How to cut $2 trillion
A blueprint from Reagan's Head of OMB
Elon Musk and his DOGE team have been hard at work for about a month now, and they claim already to have saved US taxpayers something like $55 billion of allegedly wasteful spending by the federal government. There has been a lot of published criticism of Musk’s methods and of DOGE’s seemingly inflated savings estimates, a debate I won’t go into here. But even if DOGE has in fact saved the federal government $55 billion so far, this is just a drop in the bucket of what we have been told to expect from their efforts. Which begs the trillion-dollar question of where the rest might come from.
During the presidential campaign, Musk said that with the election of Donald Trump, federal spending could be cut by $2 trillion, an estimate which he subsequently walked back to a still ambitious $1 trillion. At the time, Musk was vague about whether this target represented a cumulative total savings over some period of time (say ten years) or whether it was meant to be an annual target. Budget cuts of $1 trillion over ten years would represent a big change from recent practice, in both red and blue administrations, but at just over 1% of total forecasted spending over this period it would hardly be a game changer. And so for the balance of this post I am going to assume that Musk is in fact gunning to save some really big bucks, on the order of $1-2 trillion a year, an amount which represents 17-35% of annual federal spending (ex-interest expense on the federal debt).
But where might savings of this magnitude come from?
Well it won’t all come from the elimination of ‘waste, fraud and abuse’, as Musk has often suggested. As documented in this week’s WSJ, the federal government agencies which DOGE is currently turning upside down have for years now been working at the direction of Congress to audit their own spending. As a result of this work, the agencies themselves have identified what they estimate to be in excess of $100 billion per annum of “improper” payments, equivalent to 3% or so of the total annual spending by these same reporting agencies. Not all of these ‘improper’ payments entail excess spending by the federal government, although the vast majority of them do, and not all of them reflect fraud, although some of them do. In many cases, the improper payments are simply payments which have been made without proper documentation or in the wrong amounts. This is still a problem, of course, but one of a very different character than spending which is fraudulent.
Identifying improper payments after the fact is of course much easier than eliminating them before they occur. But let’s assume that all of this $100+ billion of estimated improper spending by our federal agencies could in fact be eliminated tomorrow with the wave of Elon Musk’s magic wand. Or better yet, let’s assume that Musk and his team could double the savings; after all he says they are already a quarter of the way there after just a month or so of work. I have no idea if this is even remotely possible, but $200 billion of annual savings would get us only 20% of the way to Musk’s revised target. Which leaves quite a lot of additional dead wood to find and then prune.
Will Musk and his team be able to do this?
We live in a world where documented fact seems no longer to carry quite the same weight that it used to, and large portions of the American public have taken to seeing as fact whatever it is they have been told by certain sources to believe. “Seeing is believing” has been turned on its head, which Donald Trump has helped to make a reality. And so if Elon Musk or the current President of the United States tell us that Social Security, Medicaid, Food Stamps or some other suspect government program is in fact a massive fraud on the American taxpayer, and they broadcast this repeatedly to their two hundred million followers, then we should expect that a large segment of the American people will take them at their word. And when this happens, we should not be at all surprised that Musk’s DOGE miraculously uncovers evidence to support this allegation, even if the evidence turns out to be based on a flawed interpretation of the data or something less benign.
Even with the best of intentions and complete integrity in its work, however, DOGE will not likely be able to cut the federal budget by anywhere near $1 trillion simply through the reduction of waste, fraud and abuse. At some point soon, Musk and his team will have squeezed about as much cost as they possibly can out of the federal budget by indiscriminately firing federal employees at suspect agencies and unilaterally terminating programs they consider to be ‘woke’. And when this happens the really hard work will begin, with large and far-reaching cuts to special interest subsidies, defense department spending and entitlement benefits which are highly popular in red and blue America.
