Cutting the US Deficit Is Easy — It’s Just Unpopular
Earlier this month, US legislators from both parties agreed on a plan to keep the government funded until March. Then Elon Musk, co-head of president-elect Donald Trump’s Department of Government Efficiency (DOGE) demanded that the 1547-page bill be scuttled. “Either there is massive change or America goes bankrupt,” he wrote on X.
When congress passed a slimmed-down 118-page bill last week, Musk posted to his followers: “Your actions turned a bill that weighed pounds into a bill that weighed ounces!”
But slim isn’t the same as cheap. The bill still included an eye-watering $US100bn ($160bn) for disaster relief and $US10bn for farmers. Separately, the Senate, on a bipartisan basis, agreed to boost Social Security benefits for some public-sector employees. The bill was just three pages long but will cost nearly $US200bn over 10 years.
The federal deficit reached $US1.8 trillion, or 6.4 per cent of GDP, last fiscal year, a record outside of war, recession or emergency. Musk and Trump have promised to attack it by cutting federal spending. One simple step would be to stop adding to it. And yet last week neither stood in the way of congress’s largesse. Musk posted in favour of the money for disaster victims and farmers. The vice president-elect, JD Vance, co-sponsored the Social Security expansion.
The reason is obvious: Spending is popular with voters and both parties. This is why commissions, think tanks and earnest outsiders have been papering Washington for decades with ideas to cut spending and the deficit – and mostly gotten nowhere.
Will this time be any different? Musk certainly brings sizzle and a soapbox that the typical think tank lacks. He claims he can slash federal spending, which was $US6.75 trillion last year, by at least $US2 trillion.
And yet to date DOGE’s ideas mostly revolve around firing civil servants, closing or merging agencies and cutting regulations. Whether this makes the government more efficient, it won’t save much money. Salaries for all civil servants cost about $US200bn-$US250bn a year – or roughly an eighth of the deficit – and more than 60 per cent of them work for military or security-related agencies, the functions Trump plans to beef up.
Moreover, some savings from shrinking the civil service could be illusory. Fewer Internal Revenue Service agents means less tax collected, for example.
The reality is that the big money isn’t tied up in the people who work for the government, but in the cheques they send out. And the cheques are much more popular than the people.
For example, the Education Department, perennially marked for extinction by Republicans, spent more than half last year’s $US274bn budget on loans and grants to students. The Transportation Department spent half its $US117bon budget on cheques, mostly to state and local governments, for highways, bridges and other infrastructure.
Federal spending
US Federal spending falls into three categories. First, interest on the debt, at $US882bn last year. Not much you can do about that without defaulting. Second, discretionary spending, which gets authorised each year by congress. This is what last week’s funding fight was about. It covers defence plus most of the federal services Americans encounter day to day, from the National Park Service to the National Weather Service.
Third, mandatory spending: this is for programs that continue each year without new authorisation, including Social Security, Medicare, Medicaid, Affordable Care Act subsidies, food stamps, welfare, child tax credits, veterans’ benefits and pensions.
At $US4.1 trillion, mandatory is more than double discretionary spending and, because of population ageing and health costs, growing much faster.
Some efficiency evangelists claim mandatory programs can be run much more cheaply. Medicare, for instance, spent $US12bn last year on administrative expenses. Can that be reduced? Maybe. But it’s just 1 per cent of total costs, compared with 12 per cent or more at private insurers.
Trump’s opportunity
So taming mandatory spending means reining in benefits. Fundamentally rewriting social programs is mostly a job for congress, and indeed Republicans on Capitol Hill are considering a 10-year budget plan that ties mandatory spending cuts of $US2.5 trillion to extending Trump’s 2017 tax cut.
But Trump can also cut mandatory spending unilaterally. There’s a misconception that because such spending is mostly determined by the authorising law, it’s on autopilot. In fact, presidents have a lot of discretion in how they interpret the law.
Perhaps no president has exercised this discretion as brazenly as President Joe Biden. He reversed an Obama-era interpretation of the Affordable Care Act to expand subsidies to families, at a projected 10-year cost of $US34bn. Treasury’s liberal interpretation of who qualifies for clean-energy tax credits in the Inflation Reduction Act (effectively, though not technically, a form of mandatory spending) added about $US300bn to the law’s 10-year cost, according to the non-partisan Penn Wharton Budget Model, or PWBM.
In a way, Biden did Trump a favour: The new president can restrain deficits unilaterally by undoing Biden’s executive actions. The nonpartisan Committee for a Responsible Federal Budget has identified up to $US1.4 trillion in such potential savings. Some, like student debt cancellation, have already been halted by courts, but plenty of others remain.
Last month, Biden handed Trump a golden opportunity when he proposed that Medicare and Medicaid cover anti-obesity drugs. Biden officials say this would cost $US36bn over a decade, but PWBM puts the cost at $US140bn.
The rule can’t be completed until after Trump’s inauguration, which means he can prevent up to $US140bn in new federal spending by simply not implementing the rule.
This wouldn’t be popular: Polls show a majority of voters want Medicare to cover anti-obesity drugs, as do 120 legislators from both parties. Trump’s nominees have sent mixed signals. Trump has regularly promised not to cut existing Medicare benefits. And during the campaign he promised to make in vitro fertilisation free, potentially saddling federal health programs with huge costs.
Trump, a populist, has built his economic platform around avoiding unpopular choices. If he’s going to make good on his promise of slashing the deficit while cutting taxes, he’ll have to do some unpopular things.
The Wall Street Journal
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