Eliminating Federal Budgetary Deficits
During the last three months of 2024 our federal government incurred a $710.9 billion deficit, an increase of approximately $200 billion from the comparable period in 2023. This increase was largely due to rising costs of servicing the nation’s $36+ trillion debt along with continued spending growth and declining tax receipts. Adding to this bad news was the very positive December jobs report making it unlikely that the Fed will continue to reduce interest rates. That means that interest charges (which already represent 23% of the federal government’s annual revenues) will continue to grow, placing the U.S. economy in a dangerous downward spiral unless substantial steps are taken to reduce federal spending or increase federal revenues.
In recognition of this problem, President Trump has called for a program to make deep spending cuts and has appointed Elon Musk and Vivek Ramaswamy to lead a mission to find ways to enhance governmental efficiency via an agency which has been dubbed the “Department of Government Efficiency”(or DOGE). While this could be a major step forward in making our federal government more fiscally responsible, it also could prove to be a major boondoggle for high tech companies eager to sell their goods and services to the federal government at elevated prices.
When Trump first announced his intention to create DOGE, Musk stated that its objective would be to cut $2 trillion from the federal government’s annual budget which would more than offset its current annual fiscal deficits and would enable it to start reducing the nation’s soaring outstanding indebtedness. Recently, however, Musk has stated that a more realistic goal would be to cut the current federal budget by only $500 billion which would also be a significant step in the right direction, but only if Trump does not proceed with his stated intention of extending the Tax Cuts and Jobs Act of 2017 (TCJA) enacted during his first term in office. That extension is projected to increase the federal debt by $5 trillion over the next ten year, totally offsetting Musk’s projected annual budget cuts.
Musk has also stated his intention to recruit hundreds of individuals now working for high tech companies who will be implanted in literally scores departments and agencies of the federal government. It will be their job to analyze the operations of the entities to which they will be assigned and to make recommendations as to ways to improve their efficiency. It’s currently anticipated that these high level recruits will serve without compensation for periods of up to six months.
Causes of Government Inefficiency
There’s no question that the departments and agencies within the federal government lack the fiscal efficiency of private enterprises. That’s primarily because the federal government is required to service the needs of all of its citizens, not just those able to pay the prices that private enterprises charge so they can operate at a profit. With more than 11% of Americans living below the poverty level, there is a substantial segment of the nation’s population that would remain largely under-served (if not, wholly unserved) by privately-owned companies. By contrast, the federal government is required to serve those who cannot afford to pay for its services, thereby causing it to absorb losses that private enterprises are free to avoid.
A related problem is that operations of the federal government must be large enough to accommodate the needs of the entire population which means that most of the time it must operate with excess capacity. By contrast, private enterprises enjoy the luxury of not having to maintain operating capacity required to service more business than they can reasonably expect will be sustained. The excess capacity which governments must maintain translates into higher capital costs as well as higher labor costs.
Adding to the inefficiency of governmental operations is the fact that governments are not free to make operating decisions based solely on economic considerations. Government agencies are controlled by legislatures which base their decisions on political considerations as well as fiscal considerations. The vast majority of American taxpayers feel that they are overtaxed which causes them to apply constant pressure on their legislatures to keep governmental expenditures at a minimum. In addition, there are many Americans who deeply resent governmental expenditures from which they derive no benefit. This adds to the pressure on Congress to minimize its fiscal allocations to the departments and agencies of the federal government.
As a result of these financial pressures, most government departments and agencies are forced to operate with antiquated technology and lower paid personnel. These factors add to the inefficiency of the federal government. The federal government is also compelled to operate under a plethora of civil service regulations which means that government employment is not attractive to many highly qualified individuals and the government is restricted from terminating employees who are not sufficiently motivated.
An even more invidious problem faced by the federal governments is that those placed in charge of conducting its operations are highly susceptible to bribery which can result in government contracts being awarded to unqualified companies and/or at excessive prices. It’s amazing how many politicians are absolutely eager to pursue a low-paying government job who emerge from their government services far wealthier than their peers.
On the other side of the equation are corporations and business executives willing to contribute tens of millions of dollars to the political campaigns of high ranking government officials ostensibly for the sheer pleasure of having their phone calls returned by the beneficiaries of their largess. Of course, there are laws prohibiting government employees from accepting bribes, but Clarence Thomas will tell you that there is nothing illegal or even immoral with accepting luxury vacations paid for by someone who can benefit from his decisions. Nor will Donald Trump tell you that there is anything wrong with promising business executives that he will reduce regulations impairing their companies’ profitability in return for campaign contributions totaling hundreds of millions of dollars.
