Nov 15, 2024, 2:16 pm EST
Elon Musk speaks during a Trump campaign rally at Madison Square Garden on October 27. (Anna Moneymaker/Getty Images)
Is there anything Elon Musk can’t do? After defying skeptics who said he couldn’t sell two million Teslas, or launch and retrieve rockets from space, slashing $2 trillion a year from the federal budget should be easy-peasy, according to his legions of fans.
Musk and Vivek Ramaswamy, who have been tasked with heading DOGE, the newly hatched Department of Government Efficiency, are aiming to cut a cool $2 trillion in federal spending. Trouble is, of the $6.1 trillion in annual federal outlays, only $1.7 trillion is discretionary. And the bigger problem is that non-discretionary spending, especially interest on the debt, is soaring, and there is nothing this dynamic duo can do about that.
“The reality is that the cuts [they] can make will be far less substantial than those required to make any meaningful dent in our runaway finances,” writes Stephanie Pomboy, the mistress of MacroMavens. “As for Elon’s hatchet to bureaucracy, total government wages and salaries are a little over $800 billion annually.”
That isn’t enough to matter, at least to the bond market, as has been highlighted ad nauseam in this space for the past year and a half. All those notes and bonds issued at never-before-seen and never-to-be-repeated interest coupons of 1% and less that are coming due will be replaced by debt with more normal yields in the 4% range. And so Uncle Sam’s interest tab has climbed from $628 billion in 2023 to just under $900 billion in 2024, and currently is running at $1.2 trillion annually, Pomboy says.
“Barring cuts to entitlements (which no one is talking about), rates are going to be higher for longer despite the efforts of Elon…and [Federal Reserve Chair] Jay Powell,” she concludes.
Far from the $2 trillion expense-cut fantasy, the incoming Trump administration’s top economic priority is to extend the Tax Cut and Jobs Act, the signature measure of his first term, which expires at the end of 2025. That will cost $4 trillion over the next decade, 2½ times as much as the original $1.6 trillion, according to the Peter G. Peterson Foundation.
That doesn’t mean there are no cuts to be made. The Committee for a Responsible Federal Budget listed this past week “$700 Billion of Easy Deficit Reduction” for the next decade. Among the savings, some $50 billion would come from closing the electric-vehicle credit-leasing loophole, which gets around restrictions on the $7,500 federal tax credit for EV purchases, depending on their origin and the buyer’s income.
That isn’t likely to be high on the Tesla chief’s list of cutting schemes. More to Musk’s liking might be to use artificial intelligence to boost efficiency. Macquarie strategists Thierry Wizman and Gareth Berry cite one estimate that automating routine administrative tasks could boost U.S. government productivity by $519 billion annually, for $5.2 trillion in savings over 10 years.
AI also could reduce the deficit by detecting tax evasion and improving the selection of tax returns for audit, they add. Improved compliance could boost revenue by $4.8 trillion over 10 years without boosting tax rates, they note.
Wizman and Berry further point to “static” analysis that estimates that tariffs favored by President-elect Trump of 10% to 20% could bring in between $2 trillion to $3.3 trillion over 10 years. But tariffs are a risky way to raise government revenue, they add, given the possibility of retaliation by trade partners. They note a Tax Foundation analysis that negative economic impacts could actually result in lower overall fiscal revenues.
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None of these measures comes close to the $2 trillion annual savings that Musk and Ramaswamy seek. Meanwhile, if Trump’s promise to extend the TCJA, plus enact campaign pledges to exempt Social Security and tips from taxes, boost the cap on state and local tax deductions, and reduce the corporate tax rate to 15% from 21% for manufacturing firms all come to pass, the already huge federal deficit at 6.5% of gross domestic product would widen further, writes Olivier Blanchard, former chief economist at the International Monetary Fund, for the Peterson Institute for International Economics.
“If Trump enacted all the measures he has suggested, a question would be how many years it will take for investors to question the risk-free status of U.S. Treasuries,” he writes. “Leaving aside this risk issue, what is likely, however, is that a further fiscal expansion, starting from an economy close to full employment, will lead to inflation and, by implication, higher Fed policy rates and a strong dollar. Once again, this scenario will trigger a potential conflict with the Fed.”
If the Fed sticks to its mandate, Blanchard says, it will stand in the way of some of Trump’s policy goals and have to increase rates to limit economic overheating, leading to dollar appreciation. As I wrote a week ago, the risk is that the U.S. central bank instead underwrites higher inflation so the economy expands briskly enough to keep pace with the debt. That’s what the recent rise in bond yields suggests.
Write to Randall W. Forsyth at randall.forsyth@barrons.com