Elon Musk and Vivek Ramaswamy have promised to cut $2 trillion from the federal budget with their Department of Government Efficiency. Simon Rabinovitch is U.S. economics editor for The Economist, and he joins host Krys Boyd to discuss how it may actually be possible to generate significant cost cutting – but not in the time frame the president-elect is hoping for. His article is “How to make Elon Musk’s budget-slashing dreams come true.”
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Transcript
Krys Boyd [00:00:00] Americans have differing views on whether two entrepreneurs who have never served in government are qualified to set fire to the federal budget as we know it. But President elect Trump believes that Elon Musk and Vivek Ramaswamy are indeed up to the job, and he’s tapped them to head an advisory panel they are calling the Department of Government Efficiency. The pair have promised to cut the budget by something like $2 trillion in a single year. So let’s take up the biggest question on the minds of both supporters and opponents of the Doge, as it is called for short. Is that even possible? From Kera in Dallas, this is Think. I’m Krys Boyd. The short answer is an emphatic no, at least not in that 12 month time frame. But my guest has taken a serious look at where these government efficiency advisers might look to cut federal expenditures and finds that while the timeline seems to be a fantasy, the bottom line may not be. Simon Rabinovitch is U.S. economics editor at The Economist, where you can read his article, “How to Make Elon Musk’s Budget Slashing Dreams Come True.” Simon, welcome to Think.
Simon Rabinovitch [00:01:06] Thank you, Krys. Great to be here.
Krys Boyd [00:01:07] So before we get into how and where these budget cuts could feasibly happen, we ought to talk a little about how this Department of Government Efficiency might work. For one thing, it’s not actually a department at all, at least not in the classic sense.
Simon Rabinovitch [00:01:22] Yeah, that’s right. It’s, you know, really an advisory group and a two person advisory group at that. So it’s been variously described as as a blue ribbon commission or an advisory group or an in government think tank. But it doesn’t have any kind of official power. The power will reside in the fact that, at least for the time being, both Mr. Musk and Mr. Ramaswamy appear to have Donald Trump’s ear and therefore they will wield a great deal of influence. But actually implementing any of the recommendations will be challenging, no matter how powerful Trump is and how much control he has over the White House. Ultimately, it’s the Congress that has the power of the purse. So a lot of the kinds of things and changes, reforms they want to make are not going to be so easily done. So it’s going to be interesting to see it. And then, of course, one of the questions then is, apart from the influence they have, how long will that influence last? You know, will Musk remain Trump’s first buddy or will there eventually be a falling out? So I think there’s a number of scenarios in which you could imagine the doge not coming close to living up to its its billing.
Krys Boyd [00:02:40] It certainly aligns with the stated desire of reducing the size and cost of government to try and get this all done without making a new federal agency. But what resources will Musk and Ramaswamy have available to them? Do they get paid staff to sort of help out with this?
Simon Rabinovitch [00:02:56] They will probably get a budget to work with. So that will depend on on whether there are funds appropriated for Doge. For the time being, they’ve been basically soliciting volunteers on X, you know, formally known as Twitter, asking people with, you know, bright ideas who are enthusiasts, basically libertarians who have a bit of time to kill, to come forward with with suggestions. And I mean, the thing about targeting government waste or trying to make government more efficient is there are a lot of people from across the political spectrum, both left wing and right wing, who have ideas, who have things that they think the government should not be doing or should be doing better. So you have lots of different ideas that are beginning to percolate up and what they actually choose to act on, we’ll see. They did actually write an op ed last week in The Wall Street Journal where they themselves talked about three big focuses. So rolling back regulation and cutting administrative burdens and basically saving costs. So they have these three overarching goals, but the content that you actually use to fill up the plan, that’s where there’s a lot to be discussed and debated.
Krys Boyd [00:04:14] So is it fair to say the Department of Government Efficiency might work? Something like a consulting firm would work for a private company, like making suggestions but not having the power to directly implement them?