Considering these sources of inefficiency in the operations of our federal government, what changes can we expect the DOGE to recommend? Based upon the statements made by Trump and his associates, their cost-reduction efforts will take place on five levels: reducing the number of employees, reducing other program costs, eliminating federal programs, and abolishing entire agencies and departments.
Reducing the Number of Employees
Both Musk and Ramaswamy have complained that the departments and agencies of the federal government are bloated with excess employees. While there may be some truth to these allegations, what they perceive as excess employees may simply be the excess capacity that the government must maintain to be able to respond in an emergency. You can only imagine the outcry that would be triggered if the government had to admit that it simply lacked the resources to address a problem which was clearly foreseeable. In this connection, the government must act like an insurer being willing to accept unusual expenditures affecting a limited number of its citizens by spreading the costs to the population as a whole.
Nevertheless, high on DOGE’s agenda will likely be efforts to make the operations of the federal government more efficient by upgrading the technology utilized by the federal government. That’s because both Musk and the individuals he is recruiting are steeped in the development of high-tech systems and software. Such systems could not only enable the federal government to expand its operations but to do so with far fewer employees, reducing both its current and future operating costs. The greater reliance on technology will also make government employees work more proficiently as well as faster which will help to offset the government’s limited ability to attract the best and brightest individuals.
Upgrading the information systems utilized by the federal government will require investments of many billions of dollars; however, considering the reductions in operating costs they will likely enable, those investments could pay for themselves in as little as five to ten years. Choosing which systems to buy, however, poses conflicts of interests (not to mention bribery opportunities). That’s because DOGE will be relying on the advice of employees of the very companies that produce the systems they will be recommending. Perhaps more importantly, those same companies will also be engaged to service those systems; and the servicing costs may be many times the costs of purchasing them. That should answer the question of why Musk is having no trouble recruiting individuals willing to volunteer their services.
Another problem is whether the federal government will simply be able to terminate those civil servants whose employment will be rendered unnecessary by the new technology. Whereas Musk was able to terminate 90% of the employees of Twitter (now “X”) shortly after he acquired that company, trying to terminate thousands of civil servants with a strong union sounds like an invitation to protracted, ugly and costly legal proceedings. To prevent this from happening, Musk has suggested that dismissed employees receive severance pay equal to twice their annual salaries. To say the least, that will be a very bitter pill for Congress to swallow. Although there have been suggestions that government employee unions be outlawed, that proposal does not seem politically feasible even considering Trump’s own dislike of employee unions and his strong hold on his Republican-controlled Congress.
On the other hand, the alternative is not particularly attractive. That’s because unless new employment can be found for the terminated employees, the federal government will suffer a loss in income tax revenues and high unemployment compensation costs. The bottom line is that while upgrading the federal government’s information systems makes economic sense, it will entail a lot of up-front costs and will not be achieved without a significant level of chaos and collateral expenditures.
President Trump has threatened to terminate all employees not deemed to be sufficiently loyal to him. While it may give him personal satisfaction, such an effort will not have a material impact on reducing the expenses of the federal government. Moreover, it may have the opposite result because their replacements will likely lack the accumulated knowledge and experience of those whose employment will have been terminated.
Reducing Other Program Costs
In order to make a major dent in the annual deficits being incurred by the federal government, cuts will have to be made in programs of substantial magnitude. At the top of that list are Social Security, Medicare, Medicaid, and VA Healthcare programs, the combined annual cost of which currently total $2.575 trillion or roughly 38 % of the federal government’s current $6.75 trillion fiscal budget. While fraud and waste does take place in these programs, efforts to eliminate those losses may prove counter-productive (see, “Eliminating Fraud, Waste & Inefficiency”).
A more fruitful (and rational) approach would be to tighten the eligibility parameters of the Social Security program. That program faces a sustainability problem as a result of our nation’s changing demographics, making it a source of increasing fiscal deficits (see, “Our National Debt”). The problem with reducing its scope is that it has roughly 71 millions beneficiaries and a potentially larger number of future beneficiaries. As a result, any restrictions on its availability will undoubtedly pose serious political issues. This would be particularly true if such changes are perceived as being made to offset the deficits that would be generated by Trump’s plan to extend the tax cuts he enacted in 2017. Those tax cuts heavily favor the wealthy who really don’t need Social Security benefits to sustain themselves after they retire. If the lack of courage demonstrated by Republican senators in evaluating Trump’s more unqualified Cabinet nominees is any indication, it would appear that at least several Republican senators will lack the courage to support any significant changes in this politically sensitive program.
