Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared at Project Syndicate and the Guardian.

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Nov. 24, 2024 –When the US election was called for Donald Trump the night of November 5, the stock market rose but the bond market fell.  The yield on 10-year US government bonds increased from 4.3 % to 4.4%,  while the 30 year yield increased from 4.5 % to 4.6%, where they remained 10 days later.  The long-term rates had been below 4.0 % in September.  The combination – stock market up but bond market down – strongly suggests that the news of Trump’s victory was seen as implying higher government budget deficits and debt numbers in the future.

Little wonder.  Candidate Trump had promised tax cuts seemingly to every audience that he spoke to. The central estimate by the Committee for a Responsible Budget is that Trump’s tax proposals would add up to lost revenue of $10 trillion over the next ten years.  Add another $ 1 trillion for extra interest incurred on the national debt.  This is far too much to be offset by the $3 trillion from sky-high tariffs that Trump proposes.  The net cost of the tax policy changes is $8 trillion.  The federal government will be selling a whole lot of bonds  That will work to keep their price low and interest rates high.  (Kamala Harris’ economic plans were also seen as widening the budget deficit, but by far less.)

The party line is that the lost tax revenue will be offset by spending cuts.   Often Republicans go on to say they want to balance the budget.  True, Trump has not recently repeated his 2016  promise to run budget surpluses so large that they would pay off the national debt by the end of his second term.  (In the event, he actually added $8 trillion to the national debt during his first term.  By comparison, all previous presidents combined had accumulated $28 trillion.)   But we are only talking here about the goal of halting the rise in the debt, i.e., balancing the budget — nothing so ambitious as paying down the debt.

1. Department of Government Efficiency

Trump on November 12 announced that Elon Musk and Vivek Ramaswamy would head up a new Department of Government Efficiency, to help cut waste, fraud, and abuse in the federal budget.  The President-elect called it a new “Manhattan Project.”  When Musk was asked by  transition team co-chair Howard Lutnick, “How much do you think we can rip out of this wasted, $6.5 trillion Harris-Biden budget?” Musk’s reply was “at least $ 2 trillion.”  That’s $ 2 trillion per year.  Or 31 % of the $6.5 trillion total of US spending.  Or 7 % of GDP [= $ 2 trillion / $28 trillion].

If there were in reality $ 2 trillion of government waste that could be cut, that would indeed pay for the tax cuts that Trump proposes.  But there isn’t.

Although the clueless name of the new institution makes it sound like a department of the government, the DOGE is only to be an advisory commission.  It will have little effect.   Even though the Republicans will have control of all branches of government during the second Trump term, there is little likelihood that the goals of the Musk-Ramaswami DOGE will be put into action.  They might not even reach the stage of specific actionable policy proposals.  But let’s waive the question of the commission’s efficacy and waive as well the massive plain-to-see ethical conflicts which the DOGE would create for Elon Musk.  Let us look rather into that claim that there is $ 2 trillion of spending that could be saved.

After all, it is true that the US budget deficits need to be brought back down to earth.     They are currently running in excess of 6 % of GDP.   As a result, the national debt is on an unsustainable path, defined as an ever-rising path as a share of GDP.   Debt/GDP has climbed steadily since 1981, except for temporary declines in 1995-2000 and 2021-22.  As of 2024, the ratio of gross debt to GDP has surpassed the previous historical record of 1946, at the end of World War II.  On the current trajectory, it will rise even more rapidly from here on out.

2. We have all been here before

There is by now a 45-year tradition of Republican presidents making sweeping promises to cut government spending, which they claim will more than offset revenue lost from tax cuts, but then failing completely to achieve them.  It is even a tradition to appoint toothless advisory commissions of businesspeople.

Ronald Reagan promised to eliminate waste, fraud and abuse in the federal budget, and to cut spending by enough to offset any loss in revenue from tax cuts, thereby reducing the national debt, “beginning today.”    He did not.   Rather, spending increased.   Together with large tax cuts, the budget deficit rose sharply.  As a result, Reagan’s two terms tripled the national debt that he had inherited from Jimmy Carter.   The story was similar under Presidents George W. Bush and Trump.

So how much does the Trump Administration propose to cut now?  Republicans often say they want to slash federal spending, but without cutting the mandatory programs, so-called entitlement spending — Social Security, Medicare, and other health-care.  This exclusion forecloses any serious effort to balance the budget.  Major entitlement programs accounted for half of all federal spending  in 2023, or 61 % of spending if farm-price support and other income-support programs are included. This mandatory spending will only continue to rise in the future, as retired people make up an increasing share of the population.

Moreover, interest payments, which are running at 13 % of total spending, are not optional.  Cutting those would mean defaulting on the national debt. Republicans don’t want to do that.  (At least, most of them don’t want to do that.  Trump has reveled in his ability to default on debts, having declared business bankruptcy six times.)   Indeed, the interest bill is likely to continue rising, as debt is rolled over at interest rates well above the rock-bottom rates of 5 or 10 years ago.

What is left is discretionary spending.  It is about 25% of total spending.  But most Republicans don’t want to cut defense, which is roughly half of discretionary spending and so 12 % of total spending.

3. Cutting non-defense discretionary spending

That leaves only non-defense discretionary spending that Republicans want to cut.  It accounts for only 14% of total government spending.  Can Musk and Trump achieve their goals by finding enough savings in this part of the budget?

Let’s try out some draconian cuts. Trump says he wants to eliminate the Department of Education.  It is hard to know how much of spending on education and training is wasteful.  But for the sake of argument, let’s assume that all of it is zeroed out, wasteful or not.  That constitutes 4 % of total spending.

Foreign aid is 1 % of federal spending, though many voters are under the impression that it is far higher.  The largest category is military aid to Israel.   Humanitarian assistance, such as famine relief, to all countries, is only one fifth of the total (much of which is spent on the output of American farmers and firms).   But let’s see what would happen if all foreign aid were ended.

Two percent of spending goes to the Federal Aeronautics Agency and all other federal transportation programs.   Hard to imagine eliminating that, but let’s go ahead anyway.

So far, we have cut a total of 7 % of spending.  But let’s also zero out the National Parks and everything else that the Interior Department does,  the National Weather Service and everything else the Commerce Department does, and so on.  In fact, let’s imagine that we somehow eliminate all of the 14 % of spending that is non-defense discretionary.  That would still not be enough to achieve the mirage of $ 2 trillion in savings that Musk claims he could achieve, equaling 31 % of total spending or 7 % of GDP, let alone to pay for Trump’s tax cuts and balance the budget.   No matter how broadly one defines waste, fraud and abuse, there is simply not enough money to be saved.

Instead, what will happen under Trump’s tax cuts is a day of reckoning, not too many years into the future, when financial markets come to appreciate the unsustainability of the debt.  At that time, Social Security and other entitlement spending will be cut sharply, more sharply than if it were done today or if taxes were not cut further today.

Supporters often say that a businessman like Trump or Musk will know how to bring fiscal order to the national budget.  But the smart money says that they don’t know what they are doing.

 

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This post written by Jeffrey Frankel.