"‘AI End Times Report’ author speaks out: Market panic exceeds expectations, calls for ‘AI tax’ to address unemployment"

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A scenario analysis report on the impact of AI sparked a global market sell-off storm over the weekend. On Tuesday, Alap Shah, a co-author of the report, publicly spoke out, admitting that the market reaction far exceeded expectations and called on governments to tax AI to address the potential wave of mass unemployment.

The Lotus Technology Management Chief Investment Officer warned in a Bloomberg TV interview that, in the next 18 months, AI advancements could reduce white-collar jobs by 5%, with the US especially vulnerable without policy intervention. He predicted that service-intensive sectors like insurance and banking face heightened risks.

Shah said governments should consider taxing the incremental or unexpected gains brought by AI to offset the impact of labor substitution and protect consumer demand. He believes the replacement of white-collar labor will create a negative feedback loop: companies lay off employees to boost profit margins, reinvest the saved funds into AI, driving further layoffs.

According to Wallstreetcn's previous coverage, the report released over the weekend envisions a scenario for 2028, depicting rapid progress in machine intelligence that boosts productivity but makes large amounts of human labor obsolete, triggering unemployment, a collapse in consumer spending, and dragging down stock indices such as the S&P 500. Shah admitted, "I originally thought there would be a modest reaction—but it was clearly beyond our expectations." He stated, considering AI-related trading has continued for about three and a half years and mostly risen, there are hardly any incremental buyers left, so this reaction was, in some ways, to be expected.

Market Reaction Far Exceeds Expectations

This report, posted on social media by Citrini Research and compounded by market warnings from Nassim Taleb and a related statement from AI startup Anthropic, collectively triggered a massive sell-off. IBM stock fell 13% in a single day—the biggest daily drop in 25 years; DoorDash, American Express, KKR, and Blackstone each fell over 6%; relevant software ETFs fell 4.8%, expanding their cumulative decline from last September’s high to about 35%.

Shah admitted he was surprised by the market's response. "I expected a small reaction, but it was absolutely bigger than we anticipated," he said on Tuesday.

He explained that given the level of the US market, the reaction was not too unexpected. "AI trading has been ongoing for three and a half years and has basically been on a straight upward trajectory. Now everyone is heavily invested, and there aren't many incremental buyers left."

The report’s scenario is set in 2028. Shah explained that this timeframe is distant enough to spur a discussion on remedies, but close enough to serve as a wake-up call. Recent volatility has increased, and tech stocks have fallen in the past few weeks over fears that AI might disrupt business models. The Citrini report further amplified concerns over broad disruptions and unemployment.

White-Collar Jobs in the "Eye of the Storm"

Shah noted that the US hasn't really created any white-collar jobs in the past three years. "A large number of positions will be replaced by AI, specifically AI agents. These tools have only been truly deployed in the past few months."

He believes information workers and their recruitment are in the eye of the storm, with information job employment numbers down nearly 8% from their 2023 peak. In the scenario posited in the report, due to severe economic contraction, 15% of white-collar workers will lose their jobs within 18 months, lacking other employment opportunities.

Shah warned that without policy responses, this group would be forced into blue-collar and gig markets, significantly lowering average pay levels in those markets. Over the next five years, US white-collar employment will be a key indicator of AI's impact, likely showing effects fastest in the US due to its more fluid labor market. "It's much easier to lay off employees in the US than elsewhere," he added.

Proposing an AI Tax to Offset Unemployment Shock

Shah called on governments to act in response to AI-induced labor substitution. He suggested considering taxes on AI's incremental or windfall gains to protect consumer demand.

"If AI replaces these jobs yet is not properly taxed, the core of the consumer economy will be hit, and this is the real risk transmission scenario," Shah said. He stressed:

"We released this report to the market not only because risks to individual stocks matter, but more importantly, if jobs disappear faster than expected and there are no solutions, both the overall and consumer economies face risks."

According to the report’s discussion, the negative feedback loop of white-collar labor substitution will weaken demand in sectors built upon intermediary services, such as finance, insurance, and software. Consumer platforms reliant on discretionary spending, including DoorDash and Uber Eats delivery services, are considered the most at-risk.

Increasing Industry Divergence

Shah noted that the benefits of AI are no longer evenly spread, but are increasingly fragmented, with the market gradually distinguishing which industries will be winners and which will be under pressure. "The software industry is the best example. The market has been selling software stocks for almost a year due to AI threats, and this trend has accelerated noticeably in recent weeks."

He said intermediary industries face real risks as well. According to the scenario described by the Citrini report, AI agents may disrupt the payment industry by eliminating transaction fees charged by companies like Mastercard and Visa, saving users money.

In terms of investment strategy, Shah revealed: "We usually short companies we believe will be disrupted by AI. On the other hand, we hold a large amount of semiconductor stocks; we believe these companies will benefit." He expects further near-term market volatility, including among software firms, as traders gauge AI's long-term impact. "We are entering a period of high market volatility," he said.

According to Bloomberg, Citrini Research was founded by James van Geelen. The report clearly states, "The following content is a scenario hypothesis, not a prediction," and its sole purpose is to simulate a relatively unexplored scenario. Shah is CEO of AI company Littlebird and managing partner at Lotus Technology Management. He previously co-founded meal delivery service Thistle and served as CEO and chairman of financial data platform Sentieo, which was later acquired by AlphaSense.

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