can handle a significant portion of HR tasks, reducing the need for large HR departments.

Cohn categorizes these current AI applications as "operations" and "enterprise" solutions focused on cost savings. He believes that as AI advances, particularly with the development of quantum computing, AI will transition from being a cost-saver to a revenue creator.