The Problem With Trying to Run Government Like a Business

0:00 So like most economists,

0:01 we try really really hard to pretend we're better than politics,

0:04 but inevitably the two are intertwined and it's

0:06 honestly naive to look at either in

0:08 complete isolation.

0:09 Political agendas have ruined many good intentioned economic plans

0:13 and bad economic conditions have ruined many political initiatives.

0:16 The new Department of

0:17 Government Efficiency and its aimed lower US

0:19 government spending to rein in ongoing budget

0:21 deficits is a good idea,

0:22 but it has clearly been mired in just a tad of political controversy.

0:27 In the interest of complete fairness, sometimes essential economic policies

0:30 have to be pushed through even if they are going to be politically unpopular.

0:34 Massively cutting down on government spending is

0:36 going to involve cutting funding to people

0:38 who are not going to be happy about losing their grants,

0:40 their contracts or their jobs,

0:42 and that is completely reasonable.

0:44 However, effective governments also cannot and should

0:47 not become needlessly bloated just in the interest

0:49 of keeping people employed for the next election.

0:51 Realistically, if fiscal policy was conducted purely on economics,

0:55 this arguably should have

0:56 been done decades ago.

0:57 But the second term of an administration that historically hasn't been too

1:01 afraid to piss in some Cheerios should,

1:02 all other things been equal, be the next best time to push

1:06 through some better medicine.

1:07 Although this is making some big assumptions.

1:09 The first is that

1:11 US debt is actually unsustainable to begin with.

1:13 Yeah, it's now over 36 trillion dollars or more

1:16 than 117% of GDP,

1:18 which for most of the countries we've explored in this channel before is well

1:22 and truly into the danger zone.

1:23 It's also not going to be helped by the fact that refinancing

1:26 that debt is going to start getting expensive now

1:29 that interest rates are at multi decade highs.

1:31 But despite all of this,

1:33 most mainstream economists maintain that the USA is special and,

1:36 within reason, can get away with running a little bit

1:39 more leverage than most other countries and

1:41 it's important to understand why and if that special

1:44 status is going to continue into the future.

1:46 Now, if this is truly unsustainable, the next obvious question becomes,

1:50 is Doge the right tool to fix the problem before it's too late?

1:53 Or is this just a political

1:54 initiative masquerading as a solution to a manufactured economic problem?

1:58 So, has US debt

2:00 finally gone too far?

2:01 Can Doge actually turn this around assuming it was managed flawlessly?

2:05 And finally, are there better solutions to this problem?

2:09 Obviously, coverage of this issue has inevitably been

2:11 mixed along political lines with a shocking

2:13 number of outlets not even acknowledging the

2:15 respective ideas or failures of this initiative.

2:17 That's why a tool like Ground News is so important.

2:20 Ground News is an independent subscriber

2:22 funded website and app on a mission to give

2:24 readers a data-driven objective way to read the news.

2:26 It gathers related articles from around the world so

2:28 you can get different perspectives in one place.

2:30 For example, the debate over USAID's shutdown by

2:33 Doge illustrates exactly why diverse perspectives

2:35 matter.

2:35 Left-leaning coverage frame Musk and Doge

2:38 actions as threats and an unconstitutional

2:40 shutdown of USAID, emphasising the need for systems to be restored.

2:44 While right-leaning outlets de-emphasise the constitutional questions,

2:46 instead using terms like shutter and dismantling,

2:49 while highlighting Doge's efforts to combat waste, fraud and abuse.

2:52 Every story comes with a quick visual breakdown of the political bias,

2:55 factuality and ownership of the sources reporting,

2:57 all backed by ratings from three

2:59 independent news monitoring organisations.

3:00 There are real-world consequences to not

3:02 seeing the full picture of pressing issues like this.

3:04 From shaping public opinion to

3:06 public policy,

3:06 this is why one of my favourite features is the Ground News blind spot feature.

3:10 This surface is important stories exclusively circulating

3:12 in the left or right media bubble

3:14 for more nuanced perspectives on the world we're living in.

3:16 I think Ground News makes it easier

3:18 than ever to check your biases and make up your own mind,

3:21 all without being overwhelmed or misled.

3:22 Go to ground.news slash explain to save 40% on the same unlimited access

3:26 vantage plan I use to get my news on the economy and the world.