Cutting the three major healthcare programs (Medicare, Medicaid and VA Healthcare) are programs whose costs are largely outside the control of the agencies that oversee them. By any standard, healthcare costs in the U.S. are far higher on a per capita basis than in any other developed nation and are roughly twice as high as they are in most other developed nations (see “Our Sick Healthcare System”). The big difference is that other developed nations have government-run healthcare systems. While those systems not only have lower operating costs, in many respects they achieve better results. On the other hand, our privately-run healthcare system tends to be more advanced. It also works better for the wealthy than the systems in other countries and worse for our nation’s poorer citizens than for their counterparts in other developed countries.
The recently enacted Inflation Reduction Act allows the Medicare Program (the nation’s largest healthcare insurer) to negotiate the prices of a limited number of prescription drugs. While this clearly has a positive impact on lowering the costs of these three major governmental healthcare insurance programs, the problem is that this authority is limited to ten drugs and prescription drug costs only represent roughly 11% of total healthcare costs in the U.S. Considering the fact that healthcare costs funded by the federal government represent 15% of all federal spending, this should (but unlikely will) be an area of great concern to the incoming Trump administration.
Another frequent cry for cutting government spending is to reduce farm subsidies. The problem is that the Department of Agriculture (DOA) has a strong lobby in Congress, especially among Republican senators and House members who represent states whose economies are significantly based on farming. As a result, notwithstanding such cries, in recent years farm subsidies have been increased, not decreased. It also should be recalled that Congress answered Trump’s call to bestow $28 billion on farmers who were injured by the tariff war he conducted with China during his first term. Considering the Republicans’ tenuous hold on both the House and Senate, this proposal seems highly unlikely to be enacted.
A more promising strategy for reducing program costs would be to change the way the federal government deals with outside contractors. Indeed, scores of programs funded by the federal government rely upon the services of outside contractors. In 2023 the federal government paid outside contractors (principally defense contractors) more than $750 billion. Reductions in the operating costs of those programs could be achieved by tightening the regulations for negotiating the contracts under which these services are performed.
Although the federal government already has a panoply of regulations governing the retention of outside contractors, it still makes extensive use of cost-plus agreements (i.e., agreements under which the contractor is entitled to receive a specified percentage over the costs it incurs in fulfilling its contractual obligations). This practice encourages government contractors to be inefficient. It took Elon Musk to prove to NASA just how wasteful this practice is. A greater use of fixed-fee agreements would go a long way toward eliminating this source of waste.
Another significant source of waste in government contracts is cost over-runs. That frequently happens in projects for the creation of new systems (like novel military aircraft or defense systems). The problem is that neither the contracting agency nor the selected contractor is able to fully foresee all of the problems that may be encountered in creating those systems. As a result, there may be numerous changes to the original design before the project is successfully completed. Under such circumstances, the government, which may have already committed hundreds of millions of dollars to the project, has little bargaining power in negotiating the costs of overcoming the “unforeseen” problems. This creates an incentive for government contractors, who invariably possess greater expertise than the contracting agency, not to raise potential issues when negotiating the original contract so they can enhance their profitability in negotiating the price of contract changes.
Other problems associated with the administration government contracts may arise as a result of collusion among employees of government contractors and those of the contracting agency. With respect to programs with annual budgets over a threshold amount, those problems as well as the actual quality of the services provided should be monitored by Inspector Generals who would not be subject to removal by the agency or department employing them or even by the President. In addition, they should be mandated to report directly to the Congress which alone would have the power to remove them for cause. As a further safeguard, whistle blowers within the contracting agency or department should be eligible to receive bounties awarded by the Congress for reporting misconduct as well as immunity from termination by the contracting agency or department. While this is a promising strategy for curbing wasteful spending, it might not meet with the approval of President Trump who terminated several Inspector Generals during his first term in an effort to prevent them (and to discourage other IGs) from reporting their findings to the Congress.
Elon Musk, along with countless other conservatives, has also called for federal agencies to drop their Diversity, Equality and Inclusion (DEI) policies as a means of achieving greater efficiency. Although Musk estimated that the elimination of DEI policies would save $120 billion annually, it’s not at all clear that anything will actually be achieved by dropping DEI policies other than to arouse the prejudices of MAGA supporters. There have also been suggestions to cut the budgets of the IRS, the FTC and other government agencies which conservative groups find an annoyance. These suggestions are also typically based on ideological, rather than economic, considerations.
