The Problem With Trying to Run Government Like a Business

0:00 So, like most economists, we try really,

0:03 really hard to pretend we're better than politics.

0:05 But inevitably, the two are intertwined,

0:07 and it's honestly naive to look at either in complete isolation.

0:11 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 Government efficiency and its aim to lower US

0:19 government spending to reign in ongoing budget deficits is a good idea,

0:24 but it has clearly been mired in just a tad of political controversy.

0:28 In the interest of complete fairness,

0:30 sometimes essential economic policies have to be pushed through,

0:32 even if they are going to be politically unpopular.

0:35 Massively cutting down on government spending

0:36 is going to involve cutting funding

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

0:41 their contracts, or their jobs.

0:42 And that is completely reasonable.

0:44 However, effective governments also cannot

0:46 and should not become needlessly bloated

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

0:53 Realistically, if fiscal policy was conducted purely on economics,

0:55 this arguably should have been done decades ago.

0:58 But the second term of an administration that historically

1:00 hasn't been too afraid to piss in some Cheerios,

1:03 should all other things been equal,

1:05 be the next best time to push through some bitter medicine.

1:07 Although this is making some big assumptions.

1:10 The first is that US debt is actually unsustainable to begin with.

1:14 Yeah, it's now over $36 trillion or more than 117% of GDP,

1:19 which for most of the countries we've explored on this channel

1:21 before is well and truly into the danger zone.

1:24 It's also not going to be helped by the fact that refinancing that debt

1:27 is going to start getting expensive now

1:29 that interest rates are at multi-deade highs.

1:32 But despite all of this, most mainstream economists

1:35 maintain that the USA is special and within

1:37 reason can get away with running a little

1:39 bit more leverage than most other countries.

1:41 And it's important to understand why.

1:43 And if that special status is going to continue into the future.

1:47 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 initiative masquerading

1:56 as a solution to a manufactured economic problem?

1:59 So, has US debt finally gone too far?

2:02 Can Doge actually turn this around, assuming it was managed flawlessly?

2:06 And finally, are there better solutions to this problem?

2:10 Obviously, coverage of this issue has inevitably

2:12 been mixed along political lines with a shocking

2:14 number of outlets not even acknowledging

2:15 the respective ideas or failures of this initiative.

2:18 That's why a tool like Ground News is so important.

2:21 Ground News is an independent subscriber funded website and app on a mission

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

2:26 It gathers related articles from around the world

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

2:31 For example, the debate over US AIDS shut

2:32 down by Doge illustrates exactly why diverse perspectives matter.

2:36 Left-leaning coverage frame Musk and Doge actions

2:38 as threats and an unconstitutional shutdown of US aid,

2:42 emphasizing the need for systems to be restored,

2:44 while right-leaning outlets deemphasize the constitutional questions,

2:47 instead using terms like shutter,

2:49 and dismantling, while highlighting DOA's efforts

2:51 to combat waste, fraud, and abuse.

2:53 Every story comes with a quick

2:54 visual breakdown of the political bias, factuality,

2:56 and ownership of the sourc's reporting,

2:58 all backed by ratings from three independent news monitoring organizations.

3:01 There are real world consequences to not seeing

3:03 the full picture of pressing issues like this.

3:05 From shaping public opinion to public policy,

3:07 this is why one of my favorite features is the ground news blind spot feature.

3:11 This surfaces important stories exclusively circulating in the left or right

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

3:17 I think Ground News makes it easier than ever

3:19 to check your biases and make up your own mind,

3:21 all without being overwhelmed or misled.

3:23 Go to ground.news/explain to save 40% on the same unlimited access Vantage

3:27 plan I use to get my news on the economy and the world.

3:30 Supporting ground news not only supports my work,

3:31 it supports an independent news platform giving

3:33 us agency over the information we consume.

3:36 Okay, so the first thing to recognize is

3:38 that this whole thing is not totally unprecedented.

3:41 We have already explored the extreme cost

3:43 cutting done by places like Argentina to fix

3:45 up their fundamentally broken economy and the Doge

3:47 program 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 manner,

3:56 even the US has actually been here and done

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

4:01 Most recently, in 1993, the newly elected government pushed

4:03 through the Omnibus Budget Reconciliation Act,

4:06 which amongst other things sought to drastically

4:08 reduce government spending to reduce the budget deficit.

4:11 This plan also simultaneously involved raising

4:14 taxes primarily on higher income earners,

4:16 but we'll also get to that detail later.

4:18 Now, this plan in conjunction with, to be fair,

4:20 a very strong overall economy and the adoption

4:23 of modern technologies like the computerization

4:24 of administration systems saw the federal government deliver

4:27 its first budget surplus in over two decades.

4:30 What's more is it was the largest surplus

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

4:36 Since then, the US government has never run a surplus again and it's been

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

4:43 Now, a quick side note is that a budget

4:46 surplus doesn't necessarily mean that the country has no debt.

