ChatGPT’s First Victim + The Department of Government Efficiency (DOGE)

23:36This is the Albanian army taking on the Third Reich right now. So if you identify that ChatGPT is coming for us and they're our enemy, it's like, okay, that's too bad. And we understand. And you're right, it's their fault. But you're fucked. because if in fact you're right and they're your enemy and they've identified this as a space they want to go after or that consumers are using agents to help them with their studies or essentially find the same utility they were finding for you at a higher price, we see no reason why that problem won't get just worse. The interesting thing here is what you said about the debt.

24:10I'd love to know what the debt is trading at because I believe someone is going to make real money here. And who is that? I think a distressed credit investor is going to come in and buy the bonds and if they do in fact blow their covenants and the thing goes into bankruptcy, I think whoever owns the bonds will come in, cut a lot of costs, say this is no longer a growth company, this is a distressed asset, but they do have revenues have fallen 18%, subscribers have fallen 20%, which means they still have 80 % of their subscribers. So this is probably still a pretty decent company. It's just that somebody's going to have to come in here and massively cut costs and recognize we're no longer a growth company.

24:50We're a company in decline, but if we can cut costs faster than the decline, we're still going to have something here. And they probably have invested a massive amount of money. I don't know what the market cap is, but if it's off 99%, that means it's like 100. It's 170 million. Okay. I'd be curious how much debt they have, but I would think distressed credit investors are looking at those bonds and saying, okay, can I own this company for tens or hundreds of millions of dollars and say, it's probably worth a couple billion dollars to someone else. They have a subscriber base who are still paying.

25:25Company's not going to zero. The best investments I have ever made have been pulling bankrupt companies out of bankruptcy at a very low price in things like consumer products or the yellow pages, and then consolidating or seeing if there's other acquisitions of other distressed companies in the space, cutting costs faster than the revenue declines. And you can usually pick them up really cheaply. And then, you know, you can make a lot of money. And the analogy I always use is that in 1999, people knew Blockbuster was going away. So you could buy a Blockbuster franchise for two and a half times its cashflow.

26:00They did go away, but it took another 12 years. So if you bought companies at two and a half times cashflow and they went another 12 years, you made a lot of money. And I think that's the case here. So I look at this and I think, okay, that's interesting. First kind of public chat GPT victim, although there's probably others not as obvious. But I actually think a distressed credit investor is probably looking at the bonds right now. Yeah, you mentioned there are probably others. I mean, I looked into this. I really couldn't find many. And I'd be interested to know maybe our listeners can identify some companies that have really gotten crushed by AI.

26:36But I do find it interesting because there was all of this catastrophizing and speculation around how AI was going to put all of these companies out of business. It was going to take all these jobs. And here we are two years into this revolution. And the big victim of AI is Czech, which is just like a kind of irrelevant company, barely any employees at all. I mean, they cut 20 % of the workforce, but that's only around 300 employees who are losing their jobs to AI, I guess. And so I just, it's interesting to me, and I'm a little surprised at how undestructive AI has proven to be. So I guess the question that I would pose to you, which companies or which sectors do you think are going to get hit by AI as hard as Chegg just has?

27:26Or is the AI catastrophizing just too overblown? Well, first off, anyone in customer service gets hit pretty hard. But if I were to look at large sectors of companies, there's software as a service. And we decided that as a palindrome, it'll be service as a software. So travel agencies, publicly traded travel agencies. I wonder how real estate agencies are going to fare in a world of AI. uh i i don't know that's that's a super interesting question around who are chat gpt's next next victims yeah i mean it feels like the entire economy has figured out a way to get ai on their side i like that or at least at the very least they've made it seem that way and it's i guess the big mistake by chegg was saying where ai is not on our side as you said AI is our enemy.

28:16But I mean, I look at the rest of these companies and no one's been taken to the woodshed by AI the way we thought, unless I'm just missing something massive here. What I find is if you're really worried about something, it usually doesn't happen because you prepare for it. It's when you don't see the comet coming, you know, no dinosaur thought, oh, I'm really freaked out about a meteor hitting Earth. That wasn't their biggest worry. I don't know how anxious dinosaurs would begin with. They were struggling with mental health. Yeah. Yeah. Who knows, right? I don't know. Being, the prospect of being eaten while you're sleeping or while you're drinking from water.

