Abundant Intelligence and Deficient Demand: A Macro-Financial Stress Test of Rapid AI Adoption

We develop a formal theory of cognitive debt: the stock of unverified reasoning obligations that accumulates when individuals use AI as a substitute rather than a complement for first-principles cognition. The model features two state variables per agent, cognitive capital and cognitive debt, and a multiplicative production technology in which cognitive capital functions as collateral that determines the return to AI adoption. We establish six propositions. Rational agents incur positive cognitive debt because the costs are deferred, partially external, and masked by short-run productivity gains. Tranquil periods lower subjective risk assessments, raise AI substitution intensity, and compound leverage, generating a cognitive Minsky moment in which subjective risk falls while true systemic fragility rises. Expected crisis losses are convex in aggregate leverage. Post-crisis, output-target pressure can produce a false-correction loop in which agents patch AI failures with more AI. The decentralised equilibrium over-adopts substitutive AI relative to the social optimum because of systemic risk, cognitive public goods, and arms-race externalities. In a two-type heterogeneous-agent economy, high-cognitive-capital agents adopt AI more intensively and may eventually erode their unaided cognitive capital below that of initially lower-skilled agents.

Generative artificial intelligence (AI) is expected to transform work, but less is known about how firms reorganize labor demand as the technology diffuses. Existing research has largely focused on which occupations are exposed to AI or whether exposed jobs decline. We extend this debate by examining whether firms adjust by changing where they hire, what jobs contain, or both. Using a nationwide dataset of job postings in the United States, covering all sectors of the economy, we construct a dynamic, posting-level measure of generative AI exposure with a two-stage large language model pipeline. The pipeline identifies the tasks described in each posting and classifies the extent to which generative AI can perform or assist them. We then decompose changes in aggregate exposure into two margins: reallocation of demand across jobs and redesign of tasks within jobs. We document three main findings. First, generative AI exposure is dynamic rather than fixed, changing substantially over time. Second, labor demand adjusts through both margins. Hiring reallocation explains the largest share of the aggregate decline in exposure, accounting for 52% on average, while within-job redesign becomes increasingly important, accounting for 39.5%. A complementary Oaxaca-Blinder decomposition shows that shifts in occupational composition account for about 90% of the exposure change attributable to observable job characteristics. Third, adjustment differs across the job ladder. Senior jobs adjust earlier and mainly through reallocation, whereas junior jobs adjust through a broader mix of reallocation, redesign, and their interaction. These findings suggest that labor-market adjustment to generative AI is a process of organizational reconfiguration, in which firms reshape both hiring demand and the task architecture of work.

We work towards measuring both AI adoption and the capability of AI to perform discrete labor tasks across various occupations. To measure adoption, we develop an open-source economic index that uses publicly available user-LLM chat data and ONET tasks to replicate studies produced by frontier AI labs, finding that occupations in the finance, computer science, and arts sectors are those with the highest adoption rates. To measure capabilities, we build a system that generates benchmark scenarios grounded in ONET occupations, tasks, and model-context-protocol (MCP) servers. We test Kimi-k2.5 with an OpenAI agents SDK harness on scenarios across 9 occupations that appear frequently in our index, finding that AI correctly executes high-level workflows but often errs in the granular details (such as specific tool calls used).