Despite what Musk has told us to expect, it is entirely possible that President Trump has no real intention of going down this path and taking the tough decisions necessary to radically reform the scale and scope of the federal budget. But for purposes of today’s post, I would like to take Musk at his word—perhaps a foolhardy thing to do—and examine what a $1-2 trillion reduction in the federal budget might realistically entail.
And so I ask: How might a true believer in a radically smaller government go about cutting the federal budget by this amount, without accounting gimmicks or PR smoke and mirrors?
For some perspective, I reached out to an old investment banking colleague of mine, David Stockman. As you may recall, Stockman was previously the Director of OMB during the Reagan’s first term, which I wrote about previously in my post Reflections on Reaganomics. Stockman has been out of government for forty years now, but he has continued to think and write about the federal budget. When I first contacted Stockman, he promised to send me a paper he was writing on exactly this topic, which has now turned into a book, aptly titled “How to Cut $2 Trillion: A Blueprint from Reagan’s Budget Cutter to Musk, Ramaswamy and the DOGE Team.”
Stockman’s book is billed as an action-plan of sorts for Musk and his DOGE team (which no longer includes Ramaswamy), written in the hope that Musk et al are in fact serious about cutting up to $2 trillion from the federal budget, a goal which Stockman thinks is not only achievable but also essential. To be clear, the book reflects Stockman’s thinking, not that of Elon Musk or those around him. But many of Stockman’s proposals will no doubt resonate favorably with the Project 2025 crowd who seem to be driving much of the Trump agenda and who have filled key positions in his administration, most notably at OMB. And so I think we should take Stockman’s work seriously, not only for the specifics of his particular proposals, but more importantly because it describes so clearly the true extent and magnitude of the budget reforms required to get anywhere near Musk’s spending reduction goals.
So where does Stockman believe these cuts may come from? Let’s explore.
Non-defense administrative agency reform ($130 billion savings). Like the authors of Project 2025, David Stockman is not a big fan of the administrative state, particularly not at the federal level. Accordingly, he proposes a series of severe cuts to the federal non-defense bureaucracy which entail the complete elimination of sixteen different federal agencies, 50% budget cuts at another nine agencies, and a 34% reduction in staff costs at all other non-defense agencies. (There are apparently over 400 agencies in the federal government, which does seem rather remarkable.) Stockman believes this sort of radical surgery is absolutely critical to the conservative reform agenda, even though the estimated annual savings amount to only $130 billion, or 6% of his $2 trillion goal.
As noted, Stockman has identified sixteen federal agencies which he believes should be eliminated entirely, many of which will come as no surprise to those who follow Republican politics: USAID, the Department of Education, the Consumer Financial Protection Bureau, a number of allegedly “woke” agencies like the Corporation for Public Broadcasting and the National Endowments for the Arts and Humanities, as well as OSHA and the Consumer Products Safety Commission. More surprisingly, perhaps, Stockman also thinks we should eliminate the FBI, an agency which he considers to be completely corrupt and unredeemable, a view he held even before Kash Patel was confirmed as the new Director.
Stockman explains his rationale for closing each of these sixteen agencies, and cutting costs by 50% at nine others, agencies which in his view represent “egregious cases of regulatory excess” or enterprises that are “not remotely the business of the central government”, the funding of which cannot be justified at a time when the Federal government is “careening toward the fiscal shoals”. One may or may not agree with Stockman’s take on these particular agencies, but it is nevertheless interesting to see how little money he thinks can be saved even by performing such radical surgery. .
Slashing special interest subsidies ($270 billion in savings). Ironically, Stockman opens his critique of federal special interest spending and subsidies—which he calls a “well-honed swindle”—with an attack on EV subsidies, a large portion of which have redounded to the benefit of Elon Musk’s Tesla. But at $2.5 billion a year, EV subsidies are just a drop in the bucket relative to the $40 billion of annual federal spending on farm price supports, subsidized crop insurance, conservation payments and other direct and indirect federal subsidies to the agriculture industry (most of which goes to “Big Ag” by the way). On top of this, Stockman identifies $60 billion in annual savings from energy subsidies (burn, baby, burn) and another $170 billion from a wide variety of what he calls “pro-business tax expenditures”, including such items as the R&D tax credit ($38 billion), housing investment incentives ($28 billion) and SBA subsidies ($20 billion).
