EDWARD LANE: Analysis and recommendations regarding the Department of Government Efficiency

Possibly concerned about the predicted economic consequences of his tax policies, President-elect Donald Trump charged Elon Musk and Vivek Ramaswamy to “dismantle Government Bureaucracy, slash excess regulation, cut wasteful expenditures, and restructure Federal Agencies” via a new advisory unit called the “Department of Government Efficiency.” Musk, for his part, promised to find at least $2 trillion in cuts in federal spending.

Given that the 2024 fiscal year federal spending was $6.75 trillion, if implemented on day one of the new administration, as I will assume for simplicity in this paper, those cuts would amount to a reduction of about 30 percent. If the current levels of spending on Social Security, Medicare, and defense remain unchanged, as effectively promised by Trump, this would amount to a reduction of nearly 60 percent of spending in all other programs.

While such draconian spending cuts have a high potential for considerable social disruption (as Musk suggested they would), it is appropriate to consider the elimination of wasteful spending, mismanagement, unnecessary bureaucracy, fraud and abuse, and unnecessarily restrictive regulations, of which there is plenty. That said, the primary focus of this article will be on the financial challenges and the possible impact on selected agencies based on what has been reported before the date of publication above. Several less disruptive recommendations are also provided.

What’s been proposed

President-elect Trump has named Elon Musk and Vivek Ramaswamy to lead a new so-called “Department” of Government Efficiency (DOGE—as in Dogecoin, is a tongue-in-cheek reference to a cryptocurrency favored by Musk—is not a real federal department but an advisory unit) to, in Musk’s words, identify “at least $2 trillion in cuts” of federal spending.

It is my opinion that while Musk speaks only of spending cuts, the intention is to reduce the annual deficit by at least $2 trillion, the difference being the inclusion of selected tax subsidies (what the IRS calls “tax expenditures”) with the spending cuts.

Also, while not stated explicitly, I believe the intention is that there would be a permanent reduction of at least $2 trillion relative to the deficit that would have otherwise emerged, meaning that the impact of the reduction would be at least $20 trillion over a 10-year budget window if it became effective immediately. (Of course, as a practical matter, the full $2 trillion spending reduction could take years to be completely implemented.)

It is interesting to note that the Republican Study Committee (RSC), an influential conservative caucus of House Republicans, has drafted a budget for fiscal 2025 (reviewed here and here) that cuts spending by over $17 trillion over the 10-year budget window. The proposals include provisions that increase the normal retirement age under Social Security—something Trump has promised not to do—while also reducing taxes by $4.2 trillion over the same period for a combined $21 trillion reduction in the deficit by the end of the budget window.

If adopted, the RSC estimates the federal budget would be balanced in seven years (see the discussion below about the harmful effects of balancing the budget). While it is not clear how this proposal would dovetail with the efforts of the DOGE, considering its source, it should not come as a surprise to find more than a little overlap.

Why is Trump doing this?

It is useful to consider why Trump is looking to reduce the deficit by $20 trillion in the first place. The answer, I believe, is a concern he might have over the projected path of the deficit and the federal debt even before any policy changes his administration might make.

The forecast by the Congressional Budget Office (CBO), based on current policy and scheduled benefits from Social Security, indicates that the annual deficit over the next 10 years’ budget window will grow from $1.9 trillion to $2.9 trillion and that the federal debt held by the public will grow by $22.5 trillion from the current $28.2 trillion to a total about $50.7 trillion (more on the debt and deficit below). Note that the 2024 GOP platform, whose policy director, Russ Vought, is Trump’s choice to head the Office of Management and Budget, did not address deficit reduction.

To the CBO estimate, add the 10-year estimate by the Committee for a Responsible Federal Budget (CFRB) of the deficit impact of Trump’s various tax cuts and spending increase proposals of $10.4 to $16.0 trillion. Taking an average of $13.2 trillion and adding that to the status quo figure of $50.7 trillion, brings the total projected federal debt held by the public to nearly $64 trillion at the end of the 10-year budget window.