4:49 It just means that it has more revenue

4:51 through taxes or other forms of income like

4:52 potential natural resource rents than it spends on all

4:55 the various things that governments spend money on.

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

5:00 surplus doesn't even necessarily mean that the government

5:02 has to pay down its debts or that it can't take on more debt.

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

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

5:11 there's no mandate for a government running a budget surplus

5:13 to commit that extra money to exclusively paying down debt.

5:17 There are a few economies around the world where

5:18 the government consistently 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 example,

5:26 don't have the level of debt that the USA has,

5:29 but it is still there because in moderation,

5:31 there are some big advantages to having at least some government debt.

5:34 And as a bit of foreshadowing, this is particularly important for the USA.

5:37 So remember that for later.

5:39 For now though, in the USA,

5:40 these details are largely academic because, of course,

5:42 an individual or a government that is spending more than they

5:45 make really has no choice other than to take on debt.

5:49 One more thing that probably needs to be mentioned is

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

5:53 Trade deficit is just when a country imports more than it exports.

5:57 Budget deficit is when the government spends more than it taxes.

6:00 Okay, so with the admittedly somewhat confusing jargon out of the way,

6:03 what is to stop the government of today committing to the same

6:05 kind of deficit reduction measures that worked 30 years ago?

6:08 Well, there are a few things.

6:11 One of the interesting details here is that this government spending cut was

6:14 done back when government spending was

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

6:20 In the USA today, government spending is almost double that at 35% of GDP.

6:25 Realistically, this means that there is a lot more spending to be cut down on.

6:28 Just reducing the rate of government spending

6:30 to be proportionally in line with what it was at the start of the 1990s would

6:34 already cut trillions of dollars from the budget.

6:36 That's before the omnibus cuts which reduced spending even further.

6:39 So this is starting to sound pretty promising

6:41 for Doge and its merry big bold men.

6:44 However, it's also important to consider

6:46 that this significant nominal and relative increase in government

6:48 spending now means that the economy is

6:51 also much more dependent on government spending.

6:54 Realistically, this isn't a good thing, especially in the long term,

6:56 because it encourages 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

7:04 takes up most of the country's economic output,

7:06 that's just a centrally planned economy,

7:08 which tends to be very bad at allocating resources compared

7:10 to economies with a healthier mix

7:11 of consumer investment and government spending.

7:14 Now, that may be true in the long term, but short-term,

7:17 ripping out the life support system overnight without a plan in place to replace

7:20 that economic activity elsewhere in the economy

7:23 will create a significant economic shock,

7:25 which will realistically just make things worse.

7:27 Government spending, even as high as it is today,

7:30 only accounts for the direct payments made by various levels of government.

7:34 Someone working a government job, will be paid by the government and will

7:37 either use that money to consume goods and services, or they will invest it,

7:40 which gives money to other businesses

7:41 to employ staff who will themselves spend it.

7:44 All of which further contributes to GDP

7:46 and perhaps even more importantly tax revenue.

7:48 If cutting down on government spending violently crashes the economy,

7:51 there will be less activity leading to fewer tax receipts,

7:54 which means that the government will most likely end up

7:56 in a worse fiscal situation than what it started with.

7:59 Another big difference between today and 30 years ago is the debt level itself.

8:04 Back then, it was roughly 57% of GDP, and today it's more than double that.

8:08 This not only means that interest payments

8:10 are now a significant budget expense themselves,

8:11 but a large debt burden just makes the economy harder to manage because

8:15 something as mundane as raising interest

8:17 rates adds significant costs to the government.

8:19 All this is to say that Doge has

8:22 the unenviable task of threading the needle between cutting

8:24 down on government spending without destroying the foundation

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

8:29 This is going to take meticulous, long-term,

8:32 methodical planning that will inevitably involve some compromises

8:35 and most likely take years to put into action, let alone see results from.

8:40 So, um, yeah.

8:41 All right.

8:42 Anyway, starting with that stated goal of cutting

8:44 $2 trillion from the budget every year.

8:46 That is a tall order.

8:47 By comparison, would be more than five times

8:49 larger than the deficit reduction act of 1993,

8:52 even after accounting for inflation.

8:54 So, why this number?

8:55 Well, big disclaimer time.

8:57 This is obviously personal speculation,

8:59 but I can't help but feel like Elon Musk, the deacto head of this initiative,

9:02 was put on the spot up on stage, came up with a number that sounded good,

9:06 and has had to work backwards on it ever since.

9:08 Again, purely speculation.

9:10 Now, to be fair, if $2 trillion really can be cut from the federal budget,

9:15 then based on current trends, that would put the government back in surplus.

9:18 So, mission accomplished.

9:20 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.

9:28 That was made up of roughly 50% defense spending and 50% of what

9:31 just gets classified as other a 917

9:34 billion accounting line that includes education,

9:37 transport, all the acronym federal organizations, courts,

9:39 and the upkeep of the federal government itself.

