Yeva Nersisyan: DOGE cuts will cost America more money than they save

Yeva Nersisyan / Special to the Post-Gazette

The second Trump administration has added a new term to the English vocabulary, getting “DOGE-ed.” Almost every day we hear about another government agency getting the DOGE treatment — cutting staff, closing down offices, etc.

The Department of Government Efficiency is supposedly making our government more efficient and hence saving us, the taxpayers, some money. But what does it mean for the government to save money? And do we really save taxpayers any money when we cut government spending?

The forest and the trees

In any principles of economics class, students learn that the macro logic, where we look at the forest, is different from the micro logic, where we study the trees. Microeconomics, for instance, focuses on the behavior of firms and households independently. In macroeconomics, however, what happens in one sector, such as the government, has repercussions for others, such as the private sector.

We can’t, for example, think of savings in government spending the way we think of savings in family spending. (As many people do.) They have very different effects.

John Maynard Keynes, the father of macroeconomics, was the first to recognize that the whole of the economy was greater than the sum of its parts. The famous example he used was the so-called paradox of the thrift.

Suppose a family decides to ramp up its savings. It can do so by cutting its consumption spending – buying fewer avocado toasts and lattes! But can the society as a whole save more by consuming less? Not really, because someone’s consumption spending is income for someone else in the economy.

If consumers spend less, there will be less national income. Less national income, in turn, means less saving for the economy as a whole. Therein lies the paradox — while an individual can save more by consuming less, the economy as a whole will end up with less saving if it cuts its consumption spending.

This macroeconomic logic can be used to understand what happens when the government decides to spend less, whether by DOGE-ing different agencies or by cutting programs such as SNAP and Medicaid. If the government is spending less, many people are earning less income. Those include government employees who were laid off directly and employees of funded programs who were laid off when the funding was taken away.

Surpluses and deficits

Since people’s consumption depends largely on their income, the newly unemployed workers will cut their own spending (and saving). Whoever was receiving their spending as income now receives less of it and will consequently cut their own consumption spending (and saving). This cycle continues with the initial cut in government spending multiplied into a larger decrease in national income.

Reducing government spending in the name of saving money actually leads to less saving in the private sector as it lowers our national income. Thinking about government “saving” in the same way that we think about saving as individuals ignores the repercussions that spending cuts in one sector have for others. It muddles the forest for the trees.

To further illustrate that DOGE-ing the government doesn’t really save the nation anything in financial terms, we can look at the “sectoral balances,” the combination of financial balances of the various sectors of the economy. For the economy as a whole, total income equals total expenditure, since someone’s income is someone else’s expenditure. If one sector of the economy has a positive financial balance (by earning more than its spending), the other sector must have a negative financial balance (by earning less than its spending).

In other words, a government deficit is always matched by a surplus in the non-government sector, while a government surplus necessarily means a deficit for the non-government sector. This is not a theory. It’s accounting. While conventional wisdom views government surpluses as adding to national savings, they actually lead to deficits for the non-government sector, including firms and households.

As a case in point, the “Clinton surpluses” were the last time the federal budget was in the black. While at the time the budget surplus was extolled as evidence of good economic management, in reality the non-government sector was financing this surplus by running a deficit — and accumulating debt.

Unwanted savings

There is one type of “saving” that cutting government spending can accomplish — that of real resources. For instance, if the government spends less on the military, it frees up resources it previously used so the private sector can employ them.

There are circumstances in which this could be desirable, such as an overheating economy that has a resource shortage. But with the labor market softening in recent months that is not the situation we are currently in.

As some people cheer the DOGE-ing of the various government agencies as a way to save taxpayer money, they would do well to recall that what’s true for the trees is not always true for the forest.

Yeva Nersisyan is chair of the economics department at Franklin & Marshall College in Lancaster, and a research scholar at Bard College’s Levy Economics Institute.