28:54That's pretty stressful. That is still my favorite TikTok because the little cheetah comes up to the watering hole for a little refreshment. And it's such a peaceful little water hole until an 18-foot croc takes that bitch into the water. and I mean I just never get sick of that and whenever I see an animal drinking at a water hole I'm like okay here we go anyways I don't know where I was going with that crocodiles it's the stuff you don't see coming what do you think what sectors do you think are going to be most disrupted by AI this is my point I don't think anyone's going to be I don't think anyone's going to be hurt in the same way that Chegg did is my view I think what's going to happen is going to be slow and we're going to figure out a way to make AI work for us.

29:40So, I mean, to me, it's telling the fact that we're here, and the big loser is this tiny company that no one cared about anyway. But, you know, maybe I'll eat my words. We'll see. One detail I did find interesting, though, that I want to bring up. So apparently, the employees of Chegg a couple years ago actually asked for an AI budget because they felt that AI would be helpful to the business. It would help with automating their answers. And supposedly the leadership denied that request. And so I feel like there are some big questions here for leaders and for managers of companies around how to innovate, because in this case, the leadership said, no, we don't need to do that.

30:26And they look stupid now, obviously. But I'm sure there are many other situations where an employee has come to leadership and said, hey, there's this new technology. We have to do it. And the manager has said, you know, thanks, but no thanks. We're going to focus on this other stuff. And it probably ended up being the right decision. And the example that comes to mind for me is like the metaverse. I mean, how many employees three years ago were going up to their managers and saying, you don't understand. Metaverse is the next big thing. We got to do it. And the guys who said no are the ones who look smart now.

30:58But, you know, in this case, if you're at Chegg, you really screwed over the entire company by not embracing AI. So I guess my question to you would be, what are some of the learnings here for leaders? It's essentially an innovator's dilemma question. How do you correctly allocate your resources while not, you know, risking falling way behind as Chegg has done. Well, I mean, just hearing you talk, what I think is it's not sectors that'll be the losers. It'll be the companies in every sector that don't incorporate AI into their business operations. It'd be like saying we knew that the Wintel revolution was going to have a huge impact on the economy, but it wasn't like PCs took out the auto industry or took out the restaurant business.

31:42It was the companies that didn't adapt and incorporate technology into their everyday business operations were beaten by the companies in their sector that did. I think the same is probably true here. I don't think, again, I think there'll be winners and losers in every category, but will there be like five or six industries that just go away? I don't know. I don't know. We'll see. We'll be right back after the break with a look at the new Department of Government Efficiency. If you're enjoying the show so far, hit follow and leave us a review on Prof.G Markets.

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33:57We're back with ProfG Markets. Donald Trump has named Elon Musk and Vivek Ramaswamy as the heads of a new entity called the Department of Government Efficiency. In a statement, Trump said the department will dismantle bureaucracy slash regulations and expenses and restructure federal agencies. He also called it, quote, the Manhattan Project of our time. Scott, your initial reactions to the Department of Government Efficiency, also known as D-O-G-E, aka DOGE. Well, I think the fact that they have two heads of a department on efficiency kind of says it all, and that is this makes no fucking sense.

34:36So first off, budget cuts aren't within a president's constitutional power. Only Congress controls federal spending and may or may not act on outside advice. And all of these Congress people have districts that are all making money from federal contracts and have a lot of employees that work for the government. So, you know, you may want to slow your roll here. An official government agency cannot be created without an act of Congress. So it's unclear if doja would exist within the government or outside of it. And effectively, this efficiency group, air quotes, is more bureaucracy, not less. And look, every single administration has had something similar talking about how to eliminate bureaucracy and inefficiency in government.