Eliminating Entire Programs
When he first took office in 2017 President Trump identified 62 federal government programs that he wished to eliminate. These included the Community Development Block Grant Program run by the Department of Housing and Urban Development (or HUD), HUD’s Weatherization Assistance Program, HUD’s Low-Income Home Energy Assistance Program, the National Endowment for the Arts, and the Corporation for Public Broadcasting. While Trump was successful in reducing the budgets of many of the programs he targeted, these and most of the others are still in existence largely because the Congress was simply unwilling to abolish them. Although Trump now has greater control over Congress than he did in 2017, it’s still unclear whether a renewed effort will be any more successful in his new administration.
Among the larger programs now being targeted for elimination is the Supplemental Nutrition Assistance Program(or “SNAP”) conducted by the Department of Agriculture (DOA). This program (formerly referred to as the “Food Stamp Program”) has an annual budget of roughly $120 billion which it uses to provides assistance to roughly 40 million Americans living in poverty (the vast majority of which include families with children and/or a person with disabilities). That assistance enables them to obtain their nutritional needs and lead productive lives.
The suggestions that the SNAP program be eliminated or transferred to the states, like so many other programs now being targeted for extinction, does not enjoy a sound economic basis. Rather, it’s simply a crass political suggestion designed to appeal to the prejudices of those individuals who resent that their tax dollars are being used to support those whom they perceive to be too lazy to provide for themselves and their families. More importantly, the suggestions that this program be turned over to the states, while removing billions from the annual budgets of the federal government, would clearly be counter-productive. If implemented, it would require 50 separate state agencies to perform the tasks now being performed by the DOA.
In addition, much of the assistance provided under the SNAP program is in the form of foods items purchased by the DOA from American farmers, a function not particularly well-suited for administration by the individual states. This would force them to bid against each other, raising their collective costs. While many critics of the SNAP program view it as simply helping poor urban families, the fact is that the DOA’s purchases of surplus agricultural products is also a boon to rural farm communities. This, in part, explains its overall popularity in the Congress
The conservative CATO Institute has made a number of other suggestions for cutting federal expenditures including privatizing the U.S. Postal Service and U.S. owned electric utilities, the air traffic control system, and other activities which they claim could be performed more efficiently by private enterprises. As discussed above, the functions performed by each of these programs is a public responsibility which should therefore conducted by entities which have a duty to serve the public. That responsibility transcends any duty a private enterprise might owe to its shareholders. Even if private companies could be compelled to serve all members of the public they might still price their services beyond the fiscal capacities of the individuals and companies they serve.
There are, of course, many programs maintained by the federal government which are continued out of sheer inertia; i.e. having once been established, they take on a life of their own and are not easily eliminated. In addition, there are also a number of federal programs whose budgetary appropriations have been allowed to expire. Vivek Ramaswamy has suggested that the latter programs should not be renewed. While this bright-line approach seems reasonable on its face, in practice it may not always work. One example is the Veterans' Health Care Eligibility Reform Act of 1996 which hasn't been reauthorized since 1998 and currently provides $120 billion annually in healthcare benefits for millions of veterans. The mere fact that Congress continues to appropriate funding is significant evidence that the program continues to serve a useful function.
Eliminating Entire Federal Agencies
No one can even say with certainty just how many agencies exists within the federal government. The vast majority of them reside within the 15 Departments of the federal government. In addition, there are 56 independent regulatory agencies that reside outside of the executive branch. Each of these has been created by Congress in an effort to relieve itself of the job of micromanaging the many facets of the nation’s affairs. Surprisingly, they make more of the nation’s laws than the Congress. In total, these agencies have over 2 million employees.
A number of the federal regulatory agencies have been the subject of attacks seeking their elimination. They include the FBI, IRS, SEC, CFTC, CFBC, EPA, FCC and FTC. Such attacks are almost universally motivated out of self-interests and totally ignore the important work that these agencies perform and the beneficial aspects of their efforts.There is not even an argument that their functions could be more effectively, or even economically, performed by the states or private entities.
In addition, President Trump wants to eliminate 19 smaller agencies. Each of these agencies has a relatively small annual budget with the result that their elimination would only have a relatively minor impact of reducing federal spending. Moreover, it’s not that they don’t serve useful purposes; rather, it’s that they support objectives in which President Trump has little interest. One exception is Corporation for Public Broadcasting (with an annual budget of $550 million) which supports independent news agencies that broadcast information often in conflict with the disinformation disseminated by Fox News and other right-wing media outlets.
