Elon Musk and Vivek Ramaswamy’s Department of Government Efficiency (DOGE) aims to slash federal spending by $2 trillion. While their bold vision faces ridiculeāespecially given Donald Trumpās tight deadline and DOGEās limited authorityāthe initiative underscores urgent fiscal challenges. The real challenge lies not in ideas but in navigating political obstacles.
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From The Economist, published under licence. The original article can be found on www.economist.com
Ā© 2024 The Economist Newspaper Limited. All rights reserved.
The Economist
How to make Elon Muskās budget-slashing dreams come true: We offer ways to do it ___STEADY_PAYWALL___
Elon Musk and Vivek Ramaswamy are keen to whip the American government into shape. On November 14th their newly created Department of Government Efficiency (DOGE) announced it wants to hire āsuper-high-IQ small-government revolutionariesā to get to work on cost-cutting. It is easy to ridicule the enterprise. Mr Musk has talked of ripping $2trn out of the federal budget; a cut of that magnitude, done swiftly, would leave public offices incapable of performing many basic functions and plunge the economy into a recession. Moreover, Donald Trump has given DOGE less than two years to get the job done. And the entity is a small advisory body, not an actual department, with a name inspired by a joke cryptocurrency.
But it would be a mistake to make light of DOGEās mission, because it does get at two essential truths. First, Americaās fiscal trajectory is unsustainable. The national debt is approaching 100% of GDP, up from 35% in 2007. With the federal deficit running at 6% of GDPāa level once associated with wars and economic downturnsādebts are bound only to climb higher, raising the risk of an eventual crisis. Second, the situation is not actually hopeless. There are plenty of ways that American officials can, in theory, put the country on a sounder fiscal footing (though getting budget cuts through Congress is another matter).
None of the small-government revolutionaries at The Economist has applied for a job at DOGE, as far as we know. But we do have a few suggestions. The key thing for the DOGE duo to realise is that they are not starting from scratch. There are already plenty of well-researched blueprints for sorting out Americaās finances. It is useful to break them into four categories: conventional spending cuts; tweaks to entitlement eligibility; changes to health-care spending; and tax reform.
Across-the-board spending cuts appear to be what Mr Musk and Mr Ramaswamy have mainly in mind when they rail against government waste. Yet there is an obvious problem. Consider the $6.8trn spent by the federal government last fiscal year. After excluding interest on existing debt as well as mandatory allocations to pensions and health insurance, just about 25%āor $1.8trnāremains. These are the discretionary funds at the heart of the annual budget process. Almost half goes to defence, which Mr Trump is loth to cut. So that leaves roughly $900bn allocated annually by the federal government to transport, education, science, national parks and law enforcement. There simply is not enough meat in this part of the budget to get close to DOGEās desired cuts.
Nevertheless, paring back discretionary spending ought to be part of the solution. It has grown by nearly a third since 2019, propelled by big increases during the covid-19 pandemic. Rather than making outright cuts, DOGE could call for strict caps on future discretionary allocations, a simple budgeting technique used on and off since the 1990s. If, for instance, discretionary-spending growth was capped at 2% per year (in line with expected inflation) until 2035, that would work out to a saving of about $500bn over the next decade relative to the forecast of the Congressional Budget Office (CBO), a non-partisan scorekeeper. That would be a good start.
Next is a recognition that America cannot fix its finances without tackling social security and Medicare, two giant programmes that together gobble up more than a third of the budget. Mr Trump vowed in his campaign platform that he would make no cuts to them. That should not stop DOGE from weighing the options. America is experiencing much the same demographic pressure as other rich countries: people are living longer, and assets meant to support them in their retirement are being stretched to cover more years. One response would be to raise the age of eligibility. To be sure, this would not be politically easy, as demonstrated by the backlash in France when Emmanuel Macron raised the retirement age there. But Mr Trump is no stranger to controversy.
The Penn Wharton Budget Model, a research group, examined the effects of delaying Medicare coverage to the age of 67 from 65. The change would be phased in by two months a year, so that it would take a dozen years to fully implement it. The savings would be about $50bn annually. Similarly, the Penn Wharton modellers looked at raising the age for full social-security benefits (in effect, a national pension) to 70 from 67. That would also reduce the governmentās obligations by about $50bn annually. Over the next decade the combined savings from these two delays to when programmes start would be around $1trn.
DOGE could then get to work on the governmentās broader health-care spending. States design and operate Medicaidāhealth insurance for lower-income Americansābut the federal government funds about two-thirds of it. This leads to a misalignment in incentives: the federal commitment is open-ended, so if spending at the state level rises, federal spending does, too. The CBO has examined potential tweaks. One would be to set a federal cap on payment per person enrolled. Were the cap to increase at the rate of inflation, it would reduce the federal deficit by almost $900bn over the next decade.
Much else can be done to reduce medical spending even more. There is ample evidence of waste in parts of Americaās fiendishly complex Medicare system. DOGE would do well to get acquainted with MedPAC, an independent commission that advises Congress on how to manage the health-care system. Among its many recommendations, it has called for closer scrutiny of billing, for more competitive bidding between providers, and for mandating that the same medical service costs basically the same at every facility (currently, hospital outpatient departments charge more than clinics). The Committee for a Responsible Federal Budget, a non-partisan group, totted up several such ideas and concluded that they could save the federal government about $550bn over a decade. And if Mr Trump were to build on the Biden administrationās efforts to negotiate lower prices for prescription drugs, there would be another $200bn-worth of savings.
If DOGE were truly courageous, its final target would be Americaās tax system. Given Mr Trumpās oft-professed desire to slash taxes, it is utterly unrealistic to expect him to raise them instead. But it would be irresponsible to look at Americaās fiscal health today without considering whether, and how, to generate more revenue. The good news is that the government does have options short of outright tax increases. Reducing tax deductions for health-insurance plans bought through employers could lower the deficit by at least $500bn over a decade, according to the CBO. Covid-era tax credits for companies that retained employees are, shockingly, still being processed; ending these would save another $80bn. And arguably the best investment the government can make in terms of its potential return is to modernise and strengthen the Internal Revenue Service (IRS), in order to crack down on fraud and make filing tax returns less onerous. If Mr Trump sustains funding increases approved by Mr Biden, tax collectors could bring in about $850bn in extra revenue over the next decade, according to the Treasury department. Alas, many Republicans would rather shrink the IRS.
Implementing all the various proposals laid out above would save the government about $4.5trn over the next decade. And there is much more that can be done: in a report in 2022 the CBO offered 76 different policy options for reducing the deficit. The main obstacle, therefore, is not intellectual firepower but political will. Budget cuts are never popular. Whatās more, the White House cannot act on any of this alone. Any serious fiscal policies must go through Congress. That may end up being the biggest test of DOGE and Mr Trump: not whether they can draw up cost-cutting proposals, but whether they can win the support of their fellow Republicans.
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