The DOGE Program and the US Economy: Spending Cuts, GDP, and the Federal Deficit
By Tim Hayes, Financial Advisor for the Public and Not-for-Profit Sector
President Trump and billionaire Elon Musk aim to significantly reduce government spending through the DOGE program. Initially, Musk proposed a target of two trillion dollars in savings, but he has since revised this figure downward.
A primary source of these government spending cuts will be workforce reductions. The outcomes for affected workers remain uncertain, as it is unclear whether they will find new employment or opt to retire. However, these cuts will have a substantial impact on the overall economy and the gross domestic product (GDP).
Gross Domestic Product (GDP) of the United States
The United States currently boasts a GDP of $29 trillion, with a government deficit of $1.83 trillion, which represents roughly 7% of the GDP. As of July 2024, the total debt in the US—encompassing state and federal debt, corporate debt, and individual debt—stands at an astonishing $101 trillion.
Musk and Trump are primarily focused on the level of federal government debt. A deficit of 7% of GDP at this late stage in the economic cycle suggests that the federal government may be spending excessively or taxing inadequately.
Components of Gross Domestic Product (GDP)
Government spending is a crucial component of GDP, alongside corporate expenditure or investment, individual spending, and the balance between exports and imports. Thus, any reduction in government spending without a corresponding increase in the other three components is likely to affect GDP.
Reducing government spending decreases the deficit, meaning that individuals or firms that would have funded that deficit through bond purchases will have more money to spend. However, many of these individuals are wealthy, and they are more likely to invest these funds in different financial assets. The same applies to firms, and purchasing financial assets does not increase GDP.
Consequently, the expectation to counterbalance the decline in GDP resulting from reduced government spending depends on individuals and corporations increasing their spending through greater borrowing. This is likely to happen if the deficit reduction results in lower interest rates.
GDP contributions over the past 60 years
| Average annual share of GDP % | Consumer expenditure | Investment | Net Exports | Government Spending | Total GDP |
|---|---|---|---|---|---|
| 1961-70 | 61.8% | 20.5% | 0.6% | 17.1% | 100% |
| 1971-80 | 62.5% | 20.6% | -0.3% | 17.2% | 100% |
| 1981-90 | 64.6% | 20.3% | -1.9% | 17% | 100% |
| 1990-2000 | 67.3% | 18.9% | -1.5% | 15.3% | 100% |
| 2001-10 | 70% | 18.6% | -4.5% | 15.9% | 100% |
| 2018 | 69% | 18% | -4% | 17% | 100% |
| 2019 | 70% | 18% | -5% | 17% | 100% |
| 2020 | 68% | 17% | -3% | 18% | 100% |
| 2022 | 71% | 19% | -7% | 17% | 100% |
| 2023 | 68% | 18% | -3% | 17% | 100% |
Source: Organization for Economic Co-operation and Development & 2018 Numbers The Balance https://www.thebalance.com/components-of-gdp-explanation-formula-and-chart-3306015
Exploring the Connection Between Debt and Spending
The economy has a peculiar nature: spending typically increases with a corresponding rise in debt, whether it be corporate, individual, or government.
A key player in this cycle is commercial banks, which generate considerable money within capitalism to finance this debt by creating deposits for customers when they extend loans.
A significant portion of both personal and corporate deposits from banks ultimately translates into government debt. This includes FDIC insurance, converting bank deposits into currency, or government bailouts of financial institutions such as Silicon Valley Bank or during the 2008 financial crisis.
If you look at the table below, you will observe that total debt in the US economy has more than doubled each decade, with a few exceptions.
One notable exception is the 1980s, when total debt surged by 202%. This decade was characterized by substantial government debt alongside rising corporate and individual debt. Yet, it also saw declining interest rates and inflation. This scenario challenged the prevailing theory that an increased money supply leads to higher inflation.
Another exception was the post-financial crisis decade from 2010 to 2020, during which total debt grew by only 43%.
Whenever someone advocates for reducing government debt, they indirectly endorse increased business or individual debt unless they disregard concerns about economic growth.
Total Debt by Decade (in trillion U.S. dollars)
| Decade | Total Debt Beginning of Decade | End of Decade | % Increase |
|---|---|---|---|
| 1950-1960 | $406 | $763 | 88% |
| 1960-1970 | $763 | $1549 | 103% |
| 1970-1980 | $1549 | $4487 | 189% |
| 1980-1990 | $4487 | $13,568 | 202% |
| 1990-2000 | $13,568 | $27,302 | 101% |
| 2000-2010 | $27,302 | $54,119 | 98% |
| 2010-2020 | $54,119 | $77,215 | 43% |
| 2020-July 2024 | $77,215 | $101,352 | 32% |
Can Lowering Interest Rates Stimulate Spending?
Lowering interest rates is a complex task, especially in the current economic climate where inflation has proven to be a persistent challenge. President Trump’s proposed programs, such as tariffs and immigration policies, are expected to further complicate the situation by potentially driving prices higher.
Even if rates were lowered based on the bubble in financial assets, check out the stock market to GDP ratio (below), Q Ratio, CAPE, and the crypto and AI bonanza. Much of the corporate and individual debt generated in this cycle has gone into financial assets, and making a 1929, 2000-type bubble bigger isn’t a good plan.
Addressing the Challenges of the Deficit
To reduce the deficit, we should raise taxes on the wealthy, who are inflating asset prices, and reform the tax code to encourage business investment. This strategy will lessen our reliance on consumer and government spending and may aid in reducing the trade deficit.
Are There Effective Ways to Significantly Lower Total Debt?
A government default could drastically cut debt but might also precipitate a global depression and trigger waves of write-offs for corporate and personal debt.
Alternatively, during the next severe recession, the government could stop supporting struggling financial institutions and permit substantial write-offs of bad corporate and individual debt. Investors exceeding the FDIC limit might lose their deposits, potentially sparking a worldwide depression.
Money and Debt Are Two Sides of the Same Coin
As you can see, debt levels will remain at figures our minds may struggle to grasp, illustrating the nature of our economy. Your money represents someone else’s debt, so the only way to reduce debt is for someone to be willing to hold less money.
The challenge lies in directing much of the new debt into investments, whether in new facilities or technology for businesses, education, research, infrastructure from the government, higher education, or technical training for individuals.
Schedule a Consultation with Tim Hayes
Fiduciary financial advisor with 35+ years helping Massachusetts public employees and educators with retirement planning. Fee-based, hourly, or commission — whatever fits your situation.
"My goal is to ensure your retirement plan is built on your best interests, not a product sale."
Schedule a consultation or call 508-277-5847.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.