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.
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.
- 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.
- 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.
- 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.
This post written by Jeffrey Frankel.
Isn’t it rather ironic that Elon Musk, the recipient of more government welfare than any other person in history is tasked with budget cutting? Without the tens of billions of government handouts, Tesla, SpaceX and Solar City would never have been possible and Musk would not be the richest person in the world. And this champion welfare queen has the gall to say that we must all suffer the pain of cuts.
Remember that Elon Musk, who was not the founder of Tesla no matter what his lawyers say, bought into the company with $5 million while the Obama Administration put in $500 million — 100 times as much as Musk. This money is what enabled the nascent company to design and produce its first production car, the Model S. And then later when the company was again on the verge of bankruptcy trying to bring to market its first real mass production car, the Model 3, it was the billions in government carbon credits which saved the company.
SpaceX was only possible because of government money which enabled it to design its first Falcon 9 rocket. And Solar City — more government tax credits.
A simple rule of thumb, not just for government, but for most areas of endeavor, is that the easy stuff has already been done. Sometimes, you find a fifty on the sidewalk, but not often. That’s why so many small businesses fail, why compromise is so often needed. It’s also why R&D often pays big dividends – new knowledge allows for new things to become “easy” for a while.
So when politicians say they cut down on waste, fraud and abuse enough to make a difference in the budget, they’re probably lying. When they say they’ll save $2 trillion through improvements in efficiency (Department of Government Efficiency, for instance), they are probably lying. The easy savings have already been done.
That’s not to say great improvements can’t be made. Simply hire lots of auditors, train them to understand, in detail, the functions of the governmental functions they’ll audit, give them broad powers to change operations, and make their roles permanent. My guess is, they could pay for themselves, plus a little. Over time, the savings would mount up – many littles equal a lot. But none of the “I’ll root out waste, fraud and abuse” guys have ever done this. Which means they are either ignorant or dishonest – same choice as always.
Now, there is another purpose for a DOGE-like effort. That is to provide cover for eliminating government functions you don’t like – the EPA if you’re a big polluter, the Consumer Financial Protection Bureau if you are in consumer finance, the Department of Education if you hate educational standards – talking to you, Tennessee, Louisiana, Mississippi, West Virginia… or if you hate Title IX. This isn’t really a matter if saving money, but rather a matter of allowing negative externalities to spill out all over the place, to allow private gain while socializing risk, to create winners and losers according to your own preference.
Musk would need to shutter entire programs in the discretionary side of the federal budget/execution.
In the case of DoD Musk could say: “why have the forces to fight two big wars at once when US does not have the logistics to do both wars at once. That could close 40% of the pentagon budget, do it fast like 1946!
That would be close to $400 billion per year………
Over 5 years $2 trillion.
If Musk goes for only “common defense”, the reuctions would be more.
What about the layoffs?
No.
So let’s assume Team Trump can find and execute $2T per year in cuts to match $2T per year in lower tax revenues. That might be budget neutral, but it’s not macroeconomically neutral. Menzie can correct me, but as I understand the arithmetic of the balanced budget multiplier, expenditure cuts that match tax cuts would still be contractionary.
It’s also apparent that the DOGE guys don’t have a clue how government appropriates, obligates and disburses. Weapon system and military construction have authorization lifespans of 3 to 5 years and another 5 years beyond that before Treasury disburses actual payments. For example, a Congressionally authorized construction of an aircraft carrier in FY2024 may not show up as an actual Treasury disbursement until FY2033. And programs authorized by President Trump in FY2020 will still be awaiting Treasury disbursements long after Trump finishes his second term. Cutting budget appropriations is one thing; cutting actual Treasury disbursements is something else again.
“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. ”
That is a feature of republicans, and trump in particular. the day of reckoning will be on somebody else’s watch. if that is the case, trump really has zero concern. he has no concern about the future, beyond his own pocketbook. this is what allows him to make some of the egregious decisions that he makes. the future does not bother him, but he knows it can be used to rile up his supporters. trump will have no problem bankrupting social security and medicare in 15 years, if it gives him what he wants today. he just makes sure to bargain with people who are concerned about the future. gives him extra leverage.