Eliminating Departments of the Federal Government
Over the years there have been numerous suggestions to eliminate entire departments within the federal government. It’s not that the services provided by those department are unnecessary, but in most cases the person(s) advocating their elimination believe that they could be more efficiently performed by state governments or by folding them into one or more other departments of the federal government and thereby eliminate duplicative efforts.
Suggestion that the functions of a department of the federal government be performed by another department within the federal government is not a novel suggestion as there have been at least a few reorganizations within the federal government wherein a department has been eliminated. In order to implement such a strategy, however, it’s necessary to do a study to determine the feasibility of any such reorganization, with particular emphasis on whether any important functions are being eliminated in the process.
The suggestion that functions currently being performed by the federal government should be turned over to the states is far more problematic for the reasons articulated above with respects to the elimination of the SNAP Program. One such proposal is President Trump’s continued calls of the elimination of the Department of Education (DOE) and the termination the employment of the DOE’s over 4,000 employees. He had tried to do this during in his first term in office, but Congress refused to accede to his requests.
To be sure, there is duplication between what the DOE does and what the states do in the area of education. The problem is that, without federal standards and oversight, vast differences in the scope and quality of education in the various states could arise, as some states might choose to allocate significant portions of their education budgets to private schools. This is what happened in the South when the Supreme Court ruled that state schools had to be integrated. The result was that public schools suffered in those states and individuals forced to attend underfunded public schools quickly fell behind their peers who attended private schools, thereby depriving them of an equal chance to succeed in life.
A similar problem is that without federal oversight some states might tailor their educational curricula to emphasize subjects which don’t adequately prepare their students to thrive in a changing world. The result would be that the state’s educational standards would decline and businesses in states that pursue that path would have difficulty in finding qualified workers and would relocate their operations to another state, thereby resulting in a decline in the state’s economy.
Similarly, some states might fail to comply with educational mandates imposed under U.S. law which are now being enforced by the DOE which has the power to withhold federal funding to state education departments. In the absence of the DOE, enforcement of those mandates would fall to the Department of Justice which would have to proceed via long and costly court proceedings to obtain compliance. This would render Congressional mandates largely ineffective and rob the Congress of the power to assure that all Americans receive a level of education needed to lead productive lives.
The Upshot
President Trump and his supporters have offered no shortage of suggestions as to how the expenses of the federal government might be reduced. Some of them hold significant promise for making the federal government more efficient. Others are wholly impractical and simply seem designed to appeal to the prejudices of their proponents’ voter base. A few can only be described as blatant efforts to further their proponents’ economic interests by transferring their own obligations to others.
Both Elon Musk and Vivek Ramaswamy have suggested that the $840 billion defense budget can be cut by roughly 15%, but their suggestions have not received any support from President Trump or from Republican members of Congress. That’s because virtually every state has companies that have contracts with the Department of Defense, rendering significant cuts in defense spending essentially out of reach.
Noticeably absent has been any mention of income tax increases which may be the best and quickest way to reduce budget deficits. Even though President Trump’s proposed plan to raise tariffs is a form of tax increase, that plan is so unpopular that even his most avid supporters have refrained from openly supporting it. Equally disturbing is the absence of any Republicans to speak out against Trump’s proposal to extend the TCJA which is projected to increase the nation’s indebtedness by $5 trillion. This includes those who constantly rail against fiscal deficits. The reality is that the self-proclaimed deficit hawks care little about deficits; they just object to our government's spending money to help Americans who are not among their supporters.
The big unanswered question is whether there are any Republican legislators with the political courage to actually take effective steps to reduce the nation’s deficits knowing that they will have adverse political repercussions. When it comes to reshaping the healthcare system and changing the eligibility requirements for the Social Security program, the answer seems to be a clear and resounding “No.”.
On the other hand, there’s real hope that they will undertake to make the departments and agencies of the federal government more efficient by upgrading their information systems. There is also a real possibility that they will consolidate duplicative functions within the sprawling federal bureaucracy. While this may not provide major cost savings, it will have the appearance of progress and in politics that may be just as important. Less likely is the possibility they will cut seemingly superfluous personnel required to meet emergency situations. The very possibility of getting caught with their fiscal pants down seems like a risk they will be unwilling to take.
At the very least all of the changes now being proposed will surely keep Congressional Republicans busy –hopefully, too busy to continue playing the political games that have been occupying them for the past four years.