9:41 Which means even if every discretionary budget item was cut,

9:45 every federal agency was scrapped,

9:47 the military was literally completely dissolved, and most unbelievable of all,

9:50 federal politicians were willing to give up their paychecks,

9:53 there would still be a $300 billion deficit.

9:55 So then, what is it that makes mandatory spending so mandatory?

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

10:02 Really, all it means is that programs are established

10:04 with rules about how money is going to get spent,

10:06 and whatever those programs need within the confines

10:08 of those rules gets given to them.

10:11 For example, military budgets are discretionary.

10:13 So military leaders need to ask Congress for money and justify that based

10:16 on what they're going to be expected to do with that money.

10:19 And of course, the government can deny that money or give them a tighter budget.

10:22 A non-discretionary item like income security is

10:25 based on rules set by the government.

10:27 But once those rules are set, how much money is spent really depends on how

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

10:35 For example, if a million people meet the rules to claim income support,

10:37 the government is mandated to pay it.

10:40 or if 100 million people meet the same rules to claim it,

10:43 the government is still mandated to pay it.

10:45 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.

10:53 A problem this can create for Doge is that if they cut

10:55 a lot of expenses and workers from the discretionary section of the budget,

10:59 that could in turn create unemployment, not only for the laid-off workers,

11:01 but also from the businesses that relied on government

11:04 funding and the businesses that relied on those businesses,

11:06 which would end up, at least in the short term,

11:09 shifting spending money from discretionary services to mandatory welfare.

11:12 Another problem is that legally it's

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

11:17 The government needs to either alter the eligibility rules or payment

11:20 amounts which must be passed by majority in the Senate.

11:22 So yeah, getting to $2 trillion is going to be extremely hard,

11:27 but realistically a smaller number would be fine,

11:28 especially if it can be done consistently.

11:31 What can make this even better is that some spending,

11:34 especially on departments like the IRS,

11:36 for example, pay for themselves many times over.

11:38 actually increasing their funding can help to process

11:40 returns more accurately and audit more effectively,

11:43 which by some estimates results in returns of up

11:46 to $12 for every additional dollar put in.

11:48 In terms of efficient government spending, that's about as good as it gets.

11:51 And frankly, I can't think of any reason

11:53 why a government would want to allocate this funding.

11:55 Now, realistically, this is going to be

11:57 the biggest obstacle to the current plans.

11:59 The last time this was done in the USA,

12:01 spending cuts were done in conjunction with tax increases.

12:04 Instead, today all of this has been done while tax

12:06 policies that will significantly reduce revenues are put in place.

12:10 Obviously, this is somewhat counterproductive.

12:12 Now, the argument is that lower taxes will stimulate more economic activity.

12:15 And traditionally, that's not incorrect.

12:18 Expansionary fiscal policy typically calls for lowering taxes

12:20 so that more money is there in the economy,

12:22 but it also normally calls for increased

12:24 government spending to do the same thing.

12:26 It also assumes that tax cuts are not being directed largely

12:30 to already wealthy economic 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 are so many problems

12:39 with the current implementation of the Doge initiative,

12:42 why is effectively the same thing working in Argentina?

12:46 Okay.

12:46 Well, first things first, the largest, most powerful,

12:50 and influential nation in history taking

12:52 economic inspiration from Argentina is Yeah.

12:56 Yeah.

12:56 Yeah.

12:56 No, those words are getting me kicked off YouTube.

13:00 The reality is Argentina was and still is

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

13:06 While some economic indicators are starting to improve thanks to radical

13:09 cost cutting and tax changes done by the new Argentine government,

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

13:15 Radical actions in such an economy really can't do much more harm.

13:19 And this is nothing new for Argentina.

13:21 It's had a long history of bouncing back and forth between

13:24 radical leaders going all in on free markets or social policies.

13:27 And normally they have had a few years of doing

13:30 some good when really all they're actually doing is just undoing

13:32 the mistakes of the radical government that came before them

13:35 before going too far in the other direction all over again.

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

13:41 economic problems is because of stability and confidence.

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

13:48 decade or so a new government

13:50 completely shakes up the country's economic fundamentals.

13:53 Now, even still, this doesn't mean

13:55 that Doge can't take inspiration from Argentina.

13:58 It should just be as a cautionary tale rather than a role model.

14:02 Having a body to oversee government spending

14:04 and identify areas of waste or places

14:06 where resources could be better allocated is a good idea with broad support.

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

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

14:15 Decisions on this scale need to be very carefully considered by qualified

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

14:22 Objectives need to be laid out months or years

14:24 in advance to make sure that industry has time to adapt.

14:26 And these initiatives need to be

14:28 done in conjunction with coordinated fiscal policy.

14:31 Now, we actually made an entire video just

14:33 last month on how to guarantee economic failure.

14:35 And there are some worrying similarities between all of this.

14:39 Anyway, you should be able to click to that video on your screen now.

14:44 Thanks for watching, mate.

14:45 Bye.