3:29 Supporting Ground News not only

3:30 supports my work,

3:31 it supports an independent news platform giving us agency over the information

3:34 we consume.

3:35 Okay, so the first thing to recognise is that

3:38 this whole thing is not totally unprecedented.

3:41 We have already explored the extreme cost-cutting done

3:43 by places like Argentina to fix up their

3:45 fundamentally broken economy and the Doge program

3:47 is clearly taking some inspiration from that.

3:50 Now that is worth addressing separately and we will get to it,

3:53 but in a slightly more controlled

3:54 manner even the US has actually been here and done

3:57 this all before and not even really that long ago.

4:00 Most recently in 1993 the newly elected

4:02 government pushed through the Omnibus Budget Reconciliation

4:05 Act which amongst other things sought to drastically

4:07 reduce government spending to reduce the budget

4:11 deficit.

4:11 This plan also simultaneously involved raising

4:13 taxes primarily on higher income earners

4:15 but we'll also get to that detail later.

4:17 Now this plan in conjunction with to be fair a very

4:20 strong overall economy and the adoption of

4:22 modern technologies like the computerisation of

4:24 administration systems saw the federal government deliver

4:26 its first budget surplus in over two

4:29 decades.

4:29 What's more is it was the largest surplus in

4:32 US history and lasted four years up until 2001.

4:35 Since then the US government has never run

4:37 a surplus again and it's been consistently

4:39 spending more than it brings in in tax revenue in a budget deficit.

4:43 Now a quick side note is that a

4:45 budget surplus doesn't necessarily mean that the country has

4:47 no debt it just means that it has more

4:50 revenue through taxes or other forms of income

4:52 like potential natural resource rents than it spends

4:54 on all the various things that governments spend money on.

4:57 What's more is that running a budget

4:59 surplus doesn't even necessarily mean that the government has

5:01 to pay down its debts or that it

5:03 can't take on more debt.

5:05 Just like an individual that earns more than they spend might maintain a

5:08 mortgage and might even do a cash out refinance

5:10 there's no mandate for a government running a

5:12 budget surplus to commit that extra money to exclusively paying down debt.

5:16 There are a few

5:17 economies around the world where the government consistently

5:19 brings in more money than it spends

5:21 but they still have significant national debt.

5:23 Now to be fair those countries like well Norway for

5:26 example don't have a level of debt that the USA

5:28 has but it is still there because in moderation

5:30 there are some big advantages to having at least

5:33 some government debt and as a bit of foreshadowing

5:35 this is particularly important for the USA so remember that for later.

5:38 For now though in the

5:39 USA these details are largely academic because of

5:41 course an individual or a government that is

5:44 spending more than they make really has no choice other than to take on debt.

5:47 One more thing that

5:48 probably needs to be mentioned is that a

5:51 trade deficit is different from a budget deficit.

5:53 Trade deficit is just when a country imports

5:55 more than it exports budget deficit is when

5:57 the government spends more than it taxes.

5:59 Okay so with the admittedly somewhat confusing jargon

6:02 out of the way what is to stop the government

6:04 of today committing to the same kind of deficit

6:06 reduction measures that worked 30 years ago?

6:08 Well there are a few things.

6:10 One of the interesting

6:11 details here is that this government spending cut was

6:13 done back when government spending was a much

6:15 smaller part of the overall economy accounting for around 20% of GDP.

6:19 In the USA today government

6:21 spending is almost double that at 35% of GDP.

6:23 Realistically this means that there is a lot

6:26 more spending to be cut down on.

6:28 Just reducing the rate of government spending to be proportionally

6:30 in line with what it was at the start of

6:32 the 1990s would already cut trillions of dollars from the

6:35 budget and that's before the omnibus cuts which reduced spending even further.

6:38 So this is starting

6:40 to sound pretty promising for Doge and its merry big bald men.

6:43 However it's also important to

6:45 consider that this significant nominal and relative increase

6:47 in government spending now means that the

6:49 economy is also much more dependent on government spending.

6:53 Realistically this isn't a good thing

6:55 especially in the long term because it encourages

6:57 economic participants to cater to the government

6:59 as effectively the largest customer in the economy.

7:01 On the extreme end if government spending takes up

7:04 most of the country's economic output that's just

7:06 a centrally planned economy which tends to

7:08 be very bad at allocating resources compared to

7:10 economies with a healthier mix of consumer,

7:12 investment and government spending.