35:23But let's just be real. Mandatory spending, including Social Security, Medicare, and federal debt interest, consumes two-thirds of the budget. So they're going to try and make fine, you know, squeeze blood from a turnip that is one third of the budget. Elon Musk claimed at a Trump rally in October that the federal budget could be cut by at least$2 trillion. That's just not true. To cut$2 trillion, Musk would have to eliminate both Social Security and national defense spending. And also, if you did that kind of cut, you would send the economy into immediate recession. because, you know, we have, what is it about a third of our GDP center, actually 38%, is total government spending.

36:04That's actually less than Japan, which spends 42%, UK at 43%, and Germany at 48%. So we're spending less on government than other places. Now, granted, they would argue they get more services for their employees, so we may be, in fact, more inefficient. The U.S. public sector employs one in seven workers, so 14 % of workers. And that's more than Germany's 13 percent and Mexico's 12 percent, but less than France's 21 percent. So I don't I find this kind of a lot of jazz hands. And just to be clear, when we're talking about the person running the quote unquote efficiency department, let's look at his track record.

36:42All right. So if you look at the auto industry, you have BMW at about one point $1.1 million per employee, right? You have Ford at$980 ,000 per employee. General Motors, $1.02 million per employee. Mercedes,$950 ,000 per employee. And who brings up the rear at $740 ,000 per employee, the least efficient automobile company? Tesla. So granted, he was able to maintain a minimum viable product with Twitter by laying off 80 % of the employees, but he also registered an 80 plus percent decline in revenue. So anything resembling a reasonable conversation would go like this. We have to put a cap or start reducing or means testing entitlements.

37:32Not everyone should be entitled to entitlements. I should not get social security. I'm not sure I should be eligible for Medicare because I have the money. We are going to have to raise revenues, which is Latin for taxes. Corporate taxes are at their lowest rate since 1938. The 25 wealthiest Americans are paying somewhere between an effective tax rate, depending on who you talk to, between 7 % and 16%. But they're paying less than most middle-income workers. But the notion that Musk and Vivek Ramaswani are going to come in and find$2 trillion in savings, good luck with that. And I just also like to, I mean, I don't know if you saw, but the new Secretary of the Interior is David Hasselhoff.

38:12And Jane Brian Lynch's character from Glee is the new secretary for Health and Human Services. I mean, this is like, this isn't even a cabinet. It's fucking dancing with the stars. My complaint with this is I can't tell how serious it is about the problem. And the feeling that I get is that this is mostly just a way to kind of put up a finger at the establishment. and that by putting Elon in charge and putting Vivek in charge, this is less about addressing the deficit and more about owning the libs. And that, to me, is a shame because this is a massive, massive problem. And everyone agrees it.

38:58Everyone agrees that the deficit needs to be solved. And everyone agrees that it would be great to have a more efficient government. But to your point, this has been tried several times in the past. Clinton tried to do it. Reagan tried to do it. Bush tried to do it. Obama tried to do it. And the other side to it, which you also brought up, is that we need to raise tax revenue. Like, if you want to get back in the green as a government, then we need to figure out a way to raise more taxes as a percentage of our GDP. And the reality is that our nation has one of the lowest tax revenues as a percentage of GDP among all developed nations.

39:40In addition, like Vivek, Vivek has talked about getting rid of all of these government agencies. Like he wants to get rid of the DOE and the DOJ. And I just, I wish he would have a sober conversation about the numbers here. If you were to get rid of every Every government agency, apart from the Department of Defense, which is huge, if you were to get rid of all of them, you would only reduce our spending by less than a tenth. Like, these numbers are tiny. What we spend all of our money on is, as you said, defense and Social Security and health care. It adds up to 75 percent of our entire budget.

40:21So let's talk about the Department of Education. It has about a$220 billion budget. some of the things they do with that money. They fund Title I of the Elementary and Secondary Education Act, which provides supplemental funding to high-poverty K-12 school districts. They fund the Head Start Program, which provides vital child care services for many low-income and rural communities across the country. The department also administers Pell Grants. Who is here speaking to you right now because of Pell Grants? Yours truly. These are investments in lower-income households that couldn't go to college, which I could not have done without Pell Grants.

