Generally, political campaigns try to put a positive spin on their economic proposals and downplay any potential costs. But with the U.S. presidential election in the final stretch, Elon Musk, who’s become Donald Trump’s loudest and most visible supporter in corporate America, has chosen a different tack: talking about the economic pain that his and Trump’s plans could inflict should Trump retake the Oval Office.
In a telephone town hall last Friday, Musk—whom Trump plans to put in charge of a government commission tasked with cutting spending—said that the spending cuts he’ll spearhead (and that famed investor John Paulson is also helping devise) would cause “some temporary hardship” but would lead to “long-term prosperity.” Even more strikingly, a few days later Musk took to X to agree with a tweet asserting that the combination of spending cuts and Trump’s proposed mass deportations of undocumented migrants would cause a “severe overreaction in the economy” and lead markets to “tumble.”
“Sounds about right,” Musk wrote.
Give Musk points for honesty, at least. He’s said that as the head of Trump’s proposed Department of Government Efficiency (DOGE, get it?), he would cut “at least $2 trillion” from the federal budget. The total U.S. gross domestic product is around $29 trillion, so slashing total spending in the economy by $2 trillion would jack up unemployment, almost certainly send the economy into deep recession, and drive stock prices lower.
Sounds about right
— Elon Musk (@elonmusk) October 29, 2024
Where the “hardship” will be felt most
The U.S. has no historical experience with government spending cuts of that magnitude, and the closest analogy to Musk’s proposed cuts is something like the massive pullback in business investment and consumer spending seen in the early years of the Great Depression. That’s not a model most policymakers want to emulate. Cutting $2 trillion would also, by necessity, require the elimination of most of the social safety net the federal government provides. So the “hardship” Musk says the cuts would inflict would be felt most intensely by people at the bottom of the income ladder.
Musk, not surprisingly, has a different take, claiming that cutting the $2 trillion can be done largely by just getting rid of fraud and waste in federal spending. Musk’s model here is something like what he did at Twitter, where he fired 70% of the company’s employees and still kept the service up and running. Trump has made similar claims. In a September speech where he unveiled the proposed efficiency commission, Trump said that simply eliminating “fraud and improper payments” would “save trillions of dollars.” And in an interview this week, he claimed that because Musk’s cuts would target waste and fraud, “nobody is going to feel” the impact of the cuts.
Needless to say, this is a fantasy. Politicians have been banging on about getting rid of government waste for decades. But the reality is that there simply isn’t that much waste to get rid of. Contrary to the stereotypical image, programs like Medicare, Social Security, and Medicaid have low administrative costs, especially relative to the private sector. Granted, the Government Accountability Office estimates there were $236 billion in “improper payments” (that shouldn’t have been made or were made in the wrong amounts) last year. But even if you could accomplish the unlikely feat of eliminating all of those before they occur, you’d still be a long way from $2 trillion in cuts.
Making deep cuts
Talking about fraud and waste makes cutting federal spending sound easy. The reality is that it’s very hard. If you exclude interest payments on the debt (which the U.S. is obliged to pay), most federal spending goes to just four areas: Social Security, Medicare, health insurance (including Medicaid, children’s health insurance, and the Affordable Care Act), and national defense. Total spending on everything else was around $1 trillion last year. So even if Musk and Trump plan to eliminate almost all of what the government does (from infrastructure spending to scientific research to food stamps to environmental protection), cutting $2 trillion would require Congress to approve deep cuts to very popular programs. The chances of that happening are slim to none.
Making the problem worse, Trump has announced ambitious spending plans, saying he wants to build “extraordinary national development projects . . . everything from highways to airports to transportation infrastructure” and “state-of-the-art manufacturing hubs.” That would require more spending, not less. Trump has also proposed a wide range of new tax cuts, as well as the extension of the tax cuts that were put in place during his administration. So if the goal is, as Musk has argued, for the U.S. to live within its means and stop running huge deficits, even cutting $2 trillion in spending would not be enough.
It is true that the U.S. needs to get its fiscal house in order. But the way to do that is via a combination of judicious cuts and tax increases, not a meat-cleaver approach. Musk may be honest about the fact that his proposed cuts will be painful, but he’s not being honest about what cutting spending on the scale he’s talking about would actually require. Instead, he’s pretending that he can do to the federal government what he did to Twitter. But that’s because he either doesn’t understand where most federal spending goes or is simply ignoring the facts. So he’s come up with a plan that’s both unrealistic and economically devastating—not an ideal combination.