Derek solves the biggest economic puzzle of the moment: Why are the most successful tech companies laying off more than 130,000 employees when the overall unemployment rate is still at historically low levels? Then, award-winning Puck journalist William Cohan returns to the podcast to discuss the biggest unanswered questions surrounding disgraced billionaire Sam Bankman-Fried, his FTX bankruptcy case and his upcoming criminal trial.
In the following excerpt, Derek examines three explanations for the recent wave of layoffs in the tech sector.
Derek Thompson: The latest layoff news is as follows: 12,000 announced gone at Google, 10,000 at Microsoft, 18,000 at Amazon. Salesforce laid off 10 percent of its workforce. Spotify, which owns The Ringer and this podcast, announced a 6 percent layoff. Overall, more than 130,000 people have been laid off from their jobs at major tech and media companies in the past 12 months; 130,000 people are more than the total number of employees at Apple before the pandemic. It’s a lot of people, but the overall US unemployment rate remains at 3.5 percent, and that’s the lowest level in the 21st century, going to one decimal place. So there’s a bit of a conundrum here, a disconnect between massive layoffs in big tech and an unusually low unemployment rate in the rest of the economy. So before I offer some theories and tell you how I see the situation, let me start on the most human level by saying layoffs suck. They really suck for people who get laid off. I won’t discuss – or I’ll talk about numbers in a moment.
Numbers have a way of smoothing out the human experience and turning everything into a serious statistic, so I want to start by saying that if 130,000 people lose their job, even a good job, even a good one, it’s still life decent high-paying job – crawling, and it’s scary, and it’s tough, and it sucks.
So, what’s up? This is a profoundly strange reversal of the 21st century economic norm that we have come to know and understand, right? In the 2010s, the economy was weak. The labor market was weak. It was Silicon Valley that was booming. And during the pandemic, the US economy was in even more of a state of shock, but the tech sector was absolutely booming. By mid-2021, that’s crazy. I believe this stat comes from Substack author Noah Smith: Just five tech stocks — Apple, Microsoft, Alphabet, Amazon, and Meta — made up 23 percent of the entire S&P 500 index. Five companies made up a quarter of the entire S&P 500. This is madness.
Today it’s the other way around. The US job market appears to be very strong in some ways, and yet the tech and media industries are the ones that are bleeding. So what’s up? And what does this inversion of 21st century norms tell us about the state of the economy?
Explanation number one, and this is the explanation I think is being offered the most in the news right now, is that big tech has just been shelved too much in the pandemic. Plain and simple. Big tech CEOs made a mistake, and now this is the correction. What does this error look like in numbers? Check out Meta, the parent company of Facebook and Instagram. In 2019, Meta had around 44,000 employees. By September 2022 they had 87,000 employees. So, in the first two and a half years of the pandemic, Meta added another Meta in headcount. It invested in workers in anticipation of an economy that didn’t pan out. Then why didn’t it arrive? Why did all these companies make the exact same mistake?
Well, as I wrote in The Atlantic last week, I think the post-pandemic economy has gotten a lot stranger than most people anticipated. Many people, and I include myself in this category, have predicted the digitization of the economy that we have seen in the pandemic, like the surge in streaming. Everyone streamed. Nobody went to the cinema. Everyone added new apps for food delivery. Nobody shopped in grocery stores. Everyone came to Peloton and did fitness stuff at home instead of going to the gym. We have named these accelerations. We have said that the pandemic is pushing everyone towards a future that is coming anyway. And so tech companies invested like that. In some cases, they doubled their workforce, but perhaps the pandemic wasn’t an accelerator. Maybe it was a bubble.
We’ve been familiar with calling pandemic stock bubbles like Peloton and Robinhood — those stocks that skyrocketed and then plummeted about 90 percent. Well, the same thing happened with employment, and then these tech companies like Alphabet and Amazon have faced all kinds of challenges during the pandemic, be it supply chain challenges. Then came inflation. Then interest rates went up. Then their stock valuations were penalized. And so all these companies thought the pandemic was like this time machine pushing them into the future, and it wasn’t. It was a mirage. And now the mirage is gone and with it the jobs.
The second explanation for this moment is, and I’ve told this story before on the podcast, it’s the interest rate theory of everything. When interest rates were low, investors were willing to invest their money and put their money in companies that had great stories about the future: companies like Tesla, or Peloton, or Robinhood, or even Meta and Alphabet. But when interest rates started to rise, stocks started falling and you saw investment flow from the technology that was the future to all sorts of companies like CVS or United, which were just some kind of service company with healthy margins. And this adjustment in markets has forced these companies – Netflix, Uber, Tesla – to change the way they do business to lay off many employees. And as we’ll see in a moment, I think these layoffs have made it safer for other CEOs to lay off their employees in order to achieve higher margins at their companies.
A third explanation, which I’d like to gloss over briefly, is that in tech it’s become a joke that in the long run every business becomes an advertising company. So Google is obviously an advertising company and Instagram and Facebook are obviously advertising platforms. For a time, about 80 to 90 percent of every marginal dollar in digital media was made by either Facebook or Google. They were the two-headed monster, the hydra; they were the duopoly. But in recent years, other companies have essentially become, or attempted to become, advertising companies. Amazon is the fastest growing advertising company in the world. You’ve seen Netflix say, “We want to get into advertising.” You’ve seen Uber start showing ads on their platform when you stop a car. And I think the more of those companies that have become advertisers, the more sensitive they might be to an advertising slowdown.
This excerpt has been edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guest: William Cohan
Producer: Devon Manze
Subscribe to: Spotify