To put that in perspective, a popular (but not necessarily meaningful) measure is the federal debt as a percentage of gross domestic product (GDP). Currently, federal debt is about 100 percent of GDP and is projected by the CBO to increase to about 122 percent over the next 10 years.

According to the CFRB, the impact of Trump’s proposals will result in increasing debt as a percent of GDP to somewhere in the range of 145 to 160 percent. No wonder Trump is concerned about the deficit as even a supportive Congress is likely to balk at such a projected increase.

To put this in annual dollar terms:

• Trump wants to cut at least $2 trillion from the deficit.
• The CBO projects the deficit will grow by an annual average of $2.2 trillion without any of Trump’s proposed program changes.
• Trump’s tax-reduction proposals would add $1.3 trillion on average to the deficit each year, about half of which comes from extending the Tax Cuts and Jobs Act (TCJA) implemented during the first Trump administration, parts of which are scheduled to expire at the end of 2025. (Curiously, Senator Michael Crapo, the top Republican on the tax-writing Finance Committee, suggests that extension of an existing law does not increase the deficit. Clearly, that makes no sense as, all other things being equal, the extension would cause tax revenue to decrease beyond the CBO forecast adding to the deficit and resulting in the need to issue new federal debt under current law.)

Finding the money

So, where can Musk find his $2 trillion? The federal spending for the fiscal year ending September 2024 was about $6.8 trillion and is divided into three parts (components may not add due to rounding; dollar estimates are based on CBO projections and the author’s extrapolation of fiscal 2023 allocations):

• Mandatory spending (that is, spending set by law) is about 62 percent of the total, or about $4.1 trillion.
  • Of that amount, about $2.3 trillion is Social Security and Medicare, both of which Trump promised not to “cut one cent” or raise the retirement age (which, of course, does not mean he will address the impending shortfall in the Social Security Trust Fund to keep benefits from being reduced with dramatic impact).
  • Of the $1.8 trillion remainder, about $680 billion is for Medicaid, $495 billion for various income security programs, $218 billion for federal civilian and military retirement benefits, $188 billion for veteran’s income security, and about $218 billion for other legislated programs.
• Discretionary spending is about 28 percent of the total, or $1.8 trillion.
  • Of that amount, about $841 billion is for defense.
  • The remaining $950 billion includes certain veteran’s benefits, education and social services, transportation, international affairs, the Department of Justice, NASA, environmental protection (EPA), income security, health, and other programs.
• Net interest on federal debt is about 11 percent of the total or $900 billion.
  • This is based on the accumulated debt and, currently, is not under the control of the president.
  • The CBO projects net interest to almost double over the next 10 years absent policy changes by Trump or his successors.

As mentioned above, if Trump and Musk are looking to decrease the deficit rather than just spending, Musk could also look to tax subsidies as a place to achieve his $2 trillion in savings. I have included that assumption in this paper but recognize that a) Musk has only mentioned “spending” cuts, not deficit, and b) the elimination of tax subsidies or deductions amounts to an increase in taxes, something Trump and Republicans are loath to do.

• In fiscal 2024, tax subsidies totaled about $1.6 trillion.
• Of that amount, a little over half comes from business deductions for retirement programs, exclusion of healthcare benefits from employee compensation, the child tax credit, deductibility of charitable contributions, and capital gains, including capital gains exclusions for home sales.
• 90 percent of the tax subsidies come from the top 20 percent of programs (33 out of 165).

We do not know yet where the DOGE will find its $2 trillion. But if we hypothesize by starting with a total of $8.4 trillion in federal spending and tax subsidies and preserve Social Security and Medicare, Medicaid, defense spending, 75 percent of remaining mandatory programs, net interest, and 75 percent of tax subsidies, we have about $1.6 trillion remaining ($1.2 trillion if tax subsidies are not included).

If new tariff revenue of up to $320 billion per year (effectively, tax increases) are added, we come up with about $1.9 trillion, just short of the $2 trillion bogey (or $1.5 trillion if tax subsidies are not included).