It looks like there is quite a lot of jockeying for what will be US policy.
I don’t see Trump making meaningful cuts in key programs. I think a transition to tariffs is hugely complicated and regressive, to boot. Thus, those who pay a lower share of their income in taxes will find price rises in imported goods to be painful. The rich, who consume less of their income, will find tariffs comparatively beneficial. I don’t see the political support congealing for a transition to tariff funding of the Federal budget.
So I think Trump just tries to borrow more, and the more technocratic voices like Musk and Lutnick will be marginalized. The problem, of course, is interest rates.
There are, I think, three theories for very low interest rates in the US.
1. The first of these sees a secular declining trend driven by either demographics or diminishing opportunities for investment in fixed assets since, say, the early 1980s.
2. The second sees lower interest rates as a function of the dislocations of the China Depression (the GFC, Great Recession and its aftermath to 2017).
3. The third sees lower interest rates linked to the rise of China and excess savings generated there cascading throughout global credit markets.
I think 1. was the principal driver behind analysts like Paul Krugman and Claudie Sahm who called for vastly increased borrowings because money was, in effect, all but free. If we accept that narrative, then Trump should have room to increase borrowings. Interest rates will decline as the dislocations of the pandemic era ease.
If 2. or 3. are right, then it’s potentially a quite different story. The China Depression and the Pandemic Era are both over, or at least ending. If interest rate distortions were caused by these, then we should see some reversion to mean. I would guess that would put the yield on 10 year treasuries around 4.5%, pretty close to their current level and about the same as during the first decade of the 2000s. The effective rate on US borrowings is 3.4% per the CBO, about 1% less the current 10 year yield. Therefore, I think interest expense will rise as a function of refinancing existing US government debt.
Similarly, if China’s surpluses were the cause of low interest rates, then China’s current situation speaks to a diminution of savings available to the global market. The good times are ending there.
Thus, if 2. or 3. are right, then effective interest rate on US debt, in percentage terms, is likely to remain stable or rise. That means further deficits have to be paid from real money, and the US’s borrowing capacity will be constrained. Alternatively, the Trump administration may test the upper limits of borrowing, Argentine style. I think the political impulse will be to continue to increase borrowing, leading to a deterioration, rather than improvement, in the US fiscal condition.
Here’s Secretary of the Treasury appointee Scott Bessent on the Larry Kudlow show today:
Bessent: “Tariffs can’t be inflationary because if the price of one thing goes up, unless you give people more money, then they have less money to spend on the other thing, so there is no inflation.”
Who knew inflation was so simple? Gas prices go up, people buy less food so no inflation. Food goes up, people buy fewer clothes so there is no inflation.
Bessent: “The inflation comes through either increasing the money supply or increasing the government spending”.
Okay, he’s a Friedman quantity of money guy, I guess.
And Bessent is supposed to be the smart one Trump appointed. We are in big trouble if this is the smartest Trump has to offer.
Okay, Bessent’s comment was really stupid; but there is a sense in which tariffs are not inflationary. While tariffs do raise the price level, tariffs are usually seen as a one-time level shift rather than a source of price inertia.
So it’s transitory? (whew!) That’ll please the voters.
Well then, I suppose the pandemic supply chain disruptions weren’t inflationary because people just bought fewer other items and their prices fell. And the 70s oil embargo wasn’t inflationary because it was just a one-time shift.
