Debt Digest | Is DOGE Missing the Bigger Picture in Federal Workforce Cuts?
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Is DOGE missing the bigger picture in federal workforce cuts? The Department of Government Efficiency (DOGE) has been working to reduce the federal workforce but has primarily focused on probationary employees. DOGE is targeting this group because they don’t have the strong job protections that make firing other federal workers far more difficult. However, as Humanocracy co-author Michele Zanini points out, DOGE needs to tackle the growing number of executive positions within the federal government. “[T]here are nearly five times more organizational layers among executive roles in the federal government relative to the 1960s. Consider the expansion of leadership positions at the DoD— from 34 to 61 in the last 25 years,” writes Zanini (see figure below). He argues that excessive management layers reduce efficiency and accountability, writing: “Streamlining the top ranks would achieve far more than trimming entry-level staff.”
Bipartisan support for closing the Medicaid provider tax loophole. In their latest Tax Tracker edition, Cato’s Adam Michel and Joshua Loucks highlight prudent spending reforms for reconciliation, including closing the Medicaid provider tax loophole. Paragon Institute’s Brian Blase explains how this gimmick fleeces federal taxpayers: “[S]tates overpay providers with Medicaid funds, that payment triggers federal Medicaid matching funds for the state, and the state requires the provider to return a portion of the overpayment. In essence, the state and the provider both reap a financial windfall from the scheme at the expense of the federal taxpayer.” According to Blase, eliminating this loophole could save more than $500 billion over the next decade. Notably, President Obama supported limiting this scheme in his FY12 and FY13 budget proposals, as did former Democratic Whip Dick Durbin (D-IL). With such rare bipartisan support, Republican legislators have no excuse not to eliminate this money laundering scheme in reconciliation this year.
Eliminating fraud and waste isn’t enough. Cato’s Tad DeHaven writes: “Social Security recipients don’t want to hear that reigning in benefits growth is necessary to fix that imbalance. They don’t want to hear that the programs they benefit from are the main cause of the federal government’s massive debt problem. The average citizen wants to hear that these problems can be solved with a little housecleaning by eliminating amorphous waste, fraud, and abuse.” However, as DeHaven points out, “Targeting ‘waste, fraud, and abuse’ didn’t solve the problem, and it never will.” Mercatus Center’s Veronique de Rugy illustrates this with hard numbers: “[E]ven if DOGE eliminates all improper payments and fraud—an estimated $236 billion and $500 billion per year respectively—we'll be facing a debt explosion. Social Security and Medicare are projected to require us to borrow $124 trillion over 30 years—four times what we've borrowed in our entire history.”
A US sovereign wealth fund could lead to state capitalism. Stephen Jen, CEO of Eurizon SLJ Capital, writes in the Financial Times that President Trump’s proposed US sovereign wealth fund (SWF) could resemble China’s Silk Road Fund or Singapore’s Temasek—focusing on strategic sectors like AI and investing in projects that “extend US influence.” According to Jen, this geostrategic agenda could advance a form of state capitalism. As I noted in a recent Hill op-ed: “[A]n SWF would create dangerous incentives for government intervention in the economy. Would a government-controlled fund invest in politically favored industries like green energy or biotech while avoiding sectors deemed ‘unacceptable’ by the administration in power? Would it use its influence as a shareholder to push political agendas on corporate America? These risks are not hypothetical; they are the natural consequences of state-managed investment.”
Stagflation would accelerate Social Security’s insolvency. Mercatus Center’s Tyler Cowen warns that “Trump is a longstanding fan of low interest rates and easy money [...] and one scenario is that he tries to impose his will on the Fed, leading to higher inflation rates.” He adds that such interventions could erode the Fed’s predictability and credibility, making it harder to control inflation. Cowen also highlights negative labor market trends, such as slowing hiring rates, concluding: “If you accept the notion that inflation is more likely to rise than fall, and that the labor market is more likely to worsen than improve, then the chances for a modest stagflation are reasonably high.” Beyond its many harmful effects, stagflation could accelerate Social Security’s insolvency. As Dominik Lett and I argued in a recent paper, stagflation—characterized by higher inflation, lower productivity, and slow wage growth—“is a roadmap to faster Social Security insolvency, resulting in bigger deficits as benefits rise faster than inflation while tax revenue lags.”