The US is experimenting with a new phenomenon. A rich, well-known entrepreneur who is pioneering electric cars and space travel has found the time to back Donald Trump and to volunteer to help the new administration.
Where we might have been expecting to see our screens full of Donald Trump assisted by Vice President JD Vance and the likely senior members of the new president’s cabinet, we see and hear more from a man who will take an advisory position – whilst at the same time running large global businesses. How will it work out?
Elon Musk has offered to set up and run DOGE, the Department of Government Efficiency. DOGE is also the name of a cryptocurrency Mr Musk has been promoting.
It may well be that when DOGE becomes part of the US administration’s architecture it will be given a more formal name and will not be a department. It seems to be emerging as an advisory committee that will work through the White House and the Office of Management and Budget. Assuming Mr Musk wishes to continue as the boss of his businesses, there would be issues about conflicts of interest if he was running an executive agency. It would also be an irony if the man brought in to cut back on departments and agencies began by setting up a new one.
At an enthusiastic Republican rally Mr Musk said he thought his advice could cut $2 trillion from the budget of $6.5 trillion. He envisages removing departments and agencies, reducing staff, and abolishing regulations that require plenty of staff to impose and administer.
There are suggestions of reducing the number of federal agencies from 400 to 100, though that presumably includes plenty of mergers rather than outright abolitions. He is joined by Vivek Ramaswamy, who also claims scope for large reductions in government staff and reach. They will be assisted by Katie Miller, wife of the Deputy White House Chief of Staff for Policy.
Why DOGE?
Governments of a wide range of parties and political persuasions like the idea of greater government efficiency. They want to spend more on front-line services and get more of the benefits of the spending to voters.
The Democrats back this approach when it comes to defence, with Vermont Senator Bernie Saunders an unlikely Musk ally when it comes to the Pentagon. To enthusiasts, it allows a government to spend more on what matters, have lower taxes and avoid excessive borrowing. To its critics it is an elusive alchemy that fails to force the pace of productivity improvements and usually fails to arrest the steady climb upwards in government costs and spending.
Few can deny the US need of it. Republicans want to cut taxes, Democrats want to spend more on transfer payments and services. Both, in office, have allowed the debt and deficit to surge. Democrats did not want to put up taxes on lower and middle earners, and Republicans find causes including defence where they need to spend more.
If President Trump and his team get good advice from Mr Musk that they can implement, then many governments will be beating a path to their door to see if they too can control costs better to relieve pressure for higher taxes. It would make it easier on bond markets to raise the money for all that extra borrowing. The Europeans and UK have an equally urgent need to rein in borrowing without cutting key services or pushing taxes up even further.
What could DOGE do?
DOGE could come up with plans for the wider public sector and Federal government that cut costs. There is a tool kit of well-known measures that have been tried from time to time, and some of them have been successful.
The committee can recommend abolition of departments and bodies, withdrawing the Federal government from the field. This is proposed for the Department of Education, where the schools and devolved government can run their own affairs without Federal intervention. This will require Congressional approval and would entail a redundancy programme with first year costs.
The committee can recommend amalgamation of bodies where there is overlap or related activities. That would remove the higher layers of management from the merging bodies, streamlining the overhead costs and allowing more unified action and responses.
The committee could recommend reductions in staffing, proposing a freeze on most recruitment or go further and seek redundancies.
There are rumours they are considering the Federal Deposit Insurance Corporation =, the Office of the Controller of the Currency and the Federal Reserve (Fed) as candidates for merger. This could lead to complex arguments in Congress and concerns by some that the Fed was being disturbed.
The committee could recommend reductions in staffing, proposing a freeze on most recruitment or go further and seek redundancies. Recruitment freezes can work well, given turnover rates for government staff, without up-front costs for change.
DOGE could recommend a spend to save scheme forcing the pace of adoption of better computing and artificial intelligence in many of the administrative and regulatory tasks government undertakes. The danger of these schemes is the increased cost is a certainty and may overrun budgets and timetable, whilst the savings will still require staff freezes or redundancies to achieve.
The committee could recommend privatising activities, taking their budgets out of the public spending exercise whilst allowing them to continue. That can also provide a payment to the state for the assets sold.
What have others done?
A country under extreme pressure to control spending and borrowing to curb hyperinflation, such as Argentina, can cut its public spending dramatically. The absence of new finance concentrates the mind, and public anger over the state of the economy allows scope for more dramatic action.
It is more difficult in a better-run economy like the US, with many forces supporting existing government institutions and staffing. There have been successful privatisation programmes and slimming of bureaucracies through reduced recruitment in some advanced countries.
What is likely to happen in the US?
Mr Musk and President Trump are aware of the dangers of legal actions and will need to create a structure where the advice can be well based with or without access to privileged information from the government machine. They need to avoid creating conflicts.
Assuming Mr Musk and his supporters study how government works and grasp the importance of the political dimension to all that they do he could take on the task of chairing an advisory committee. A committee would have available several ways of reducing the size of government, cutting costs, boosting productivity and improving the quality of what is done. It will need to work closely with the White House to reflect the political appetite for such changes.
If they are successful, it will boost US growth, allow greater freedoms to private-sector companies and reduce state spending and borrowing. This, in turn, can allow a faster reduction in interest rates by reducing the burden of new issues of state debt on the markets.
If they encounter too much resistance or difficulty, then the President will face tougher budget choices with the need to delay tax cuts or find spending cuts that affect services and benefits. He could also run the risk of borrowing more and trust the markets to not push up interest rates too far.
The outcome is likely to fall well short of a $2 trillion annual cut in the first two years but may produce some wins that ease the budget pressures modestly.
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