You’ll notice that I used the weasel worded phrase “a sense in which tariffs are not inflationary.” That wasn’t an accident. Quite a few mainstream economists prefer to emphasize price inertia as inflationary rather than just a jump in the price level. And while that distinction might not matter in the minds of voters, it does matter if you’re a policymaker. For example, if you sit on the FOMC and Trump’s tariffs cause a jump in the price level and if you believe tariffs are inflationary, then the appropriate policy response would be to raise interest rates. I doubt that very many FOMC members would see things that way, so presumably they would focus on the extent to which tariffs contribute to price inertia. As an example, suppose Trump’s tariffs increase 2025 prices by 10 percent (just a made- up number for illustrative purposes). Under “inflation as price inertia” next year’s price should also be 10 percent higher than the 2025 price level; and the 2027 price level should be 10 percent higher than the 2026 price level. But if tariffs do not contribute to price inertia, then we should see disinflation (not deflation!) as the 2026 price level falls to 5 percent and eventually returns to 2 percent.
In order for tariffs to be inflationary we would need some kind of mechanism that would lead to price inertia; e.g., cost push contracts, cost-of-living adjustments, retaliatory tariff wars, expansionary Fed policies, etc.
silly boy, you think trump is actually concerned about inflation? he is not. and this is nothing more than laying the ground work for another con by trump. he will convince his masses that inflation never occurred under his watch. just repeat after me. there is no inflation. there is no inflation. he got half the country to believe that inflation was running rampant (under 4%), the economy was a disaster (record stock market) and unemployment was out of control (at record low) during the election cycle. trump has realized the only reality is the one that he creates. control the narrative. it begins with tariffs are not inflationary.
as long as the media, blogs, and other outlets continue to allow misinformation, this is an effective gameplan. the reason I spend time chastising folks on this site, such as rick stryker, bruce hall, econned, corev and others is that allowing their misinfomration to go unchallenged results in the political world we are now dumped into. for example, rick stryker tried to argue that the coronavirus was not dangerous nor infectious early in the pandemic. his goal was not factual. it was to provide references for guys like trump to argue against taking action on the pandemic. it resulted in the death of millions. misinformation is dangerous, and practiced by several on this blog.
To your point here: From the consumer’s perspective, a real price increase is indistinguishable from inflation. I too believe inflation is a monetary phenomenon. But we can also have real price increases, and in fact, those hurt more, unless taxes are cut.
We’re not in 2017 anymore. I think the room for fiscal adventurism is much more constrained.
We are in big trouble.
What amazes me is the number of people who think a business mentality works in the government. The aims of a business are completely different from the aims of a government, for starters. That’s probably patently obvious to everyone here. It seems like it should be patently obvious to everyone, but it must not be. Look at corrupt regimes where the government operates monopolies in various parts of the economy. That never ends well. That’s also my take on the result of approaching government like it is a business, never mind what the corrupt regimes call it.
Interesting – now throw in more extreme and costly weather events into the mix.
It’s not more storms moving into where people are; it’s more people moving into where storms are.
https://www.nytimes.com/interactive/2024/09/30/climate/americans-moving-hurricane-wildfire-risk.html
That is just bad risk taking, not an argument for more government spending. People in Florida, for example, are rethinking their decisions as insurance companies refuse to insure certain locations. Rational people stay in Madison, Wisconsin rather than moving to Ft. Myers, Florida or Phoenix, Arizona just because winters are nicer. Build those bonfires (but not too many or Wisconsin will be the new Florida ).
Bruce Hall: I read the article, and I took from it that two factors are at work – first the movement to more vulnerable areas, but the second is the bigger events, e.g., the wildfires noted in the UW Madison study in the article. You’ll also note that in the graphic here:
https://www.ncei.noaa.gov/access/billions/#:~:text=2024%20in%20Progress%E2%80%A6,events%20(CPI%2Dadjusted).
a lot of Midwestern disasters. I’m pretty sure in the Midwest there’s not a fast growing population moving into more hurricane prone areas…
I’m pretty sure that an unusual weather pattern is not indicative of climate change.
