Can DOGE actually save federal money by cutting government jobs? Unlikely, economist Joel Naroff says

There is an urban legend that governments are horribly inefficient, and all it takes is cutting the workforce and getting rid of waste and fraud to change things dramatically. President-elect Donald Trump has proposed a Department of Government Efficiency (DOGE) and asked Elon Musk and Vivek Ramaswamy to head the quasi-government organization to do just that.

Can they succeed? It is doubtful.

There are two major problems the DOGE heads face. First, the government doesn’t actually produce much, so adopting a corporate restructuring model may not make sense.

Second, their suggestion that $2 trillion can be cut from the budget runs up against the reality of how the government actually spends its money. Most of the budget goes to entitlements, defense, and interest on the debt. Changes would require politicians to cut popular programs.

Let’s start with the first problem: The government is not a factory. It builds almost nothing, so standard efficiency models, which usually involve cutting workers and adding capital, may not be relevant.

For example, the Department of Defense doesn’t build a tank, a jet, a ship, an assault weapon, a uniform, or a boot. It didn’t build the Pentagon.

Who does that work? The private sector.

The government is a wealthy consumer who directly supports a significant portion of the private sector economy through its purchasing activity.

Can government programs be streamlined and costs lowered by reducing the number of workers building everything the military needs? Probably, but it would mean the government telling private companies how to run their businesses. That also means there would be fewer private sector employees.

And what is true for the Defense Department is true for all the other federal departments.

Yes, there are roughly 2.4 million federal government workers, but many are in oversight or program management positions, or directly servicing clients. Cutting them makes fewer employees responsible for ensuring contracts are followed and services provided. Can you say fraud?

My guess is that DOGE’s biggest proposal will be replacing workers with AI across as many departments as possible. That could potentially cut red tape, the one thing that government does produce efficiently.

But how much money would it save?

The federal government spent roughly $300 billion in 2024 on salaries and benefits for its civilian employees. Even if AI allowed for a 10% reduction in workforce, the $30 billion in savings would constitute less than a 0.5% cut in government spending.

Simply put, even if there are workforce reductions, the potential savings are limited.

The next problem: most federal government spending goes to income transfers, such as Social Security, Medicare, Medicaid, unemployment insurance, farm subsidies, and student loans. And there is also the most important expenditure of all: interest on the debt.

A breakdown of the federal spending will make the problem clear.

The federal government spent $6.752 trillion in the latest fiscal year, which ended Sept. 30, 2024. The largest share, 21.6%, went to Social Security. Next came health and human services, which ate up 13.5% of the budget, followed by interest on the debt, 13.1%.

Similar shares, 12.9%, went for national defense and Medicare each, while income security-related concerns constituted about 10% of all spending. Spending on veterans’ programs (4.8%), education (4.5%), transportation (2%), and other (4.6%) accounted for the rest of the outlays.

The DOGE leadership claims it can cut $2 trillion from the budget. That would reduce the budget by about 30%. Where can they find the money?

Got me.

Most of the government’s spending is categorized as entitlement spending. If you qualify for it, you get it. Social Security, Medicare, Medicaid, unemployment benefits, and health security (Obamacare and children’s health insurance) are examples.

Unless Congress changes the formulas and/or the qualification requirements, DOGE will have no control over those funds.

Roughly two-thirds of the budget goes toward mandatory spending. When you add in interest on the debt, the share hits about 80%.

Most of what is leftover goes to defense spending, leaving about 7% for what is known as discretionary spending.

In other words, on an annual basis, Congress gets to play with only about 7% of the budget, and much of that is for programs that are politically untouchable, such as farm supports.

So, what will Musk and Ramaswamy do?

Consider the proposal to eliminate the Department of Education, shift its responsibilities to other departments, and terminate programs.

In fiscal 2024, the Education Department spent $268.4 billion, or only 4% of the total budget. Most of that money (60%) went to student aid (loans). Moving student loans to other departments would still require an infrastructure to oversee the programs.

There is very little to be gained by terminating the Department of Education.

Of course there is always the biggest discretionary category: defense. Does anyone really believe the Trump administration is going to suggest cutting defense spending?

What about farm supports? Not likely. Indeed, the biggest portion of the Agriculture Department’s spending (72.5%) goes for nutritional programs for the poor that are some of the most effective at lowering future government costs.

So, what will they cut? Discretionary spending that representatives and senators stuff into budgets so they can show they are taking care of their districts’ and states’ special needs? Social Security? Medicare? Medicaid? Unemployment insurance? Income, health, food support, and/or housing assistance for the poor? Homeland Security? How about defaulting on the debt?

Good luck with cutting any of those.

Really, how can anyone take Musk and Ramaswamy seriously if they start off with a ridiculous proposal to reduce government spending by 30%. But they keep getting lots of press.

And that reminds me of a line from the 1962 movie The Man Who Shot Liberty Valence. It went: “This is the West, sir. When the legend becomes fact, print the legend.”

This is Washington, and the urban legend — that it is easy to cut federal government spending — has become fact, so the politicians are pushing the legend.

Don’t expect much from DOGE other than lots of talk and some smoke and mirrors.