40:59And by the way, those are investments. They're not entitlements, they're investments. A lot of the money that goes to seniors is welfare. A lot of things like Pell Grants and the Department of Education are investments because you stop making these investments. There's a very credible argument that I end up continuing to live with my mom instead of paying a shit ton of taxes, which I do. These are forward-leaning investments, or you increase government spending on police, fire, rehabilitation, mental illness, diabetes, you know, incarceration. I would argue the problem is we can't connect it as quickly as they'd like.

41:36I would argue the Department of Education is probably one of those departments where over the medium and long term, we see a really strong return on investment. You know, eliminating the Department of Education, which they describe as a one-stop shop for the woke education cartel. Yeah. It's just like, that's just an unserious proposal. Yeah. So like, it's just not even about politics. It's like, can we actually have like a legitimate conversation about the problem? I don't, I don't know where I see with all of this, whether it's Roe v. Wade being overturned or this ridiculous notion about efficiency, here's going to get, here's who's going to get hurt.

42:14It kind of preys on the most vulnerable, right? My kids don't need the Department of Education, either will yours. But a middle-class family, a family in rural America, kids who couldn't afford to go to college or junior college or need student loans, are in poor school districts that don't get the funding they need because they don't have rich parents showing up and bidding$5 ,000 for lunch with Ed Elson or whatever, these stupid charity auctions. This is, again, if you reverse engineer to who really gets hurt with these policies, it's the most vulnerable. And do we need a more efficient government?

42:52Are there places to cut spending? 100%. But what I would do if I were a Democrat is, and I am a Democrat, is like, look, we'll go one for one. You or one for two. For every dollar you increase or we find in cuts, you're going to raise$2 in taxes. There's been an explosion in wealth and prosperity. We keep coming up with reasons to save businesses and stimulus and PPP. Oh my God, what if Delta actually goes out of business? But then when they're printing money, you want to lower taxes on them? So look, we need government. I do believe government is too big. When it gets to this point or even bigger than this point, it starts to crowd up private investment.

43:36I do think there's something to the notion that we shouldn't be whatever it is, 38 % of GDP, we should be under 30%. I get it. But the only way realistically we're going to have a serious conversation is to cap increases in spending, cut in areas where we can, but also you got to talk about the revenue side. I mean, what's next? They're going to nominate Matt Gaetz to be attorney general. Oh, wait. Oh, wait. Anyways. I'm all riled up, Ed. I'm going to just take the other side of this now, though. There is a positive to this, that Elon and Vivek heading up this new department. And to me, it's exemplified by a tweet that was put out by the new official account for the Department of Government Efficiency that was posted on X.

44:20And I really like this. They said, quote, we are very grateful to the thousands of Americans who have expressed interest in helping us. We don't need more part-time idea generators. We need super high IQ, small government revolutionaries willing to work 80 plus hours per week on unglamorous cost cutting. If that's you, DM this account with your CV. Elon and Vivek will review the top 1 % of applicants. I love this, and I love the language they're using here. And it was an incredibly popular post. I mean, people were liking it. They were commenting on it. They were saying, let's fucking go, you know, and it's a very bro-y comment section.

45:03But what it has done, clearly, by putting Elon and Vivek in charge, is there are these great marketing tools for attracting talent. Because I think previously, one of our biggest issues in America has been that it's not cool to work for the government. But clearly what's happening here is, you know, whether you like Elon and Vivek or not, they're clearly making it sexier to work for the government. On that tweet, you know, the way that they're sort of making it exciting that we're going to be cutting costs in an unglamorous way, but we need the smartest people in America to help us do it. That to me is the right direction.

45:42And if using Elon and Vivek are the ways to do it, I'm actually all for it. I like that. I think that's really insightful. And you're absolutely right. We need to make government jobs aspirational. And if we can use two aspirational, you know, very successful man to create that aspiration around government work. I love how you're calling balls and strikes. And I think that's true. I think that is a positive and anything that attracts brighter human capital into government service, that is the silver lining here. Yeah. They just need to be honest about what this is all for. And if this just becomes a giant talking point to own the libs, this is not productive.

46:23Ed, no one owns me. I'm my own woman. I'm fucking Mary Tyler Moore, in Minneapolis throwing my hat into the air. You're gonna make it after all. Ask your parents, Ed. Ask your parents. I will do that.