7:13 Now that may be true in the long term but short term ripping

7:17 out the life support system overnight without a

7:19 plan in place to replace that economic activity

7:21 elsewhere in the economy will create a significant

7:23 economic shock which will realistically just make

7:26 things worse.

7:26 Government spending even as high as it is

7:29 today only accounts for the direct payments

7:31 made by various levels of government.

7:33 Someone working a government job will be paid by the

7:35 government and will either use that money to consume

7:37 goods and services or they will invest it

7:39 which gives money to other businesses to

7:41 employ staff who will themselves spend it.

7:43 All of which further contributes to GDP

7:45 and perhaps even more importantly tax revenue.

7:47 If cutting down on government

7:49 spending violently crashes the economy there will be

7:51 less activity leading to fewer tax receipts

7:53 which means that the government will most likely end

7:55 up in a worse fiscal situation than what it

7:57 started with.

7:58 Another big difference between today and 30 years ago is the debt level itself.

8:02 Back then it was roughly 57% of GDP and today it's more than double that.

8:07 This not only means that

8:08 interest payments are now a significant budget expense

8:11 themselves but a large debt burden just

8:13 makes the economy harder to manage because

8:15 something as mundane as raising interest rates

8:17 adds significant cost to the government.

8:19 All this is to say that Doge has the unenviable task

8:22 of threading the needle between cutting down

8:24 on government spending without destroying the

8:26 foundation that an increasingly dependent economy has been built on.

8:29 This is going to take meticulous

8:31 long-term methodical planning that will inevitably involve

8:34 some compromises and most likely take

8:36 years to put into action let alone see results from.

8:39 So um yeah alright anyway.

8:41 Starting with that stated goal of cutting $2 trillion from the

8:44 budget every year that is a tall order by comparison

8:47 would be more than five times larger than the

8:50 deficit reduction act of 1993 even after accounting

8:52 for inflation.

8:53 So why this number?

8:54 Well big disclaimer time this is obviously personal

8:58 speculation but I can't help but feel like Elon

9:00 Musk the de facto head of this initiative

9:02 was put on the spot up on stage came up with

9:04 a number that sounded good and has had to work

9:06 backwards on it ever since.

9:08 Again purely speculation.

9:09 Now to be fair if two trillion

9:12 dollars really can be cut from the federal budget

9:14 then based on current trends that would put the

9:16 government back in surplus so mission accomplished.

9:19 Except not really.

9:21 All non-discretionary spending done in the last fiscal year

9:24 that we have comprehensive data on was $1.7 trillion.

9:26 That was made up of roughly 50% defense spending and

9:30 50% of what just gets classified as other a $917

9:33 billion accounting line that includes education

9:36 transport all the acronym federal organizations

9:38 courts and the upkeep of the federal government itself.

9:41 Which means even if every discretionary

9:43 budget item was cut every federal agency

9:45 was scrapped the military was literally completely

9:47 dissolved and most unbelievable of all federal politicians

9:49 were willing to give up their pay

9:51 checks there would still be a $300 billion deficit.

9:54 So then what is it that makes mandatory spending

9:57 so mandatory?

9:58 Well mandatory is probably honestly another confusing word for this.

10:01 Really all it means is that programs are

10:03 established with rules about how money is going

10:05 to get spent and whatever those programs need within

10:07 the confines of those rules gets given to

10:09 them.

10:10 For example military budgets are discretionary so military

10:12 leaders need to ask congress for money

10:15 and justify that based on what they're going to be

10:17 expected to do with that money and of course the

10:19 government can deny that money or give them a tighter budget.

10:22 A non-discretionary item like

10:23 income security is based on rules set by the

10:26 government but once those rules are set how much

10:29 money is spent really depends on how many

10:31 people participate in those programs based on eligibility.

10:34 For example if a million people meet the rules

10:36 to claim income support the government is mandated

10:38 to pay it or if 100 million people meet the

10:41 same rules to claim it the government is still

10:43 mandated to pay it.

10:44 Now that makes this spending much harder to control because it's not set down

10:48 to the dollar in advance and things like

10:50 welfare payments will depend on variables like unemployment.