To achieve this goal would mean eliminating:

• 25 percent of mandatory spending outside of Social Security, Medicare, and Medicaid (which means eliminating funding for federal civilian and retirement benefits and other mandated programs);
• all discretionary spending after defense (which means eliminating the Departments of Education and Justice, the EPA, NASA, and others); and
• 25 percent of tax subsidies (which includes deductions for Individual Retirement Accounts, qualified dividends, and mortgage interest for owner-occupied homes).

Another analysis illustrates how even the elimination of all non-defense discretionary spending—including, for example, the FAA, the National Weather Service, the Department of the Interior, and the Department of Commerce—would not be enough to achieve the $2 trillion goal.

Note that the elimination of tax deductions for individuals is effectively a tax increase and elimination of deductions and/or subsidies for corporations will likely lead to price increases. Both outcomes seem unrealistic for a Republican-controlled Congress.

Attention may also be given to Musk’s plan to eliminate certain “unauthorized” federal expenditures amounting to some $516 billion in fiscal 2024 (these are expired authorizations for spending for agencies or programs that remain in effect). While canceling “unauthorized” expenditures might seem like a big deal, once critical programs like veterans’ healthcare and opioid treatment centers are excluded, as painful as terminating the remaining programs may prove to be, the dollar savings would be insignificant to the overall goal.

What do we know so far

As it is early days and the DOGE is just getting underway, there is not much we know for sure about exactly what the DOGE will recommend. Here is what we do know:

• DOGE will focus on cutting federal regulations and the workforce that supports them. The estimated cost to the U.S. economy of regulations ranges from $300 billion to over $3 trillion, depending on what is being counted and who is doing the counting. The portion of this cost borne directly by the federal government is not clear.
• DOGE will also focus on reducing waste, fraud, and abuse. The Government Accounting Office estimated that improper spending in fiscal year 2023 was $235 billion, 43 percent of which was improper Medicare and Medicaid payments, about evenly split.
• Healthcare spending will be a major focus for the DOGE’s spending reductions. Medicaid is likely to be the category where the impact will be the largest, with federal spending projected to be about $600 billion in fiscal year 2024 though going mostly to poor children and families.Enhanced premium tax credits expiring in 2025 (amounting to about $66 billion in fiscal 2024 and projected to be nearly $700 billion for the period 2024 to 2033) will also be targeted (resulting in upwards of 4 million people becoming uninsured, with those affected skewed toward “red” states where expanded Medicaid was not adopted).

• The authors of Project 2025 and its proposals are likely to play a large role in reshaping and reducing government. Despite presidential candidate Trump distancing himself from Project 2025, since his election he has reached out to nearly a dozen authors and contributors to lead various agencies and to fulfill other important roles, including the Office of Management and Budget. Over 140 people who worked on Project 2025 worked in the first Trump administration.Cost-cutting measures promoted in Project 2025 include: cutting the Department of Education including low-income and early education programs like Head Start, reforming farm subsidies by “eliminating subsidy dependence,” and restructuring the Environmental Protection Agency and the Department of Housing and Urban Development.

Shifting programs to the states

An alternative presented in Project 2025 is to move some programs (for example, the Departments of Education and Housing and Urban Development) to the states which would have the effect of preventing the president from being blamed for killing them. Medicaid presents another option for cost-shifting to the states. Presumably, the shift would occur with insufficient or no funding (otherwise, there would be no point) in which case the states would need to raise taxes, increase borrowing (which would push up interest rates), reduce program services or payments, cut other local programs, or some combination.

What about the impact on employment

The effect on employment is another consideration. While not all reductions in federal spending will result in job losses, many will. One estimate of Project 2025’s impact on federal employment would be the elimination of up to 1 million federal jobs, or over 40 percent of the non-military federal workforce. Based on a total federal civilian payroll of around $213 billion for 2.3 million workers, a reduction of 1 million civilian federal employees would not go very far in search of a $2 trillion reduction in federal spending. The rest would need to come from the private sector.

