We grew up with tales of $500 toilet seats and bridges to nowhere when describing the abuses of government spending. In a few days, Americans will get our first taste of what it will mean to make our government efficient once again.

 

The Department of Government Efficiency (DOGE) is not an official government department. That would require an act of Congress. Since members of that august body have been the major contributors to decades of inefficient use of government funds, it probably was a good idea to bypass a vote on making DOGE "official."

 

Instead, it will operate as an advisory body, run by two of President-elect Trump's closest allies with a direct line to the Oval Office. Billionaires Elon Musk and Vivek Ramaswamy will serve as volunteers and not federal employees or officials. They will assist the president in recruiting a team of professionals who will provide guidance to the White House on spending cuts and compile a list of regulations they believe are outside of various agencies' legal authority.

 

Both men floated the idea of saving the country $2 trillion in savings or around a third of annual federal government spending by slashing federal regulations, overseeing mass layoffs, and shutting down some agencies entirely. That played well to the populist wave of voter sentiment but has since been paired back by half after winning the election. Their job, even with the newly reduced target of $ 1 trillion in savings is still formidable.

 

Just about everyone is for more government efficiency, if it does not come out of their backyard. Reduce defense but don't touch Social Security. Get rid of the education department but keep consumer protection. Everyone's interests are supposedly represented by lawmakers in Congress. Given that the House is almost evenly split and rife with factions in both parties, consensus on the passage of spending cuts will surely test both the persuasive abilities of Trump and his unofficial volunteers.

 

Their success or failure will have far-reaching effects on the stock market and the economy. Over the last decade, government spending has gone through the roof. The U.S. spent $6.75 trillion, an increase of $617 billion over 2023. That spending was 23.4 percent of Gross Domestic Product. Some argue that if you include the 13 percent spent by states and local governments, plus annual compliance costs to comply with federal regulations, the total is far higher.

 

As a result, the country's deficit is expected to grow to $1.8 trillion last year and to total $2 trillion in 2025 unless something changes, according to the Congressional Budget Office. Total debt is now running at $6 trillion, or more than 125 percent debt to GDP ratio which means that the U.S. government has more debt than the size of the entire economy. We are fast becoming what is called a "banana republic country." It is one of the main reasons why the benchmark 10-year U.S. Treasury bond’s yield has exploded in the last few weeks.

 

Given this backdrop, reducing the size of government while increasing its efficiency generally leads to positive effects on economic growth, which is extremely important for reducing the deficit and debt. According to most economic theories, a smaller government with effective operations can often stimulate private investment and innovation. That should lead to faster economic expansion over time, more tax revenues, and less need to borrow. How that all plays out depends on how the government is scaled down and which programs are affected.

 

Few in the media are talking about what will happen to the economy in the event DOGE is successful in reducing spending. Sure, according to economic theory, a more efficient government will lead to higher growth but over what time frame? My own opinion is that in the short run (the next year or two) slashing government employment, programs, and agencies will hurt the economy more than it helps it.

 

Let's be conservative and guess that all-in, Musk and his men, succeed in pairing $800 billion from the government's 23.5 percent share of the economy. What happens to GDP? It doesn't take a rocket scientist to figure out that we could see a substantial decline in economic growth. It would probably mean higher unemployment too since the federal government employs more than 3 million people or 1.87 percent of the civilian workforce.

 

This slower growth would hurt corporate revenues and profits and possibly translate into a lower stock market, all else being equal.

 

The upside would be a leveling off in interest rates, some relief on our mounting debt burden and deficit, and maybe less inflation. At the same time, other policy initiatives from the new administration such as tax cuts, tariffs, and immigrant efforts could contribute to even slower growth or achieve the opposite.

 

In any case, over the next two to three weeks, I would pay close attention to the balloons floated by the DOGE boys. See what initiatives create the most blowback and what ideas may stick. Deep cuts in Medicaid, for example, which represent 10 percent of the federal budget, would hurt blue states the most, as well as hospitals in general. That suggestion and many others would cause a great deal of outrage. It is a question of whether the country is willing to accept short-term pain in exchange for long-term gain. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.