10:52 A problem this can create for doge is that if

10:54 they cut a lot of expenses and workers from the

10:56 discretionary section of the budget that could in

10:59 turn create unemployment not only for the laid

11:01 off workers but also from the businesses that

11:03 relied on government funding and the businesses

11:05 that relied on those businesses which would end up

11:07 at least in the short term shifting spending

11:09 money from discretionary services to mandatory welfare.

11:11 Another problem is that legally it's

11:14 a fair bit harder to change mandatory spending.

11:16 The government needs to either alter the eligibility

11:18 rules or payment amounts which must be passed by majority in the senate.

11:22 So yeah getting to two

11:23 trillion dollars is going to be extremely hard

11:26 but realistically a smaller number would be fine

11:28 especially if it can be done consistently.

11:30 What can make this even better is that some spending

11:33 especially on apartments like the IRS for example

11:36 pay for themselves many times over actually

11:38 increasing their funding can help to process

11:40 returns more accurately and audit more effectively

11:42 which by some estimates results in returns of up

11:45 to 12 dollars for every additional dollar put in.

11:48 In terms of efficient government spending that's about as

11:50 good as it gets and frankly I can't think

11:52 of any reason why a government wouldn't want to allocate this funding.

11:55 Now realistically this is

11:56 going to be the biggest obstacle to the current plans.

11:58 The last time this was done in the USA

12:00 spending cuts were done in conjunction with tax

12:02 increases instead today all of this has been

12:05 done while tax policies that will significantly

12:07 reduce revenues are put in place.

12:09 Obviously this is somewhat counterproductive.

12:11 Now the argument is that lower taxes will stimulate more economic

12:14 activity and traditionally that's not incorrect.

12:17 Expansionary fiscal policy typically calls for

12:19 lowering taxes so that more money is there in

12:22 the economy but it also normally calls for

12:24 increased government spending to do the same thing.

12:26 It also assumes that tax cuts are not

12:28 being directed largely to already wealthy economic

12:30 participants with a lower propensity to consume

12:33 at least not nearly as much as the lower income households losing their jobs.

12:37 So then if there

12:38 are so many problems with the current implementation of

12:41 the DOGE initiative why is effectively the same

12:43 thing working in Argentina?

12:45 Okay well first things first the largest most powerful and

12:49 influential nation in history taking economic inspiration

12:53 from Argentina is yeah yeah no

12:56 those ones are getting kicked off YouTube.

12:59 The reality is Argentina was and still is in much

13:02 worse shape than the USA ever has been.

13:04 While some economic indicators are starting to improve

13:07 thanks to radical cost cutting and tax changes done

13:09 by the new Argentine government it must be

13:11 recognised that it would be hard for them to get much worse.

13:15 Radical actions in such an economy

13:17 really can't do much more harm and this is nothing new for Argentina.

13:20 It's had a long

13:21 history of bouncing back and forth between radical

13:24 leaders going all in on free markets

13:26 or social policies and normally they have had a

13:28 few years of doing some good when really all

13:30 they're actually doing is just undoing the

13:32 mistakes of the radical government that came

13:34 before them before going too far in the other direction all over again.

13:38 The reason Argentina has had so many long-term

13:40 economic problems is because of stability and confidence.

13:44 It's hard for businesses and industries to develop in

13:47 Argentina because every decade or so a new

13:49 government completely shakes up the country's economic fundamentals.

13:52 Now even still this doesn't

13:54 mean that DOGE can't take inspiration from Argentina

13:57 it should just be as a cautionary tail

14:00 rather than a role model.

14:01 Having a body to oversee government spending and identify areas of waste

14:05 or places where resources could be better allocated

14:07 is a good idea with broad support.

14:10 It needs to realise that sometimes the slow nature

14:12 of government is a feature and not a bug.

14:14 Decisions on this scale need to be very carefully considered by qualified people

14:19 with not even the potential of a conflict of interest.

14:22 Objectives need to be laid out months

14:24 or years in advance to make sure that industry has

14:26 time to adapt and these initiatives need to be

14:27 done in conjunction with coordinated fiscal policy.

14:30 Now we actually made an entire video

14:32 just last month on how to guarantee economic

14:35 failure and there are some worrying similarities

14:37 between all of this.

14:38 Anyway you should be able to click to that video on your screen now.

14:41 Thanks for watching mate, bye.