We know that, even adjusted for inflation, the value of homes and commercial real estate has risen significantly in the past half century (just look at the square footage of homes as an example). Beyond size, people have moved out of central cities and so the population covers more geographical area in higher valued property. Any series of storms going through an area is likely to cause more damage in 2024 than 1974.
https://www.census.gov/content/dam/Census/programs-surveys/ahs/working-papers/Housing-by-Year-Built.pdf
Secondly, our ability to actually detect tornadoes has improved significantly over the past 30 years or so.
https://www.thv11.com/article/weather/improved-technology-detect-tornados/91-d4e95d18-80f0-455b-992f-c6404623795d
I agree that climate and weather are not static nor are they linear.
Regardless, this has little to do with eliminating frivolous and inefficient spending… whether that’s $200 billion or $2 trillion.
“It’s not more storms moving into where people are; it’s more people moving into where storms are.”
of course if population increases, they need to live somewhere. over time you will always find people move into riskier areas. supply and demand.
on the other hand, I do not think it is in dispute that the number of 100 year or 500 year (or longer return period) weather events are increasing. what that means is that an event that used to have a 100 year return period now has a 50 year or less return period. what used to be medium risk areas have now become higher risk areas, while people already lived in those locations. that is what is meant by climate change risk. areas that historically were medium risk have become high risk. it is not the fault of migration into those areas. they were already populated during a lower risk environment. Houston is an example. there has been a distinct shift in extreme rainfall events in the Houston area over the past decade. areas that rarely flooded in the past are now flooding with more frequency. hotter weather (as if Houston can get any hotter in the summer) holds more moisture potential, which results in more rainfall in shorter amounts of time. population growth adds to the problem. but it would not be an issue if the area risk had not increased do to climate change.
Sorry, but this is not a one or other situation. Both are true.
The idea that money growth CAN lead to inflation is well established. The idea that it MUST lead to inflation has been pretty completely debunked by the low inflation of the early 2000s. Fiscal policy, likewise, can lead to inflation, but need not. Again, the 2000s give evidence. And note, that means even the combination of expansionary fiscal policy and expansionary monetary policy needn’t cause inflation to accelerate.
In addition, we have now seen that today’s economy can suffer inflation as a result of a supply shock, just as was demonstrated in the 1970s with oil embargoes. Any claim that only demand-management policies can influence price levels is drivel. Hell, ask any Reaganite.
Bit there’s Bessent, arguing that the supply side cannot influence the general price level. Not a good start for a future Treasury Secretary. He is also arguing that the income effect will drive down prices on goods not under tariff to fully offset the general price effects of tariffs – no impact on quantity. That’s so inane that it cannot represent actual thought. Anyone who has ever thought one little bit about the Econ 101 supply-and-demand picture would know better.
This guy is leaking credibility at a tremendous rate.
Perhaps the issue is “It depends on what the meaning of the word ‘is’ is.”
Waste to some is looking at a process or program or organization and seeking to make it more efficient and effective. To others, it is looking at a process or program or organization and seeking to eliminate it. Most people focus on the former. Some on the latter.
Some, like the National Association of Manufacturers point to the burden of government as a cost to the economy while others would argue its a necessary social and safety cost. https://www.nam.org/wp-content/uploads/2023/11/NAM-3731-Crains-Study-R3-V2-FIN.pdf
It seems that there is little agreement on what is “waste”, so there can be little agreement on what is “cutting waste”. The GAO has made some recommendations regarding the simple strategy of eliminating fragmentation, overlap, and duplicative efforts. That should be the easy part. But given the entrenchment within the government, it is probably the difficult part.
https://www.gao.gov/duplication-cost-savings
https://files.gao.gov/reports/GAO-24-106915/index.html
No pgl? It’s all so shockingly civil.
Oh, great. Trump names Kevin Hassett for head of the National Economic Council.
Hassett’s DOW 36,000 was just stupid but his “Cubic Model” of Covid data implying that deaths would drop to zero by May of 2020 was down right criminal.
Hassett was working to back up his Dear Leader’s rosy projections which were used as justification to relax pandemic mitigation policies just as the real pandemic was getting started.
People died. Over a million. Thanks, Kevin.
Seems like kevin and rick stryker were sharing the same deadly covid analysis. Misinformation is deadly.