Stockman’s arguments for slashing special interest funding no doubt have merit, but many of these special interests (eg the farm lobby) are particularly powerful in red states, whose Congressional representatives love to decry ‘big government’, except when the money is directed to their own districts. To date, Musk has proceeded without seeking Congressional approval for his plans, but at some point this will have to change. And when it does, we may well discover that many cuts to special interest funding have been quietly taken off the table.
Shrinking the ‘warfare state’ ($500 billion in savings). David Stockman’s critique of the ‘military-industrial complex’ calls to mind the warnings of President Eisenhower in his farewell address when he left office in 1961. But I think it’s fair to say that even President Eisenhower would be stunned to see how much the US spends today on so-called ‘defense’. The US defense budget has for years now been considered to be off limits for serious cuts, largely in the name of ‘national security’, but in reality the opposition to defense cuts has often had more to do with the amount of defense spending which ends up in key congressional districts. Stockman thinks the time has come to put an end to this military pork. “If Donald Trump’s ‘America First’ foreign policy means anything at all”, says Stockman, “it means that the current level of defense spending at $1 trillion is double the size that an adequate homeland defense shield actually requires”.
I have no idea whether Stockman’s analysis and critique of defense spending is remotely sound. But even if his analysis is spot on, the way in which he articulates the need for massive defense spending cuts—with frequent references to the USA as the “Warfare State” and the “War Capital of the World”, running an “Empire First” foreign policy”—seems unlikely to foster much Congressional support among the Pledge of Allegiance crowd, although Ilhan Omar and the pro-Russia wing of the GOP might applaud it.
But even if Stockman gets his way with the DoD budget—cutting total defense spending by 50%—we are still only 45% of the way toward meeting the $2 trillion goal, after wiping out half of the administrative state and eliminating special interest funding with its strong support in Congress.
Reduced entitlement spending ($1.1 trillion in savings). The US federal government is often referred to as a giant insurance company with an army, and for good reason. Nearly all American workers participate in Social Security as well as Medicare. Over half of all American households receive cash or in-kind benefits from one or more major federal entitlement programs, and even among households headed by a person under the age 65 (when Social Security and Medicare typically kick in), the total is 40%. The annual cost of these programs now accounts for something like 70% of total federal spending (ex interest expense), over half of which is attributable just to Social Security and Medicare. Given the size of these programs, it will be virtually impossible to reduce the size of the federal budget significantly without serious reform of our largest entitlement programs, including Social Security and Medicare.
But this does not mean that such reform will be easy to implement, politically speaking. Social Security reform is often referred to as the “third-rail of American politics, step on it and you die”. The same thing can be said of Medicare, which like Social Security benefits the families of large numbers of middle-class Americans who show a remarkable propensity to vote their pocketbooks on these issues. And while many red state politicians seem for now to be going all-in on slashing means-tested ‘welfare’ programs like Medicaid, Obamacare and Food Stamps, they may feel differently about this when they start hearing from the millions of die-hard MAGA supporters in their districts who would not be able to make ends meet without these benefits.
Social Security is particularly popular for a number of reasons, I suppose, but according to Stockman the biggest reason may be that for most participants the value of promised lifetime benefits far exceeds the actuarial value of the FICA taxes paid in. For demographic and other reasons, this gap between the value of the promised payments and the associated tax contributions is growing and will not be sustainable going forward without a significant cut in benefits and/or a large increase in funding (taxes), neither of which are likely to be popular.
Popular or not, however, the major federal entitlement programs must be reformed if we are to get anywhere near the Musk/Stockman spending reduction targets. And this is true for the same reason that Willie Sutton said he robbed banks: “Because that’s where the money is”.
