While the Democratic Party expresses disapproval of the Trump administration’s wrecking-ball authoritarianism by wearing pink, investment banks have been seeking guidance from America’s stand-in opposition: conservative and libertarian think-tanks.
The Washington Strategy team at Jefferies invited Jessica Riedl of the Manhattan Institute and the Cato Institute’s Alex Nowrasteh and Ryan Bourne in for a chat. The subject was Doge, the Department of Government Efficiency, and whether there’s any truth to its claim to have saved $105bn through workforce reductions and contract cancellations.
TL;DR — no.
Key takeaways: 1) DOGE’s actual impact is less than $10bn; 2) DOGE cannot reduce spending passed by Congress; 3) Meaningful cuts would require reforms on entitlement programs.
Here, via Jefferies, is Cato Institute’s Doge strategy ready-reckoner:
1. Purging progressive influence: DOGE is being used to remove left-leaning personnel and policies from the federal government. This is evident in its exemption of security agencies, its focus on dismantling diversity programs, and its termination of probationary employees hired under the Biden administration.
2. Musk-style corporate restructuring: DOGE is applying Elon Musk’s cost-cutting playbook to the federal government, prioritizing workforce reductions despite personnel costs being a minor share of overall federal spending.
3. Public relations strategy for spending cuts: By spotlighting small-dollar programs, it may be using public misconceptions about federal spending to push a broader austerity agenda.
4. Legal challenge to expand executive power: DOGE is testing the limits of presidential control over federal spending, potentially setting the stage for a Supreme Court ruling that weakens legislative constraints around impoundment.
5. Political cover for fiscal policy: DOGE serves as a shield for congressional Republicans, allowing them to extend the 2017 tax cuts and expand the deficit while enacting only minimal spending reductions.
And for what? A $10bn reduction would be less than 0.2 per cent of the US fiscal deficit. Summing up Doge’s approach as “spending cut performance art”, the Manhattan Institute presentation puts true savings at “closer to $2bn, or 0.03 per cent of federal budget”.
Musk’s hand-wavy target of cutting between $1tn and $2tn by July 2026 remains in place, but even the $105bn it has claimed so far doesn’t stand up to scrutiny. Nor, if the idea is balancing the budget, does a strategy of lay-offs and contract cancellations make a lot of sense; not when social security, Medicare/Medicaid, veterans’ benefits, defence, and interest payments account for 75 per cent of federal spending.
Per Jefferies, in its note to clients:
Cutting 25 per cent of federal employees would save only 1 per cent of the budget, and eliminating USAID would only account for 0.6 per cent of the spending. A more practical target would be addressing payment errors, but it would yield only around $100bn in saving.
These figures are dwarfed by the scale of what’s required:
Under the current tax code and modest spending adjustments, the deficit is projected to rise from $2tn to $3.6tn in the next decade. If the US ever defaults on its debt, no external bailout would be possible, and the resulting economic shock would be severe. A key driver of rising costs is Social Security, largely due to demographic shifts—while five workers once supported one retiree, that ratio has fallen to three and is expected to reach two in the next decade. Some lawmakers acknowledge that adjusting Social Security would be necessary, but raising the retirement age or reducing benefits is politically costly.
The Cato Institute outlines possible ways to reduce the fiscal spending by as much as $2.4tn, including entitlement reform (Social Security and Medicare), eliminating corporate subsidies, ending federal aid to states, selling federal assets, simplifying the tax code to promote efficiency, and regulatory reform to spur growth.
Deporting people won’t work either:
Having the world’s reserve currency makes debt of 123 per cent of GDP just about tolerable. When it stops being tolerable is the issue. Jefferies puts forward the argument that significant cuts will have to come eventually. Going by the constitution, Congress has sole responsibility for matters fiscal, so investors are at risk of paying Doge too much attention (though fans of democracy may feel they have little choice).
We’ve extracted the Manhattan Institute and Cato Institute PDF slide desks from Jefferies’ research. Shout at us by email if you believe that to be a problem.