Simon Rabinovitch [00:04:26] That’s exactly that’s exactly right. That’s a good analogy, except that I would say that a consulting firm, you know, they have a professional blueprint for how they make these kinds of recommendations and lots and lots of people working for them. And and they probably have a view to actually getting these recommendations through. I think, you know, you might actually expect Doge to be less impactful in the sense that, you know, Ramaswamy and Musk are iconoclasts. They’re you know, idiosyncratic individuals who’ve been very successful, obviously in the private sector. But when you look at some of their discussion about the idea that, you know, you can just target government waste and inefficiency and somehow find $2 trillion in savings, that’s pretty far from the truth. And given that it’s not a permanent institution, in fact, it’s due to expire by July 4th of 2026. So it’s you know, we’re talking about a time limited effort here, basically 18 months. It’s going to be hard to bring about that kind of dramatic reform that that that they are talking about.
Krys Boyd [00:05:33] And, of course, as you mentioned, Congress has to get on board with any of these ideas. And then the agencies that might still exist but have radically smaller budgets will need time to figure out what they won’t be doing anymore. It’s not as simple as sort of pulling a lever and turning something off.
Simon Rabinovitch [00:05:51] Yeah. So I mean, even the question of kind of rolling back regulation. So you look at, you know, what the deregulatory process actually involves and they’ve talked about eliminating agencies. There has been discussion even of eliminating the Department of Education. Well, something like that is, you know, that cannot be done by executive order by the White House. So, you know, President Trump, President-Elect Trump can’t just wave a magic wand and get rid of the department. You know, you can’t even do it with budgeting. We often talk about the reconciliation process, which is, you know, theoretically, with the Republicans having a majority, a narrow majority in Senate that will be able to pass a budget through the reconciliation process, which means they will not need any Democratic support whatsoever. Well, that applies to budgeting, but that does not actually apply to getting rid of a department or even an agency. So just in terms of the configuration of Congress, you know, they talk about wanting to downsize government dramatically. It’s very, very, very difficult to do that. And to actually do that, they would have to have some support from Democrats, which I don’t think will be forthcoming. So, yeah, just getting rid of agencies holus bolus, I don’t think we’ll be able to see that. And frankly, even if we did see that, if you look at the number of federal government employees out there and the amount of money that’s spent on their wages, it wouldn’t get you anywhere close to the kinds of savings they’ve promised. So it’s, you know, one, it’s not going to happen. And two, even if it did happen, it still wouldn’t deliver what what they’ve talked about.
Krys Boyd [00:07:24] All right. Setting aside practical questions like how long it might actually take and whether it’s really feasible, Musk and Ramaswamy have set this goal for themselves of cutting $2 trillion from the federal budget. That is like an enormous share of the annual federal budget, isn’t it?
Simon Rabinovitch [00:07:41] It is. So we should be clear that that $2 trillion goal, it was it was something that Musk mentioned back during the campaign. And he didn’t he didn’t spell out exactly in detail whether he meant immediately or in a year or in two years. So so, you know, there is room for interpretation about it. This is not kind of engraved in stone. So so I think it is important to recognize that. But the way it was commonly understood and the way that he seemed to intend it was that the idea was you got this big bloated federal budget and you can just basically make $2 trillion disappear by identifying fraud and waste and duplication and redundancy. Well, the problem is that if you look at the federal budget, it’s approaching $7 trillion a year. So a $2 trillion cut. You’re looking at basically cuts of one third across the board for all government programs. Now, that in itself would be extremely difficult. But then if you look at how the federal government actually spends its money, basically two thirds of the budget now go to entitlement programs. So Social Security, Medicare, Medicaid, as well as interest payments on existing debt. So that’s two thirds. And Trump has promised that he’s not going to touch Social Security or Medicare. And you definitely have to make your interest payments so that two thirds is off the table. You’re going to have the remaining one third, which is discretionary spending, which you could argue might be a bit more credible. But then if you look at that discretionary spending, more than half of that goes to defense, goes to the Pentagon and the Department of Homeland Security. So, you know, that’s another thing that Trump has said he’s not going to cut. Other Muskett suggested that maybe there are cuts to be made with the defense procurement process, but nevertheless, you’re then left with a rump of discretionary spending for things like transportation and education, which does not get you to even $1 trillion a year. So even if theoretically, the federal government stops spending anything on schools, on highways, on power plants, you know, things that actually really do matter to to the lives of ordinary Americans, Even if the federal government stopped spending anything on that, you still would not hit that $2 trillion annual target. So that’s why I think a lot of people looking at at Elon Musk’s rhetoric have said, you know, hey, we applaud you for for trying to make government more efficient. But this $2 trillion promise is just absolutely far fetched.