So how does Stockman suggest one might go about extracting over $1 trillion in annual spending cuts from these entitlement programs? With respect to Medicare and Social Security, Stockman proposes that we begin by increasing the amount of means testing well beyond what we have today (for example with income-based premium adjustments on Medicare). According to Stockman, the top quintile (20%) of income-earners currently receiving benefits collect over $1 trillion annually from Social Security and Medicare, amounts they don’t need in order to stay comfortably above the poverty line, which was after all the original justification for Social Security. And so he proposes that the benefits paid to these individuals be cut by roughly 60%, which he proposes to claw back through a graduated means testing on those earning more than $75,000 a year (before benefits). On Stockman’s calculations, this would generate savings to the federal government of $575 billion a year by 2029.
On top of this, Stockman proposes an immediate 10% across the board cut in federal reimbursement payments to Medicare providers, which he believes would save the federal government ca $150 billion a year and incentivize some much-needed restructuring in the health-care delivery system. He believes the federal government could save an additional $325 billion a year by slashing what he considers to be the “bloated bureaucracy” surrounding much of our federal means-tested entitlement programs—Medicaid, Food Stamps, Child Nutrition and Health, etc—and by returning much of the administrative responsibility for these programs to the states and funding them with block grants provided by the federal government. It seems the federal government is actually quite efficient at collecting taxes and distributing checks. Who’d have guessed?
And to top things off, for a cool $1.1 trillion in entitlement savings, Stockman proposes that we cut $50 billion a year from the federal budget for higher education, or what is left of it after we eliminate the Department of Education. He says this can be done by consolidating all higher education support into a single block grant to the states, abolishing federal student loans entirely, and cutting all other federal educational spending by 40%. He justifies these cuts in part by noting that federal spending on higher education has increased by 325% (in constant dollar terms) since 1981, compared to a 50% gain in the size of the college student population, with no apparent benefits to the American taxpayer or the economy, at least none that Stockman is willing to acknowledge.
Can Trump pull this off? If Stockman’s specific proposals seem rather extreme and politically implausible, that’s probably because they are. But that doesn’t mean they are not directionally correct. And we should not underestimate the amount of political capital now held by President Trump, at least in his mind, capital which he may (or may not) choose to use for this purpose. Spending cuts of $2 trillion a year are just about what is required to balance the federal budget, which was last done during the Clinton administration. And while balancing the budget may not be anywhere near the top of Trump’s ‘to do’ list, he does seem to care an awful lot about his proposed tax cuts, which will add $5-10 trillion to the federal deficit (and debt) over the next ten years, even before the payment of a large “DOGE dividend”.
We have long known that the Republican Party only really cares about deficits and the debt when Democrats occupy the White House, but I understand that there are still a handful of Republican deficit hawks left in Congress. And with a very slim Republican majority in both houses, Trump is going to need every single one of them (and some parliamentary sleight of hand) to pass his budget-busting tax plan. Given Trump’s now complete domination of what was once the party of Lincoln, however, the Republican budget hawks in Congress may conclude once again that discretion is the better part of valor and elect to hold their noses and vote to cut taxes now while deferring the largest and most painful spending cuts to later, perhaps after the midterm elections or better yet the beginning of Trump’s third term in office.
But when these spending cuts do kick in with programs like Medicaid, the pain will be felt “bigly” even among Trump’s most loyal MAGA supporters, who seem to believe the DOGE mandate is limited to defunding DEI and other woke activities. Won’t they be surprised!
Links
DOGE Claims It has Saved Billions, See Where, WSJ February 22, 2025
That Time Elon Musk Showed Up with a Chain Saw, Literally, WSJ, February 22, 2025
Here are the Digital Clues to What Musk is Really Up To, NY Times Opinion, February 21, 2025
This Spending Fight Is Really About the Constitution, WSJ, February 21, 2025
Republicans Caught Between Trump and the Farmers, Washington Post, February 20,2025
GOP Split on Medicaid Imperils Trump’s Tax Cut Plans, WSJ, February 23, 2025