How else might the deficit be cut

Here are some ideas for reducing the federal budget:

• The IRS estimates that it loses $1 trillion in unpaid taxes every year, mostly on account of evasion by wealthy individuals and large corporations. While the Inflation Reduction Act included funds to tackle this problem, House Republicans have proposed cutting the fiscal 2025 IRS budget by nearly 18 percent. Collecting a significant portion of these unpaid taxes and preventing future fraud would make a meaningful dent in Musk’s $2 trillion reduction goal.
• Average cost overruns for major defense contracts of about 40 percent have included about $183 billion on the F-35 fighter aircraft and over $60 billion for the Air Force’s Sentinel program. Considering Elon Musk’s demonstrated expertise in large-scale projects, perhaps he could lend a hand to the Defense Department’s procurement management.
• Net interest costs on federal debt are projected to be $892 billion by the CBO for fiscal year 2024, increasing to $1.7 trillion by 2035 before taking into account any new tax or spending programs. Currently, the amount of interest paid on federal debt is determined by market forces when debt is issued by the Treasury and acquired by primary dealers.Another way to substantially reduce the net interest burden, used before, would be for Congress to instruct the Federal Reserve to lower the overnight interest rate to near zero and to limit future Treasury issues to T-bills with a duration of no more than three months where the interest rate would closely track the overnight rate. Corporate, municipal, and foreign debt could fill the demand for longer-dated debt.Eventually, net interest costs would tend to be a small fraction of current levels. In this way, reductions in interest on federal debt (which largely goes to wealthy individuals and foreign governments) would relieve pressure to cut federal programs that would largely hit middle- and low-income families.

When will spending cuts happen

While Musk has set the expiration date for the DOGE to be July 4, 2026, reductions in federal spending from currently established levels could begin as soon as Trump is inaugurated. With reduced spending goals by the House Republican Study Group and Scott Bessent, Trump’s pick for Treasury secretary, if even partially enacted, and with the influence of Russell Vought, Trump’s nominee for the Office of Management and Budget, significant reductions could begin even before the end of the fiscal year, September 30, 2025.

Do we need to reduce the deficit

Deficits arise as a result of the government spending more than the revenue it takes in. Deficit reduction is not the same thing as running a balanced budget, as will be discussed next.

Deficits should not be opposed based on how high they are. Rather, if the deficits were created to build productive capacity in the U.S. to mitigate future inflation, smartly address climate change, and/or reduce income and wealth disparity, they would serve a useful purpose.

On the other hand, if an increase in the deficit exacerbates income and wealth inequality (as an extension of the TCJA would) prevents needed infrastructure or investment spending, or puts pressure on Congress to reduce spending on Social Security, Medicare, Medicaid, or other essential social programs that address the welfare needs of the public, this would not be in the best interests of the nation.

Do we need to balance the budget and reduce federal debt

Balancing the budget means not just reducing the deficit but totally eliminating it and, to the extent a fiscal surplus emerges, reducing the federal debt. Thinking about how households and businesses are managed, this seems to be an attractive goal, and it is a goal of the Republican Study Committee, the conservative caucus of House Republicans.

However, the federal debt is not like a household or business debt or even state and local debt. The federal government cannot go bankrupt, and federal debt is not a “ticking time bomb.” In fact, in each of the eight times that the federal debt was reduced since 1800, a recession immediately followed.

Without deficit spending, and as long as our balance of payments with other countries remains in deficit as they have for most of the last 60-plus years, the nation’s net wealth would decline and won’t recover until the accumulated surplus is eliminated.

A last word

Elon Musk has said that as Americans learn to “live within their means … that necessarily involves temporary hardship, but will ensure long-term prosperity.” He has praised Argentina’s recently elected President Javier Milei’s “slashing” government expenditures without regard to the poverty that followed, a predictable result based on the concept of the sectoral balance.

Based on the above analysis, it seems doubtful that even if the DOGE comes up with $2 trillion of federal expenditures to eliminate, Congress will go along or that Americans will appreciate what Musk means when he says they will learn to “live within their means.”