46:49Let's take a look at the week ahead. We'll see earnings from NVIDIA, Target, Walmart, and Lowe's, and we'll also see consumer sentiment data for November. Do you have any predictions for us, Scott? Mine is kind of weird. So a bunch of companies, smart companies, bought up these cheap and supposedly dying local news stations. Do you ever watch local news? Never. It's hilarious. It's literally hilarious. Some guy, the weatherman, is like constantly predicting, hail the size of golf balls. And it's usually some older guy with good hair who makes you feel comfortable and some hot young woman who's hoping, you know, she's going to get Katie Couric's job or, I don't know, Savannah Guthrie's job someday.

47:30And the two of them have a nice, pleasant banter. And basically, they do the weather, they do local sports. And in between then, they have a bunch of segments called, this is what stupid people did in our neighborhood today. But these companies hemorrhage money for 20 months every two years. And then for four months, they have a tsunami of money that washes over them in the form of political advertising. Because the general consensus to date has been that old people vote and old people watch local news. And so they quintuple their ad rates and they just rake in money for the four months leading up to the election.

48:02I think those local TV stations and their owners are about to get disrupted, as I think one of the externalities or realizations of this election is that TV generally does not work. If you want to influence seven-year-old white women, which is the viewer of MSNBC, go on and you'll reach a million people. But if you want to reach 55 million 34-year-old males, go on Rogan. I think you're going to see a tsunami of capital, election spending capital, transition out of local broadcast news stations or local broadcast stations into podcasts. And I think we're about to see this cute little anomaly in the markets be dislocated or slash disrupted.

48:46I think local TV stations are about to get the shit kicked out of them. And that capital election spending, which is only getting bigger and bigger, is about to flow. I already see this happening. All these people who are clearly planning to run for president are calling me and seem to be very interested in me right now and expressing their viewpoint and telling me how much they love our work on Young Men, which they do. These are good people, but they're also interested in starting to come on our podcast because everyone has noticed that the technology that doesn't work is knocking on doors and that the person with the most money is not, unlike in the past, necessarily the winner here.

49:22Kamala raised more money. It's the person that's smartest about media. and going after media that attracts old people who have already made up their mind doesn't work. But young men who are more persuadable, people go to cable TV, people go to local news or go to cable news to sanctify their religion or their positions. And their religion is their political views. People, young men go to podcasts to actually learn. They're all more open there. And then if you look at the numbers, anyways, my prediction is the following. Local news stations loss is gonna be podcast gains and we're about to see these kind of tired, non-innovative companies that have had this sugar high from political spending, I think that's about to come to a fairly abrupt end.

50:06Yeah, and I would also just add, I think you gotta throw social media into the mix too, because what you just described about local news channels, like here's a compilation of stupid things people did in the neighborhood this week, that's TikTok, except with presenters. So you can get the same product on TikTok, that's what TikTok is for, That's where all the young people are. And it's pretty staggering how much more money these campaigns spent on TV ads versus social media ads. They should be on TikTok and they should be on Instagram Reels, which to me is going to translate to even greater profits for ByteDance and Meta.

50:46This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Jessica Lange is our research associate. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Thursday for our conversation with Jigar Shah, only on Prof G Markets.

51:23Reunion As the world turns And the dark flies In love, love, love, love

51:51I'm so bullish on podcasting last night. I think next year you could make, I don't know, 15, 18 bucks an hour if you keep this up. This could get, yeah. If you keep, Ed, just a little motivation, a little motivation. If you keep working this hard and my predictions come true, I'm going to get to buy two Ferraris. I can't wait. I cannot wait. Yeah. All right. Secretary of Transportation, Joe Exotic. Every minute your finance team spends wrestling with data is a minute lost. Insight Software's AI-powered insights instantly move you from complexity to clarity. Automated analysis, real-time reporting, strategic recommendations, all at your fingertips.

52:35Transform how your finance team works and watch your business grow. So stop wasting time, start making smarter decisions. Learn more at insightsoftware.com slash AI.