Krys Boyd [00:10:20] Ramp up discretionary spending, by the way, is a phrase that I’ll congratulate you for. I’m going to keep that in my in my back pocket. So you estimate something like $900 billion in annual spending could be up for cutting. You divide this into four essential categories. Let’s start with conventional spending cuts. What programs? What might be significantly cut or eliminated if Musk and Ramaswamy get their way?
Simon Rabinovitch [00:10:49] Well, if they get their way, you know, as I’ve said, they want to go after the Department of Education. They’ve talked about, you know, on the defense side just how bloated the procurement process is. Musk, you know, has hinted that, you know, NASA, for example, is extremely inefficiently managed. And, of course, you know, questions about conflict of interest, given that, you know, his company, Space X, is, you know, a competitor with NASA. So, you know, there are areas that they would like to cut down. They’ve also talked you know, Ramaswamy has been big about the idea of deregulation. So going after the SEC and the Securities Exchange Commission, which oversees the stock market and the bond market, basically going after the EPA, the environmental authority. So, you know, he views deregulation both as a way to save money by cutting back the size of the federal workforce and also as a way to make the economy more efficient. Now, I should just say that if you look at the total employee count at federal agencies, it’s less than 1% of the actual federal workforce. The lion’s share of federal employees are people who are in defense, you know, the troops. So so so actually, you know, if you don’t start cutting back the number of soldiers, it’s going to be very difficult to hit the kind of headcount targets that they have laid out. So that that’s another reason why we can talk about the unreality of their promises. In my article, Krys, I did look at a variety of ways in which you could actually begin to approach this question with a greater degree of realism. You know, this is actually an important project if you look at America’s fiscal trajectory. It is very, very worrying. The national debt today is nearly 100% of GDP. Back in 2007, it was about 35%. So we nearly tripled the national debt in just over 15 years. The federal deficit is running at about 6% of GDP. It’s projected that that will actually increase under under Donald Trump, it might get to 7 or 8%. I mean, just to put that in perspective, it used to be that a federal deficit of 3% was seen as worrying, you know, getting beyond 3%. That’s what you would do if the if the country was at war or if there was a recession and you needed a big fiscal stimulus. But, you know, right now is is a time of relative peace is a time of relative prosperity that, you know, growth is very, very strong. So the notion that you have a federal deficit of 6% now and that that is going to increase, that’s very, very worrying. It is setting up America for a problem at some point down the road where the federal government will really struggle to pay its bills, at which point you will have to make massive cuts to things like Social Security and Medicare. So, I mean, it is absolutely true that there are serious fiscal problems that the country faces and therefore, there needs to be serious attention paid to, you know, what are different things that can be done to try to put the country on a better path?
Krys Boyd [00:14:03] Simon Just to go back for a moment to this question of debt and deficit and having been on the rise, I mean, it’s no longer cheap for the federal government to borrow money, is it, with rising interest rates?
Simon Rabinovitch [00:14:14] No, it’s not. And so that’s one of the reason that interest costs have been going up. You’ve got the stock of of federal debt. And, you know, as I said, it’s about 100% of GDP. You know, by and large, a lot of that debt has been financed in earlier years when interest rates were lower. But, you know, now for the Treasury to run a bond auction, it has to pay, you know, whatever is the prevailing rate for for treasuries in the market. And so, you know, whether it’s issuing one year or two year, ten year debt, it’s basically paying about 4%, 4.5%, whereas a few years ago, before, you know, early in the Covid pandemic, it was paying closer to 2%. So that’s a that’s a big, big difference. And in the same way that, you know, we’ve seen for homeowners how big of a struggle it has been as mortgage rates have have gone up dramatically. And nobody is really thinking about, you know, refinancing their home in this environment while the federal government is in a similar position, except that it does have to refinance a portion of its debt every year. There’s always a certain amount of debt that’s maturing and not just the way the federal government operates, is that there’s always going to be outstanding debt. And then if the prevailing interest rate goes up, as it has done that, that does impose a real burden. And it means that, you know, instead of having extra money that could be used for science R&D or for national parks or for schools, it just goes to paying the interest burden on debt. And the bigger. The outstanding amount of debt, then every tick up in the interest rate is just that much more painful.
Krys Boyd [00:15:55] So your sense is that one way to reduce the amount we’re spending without just slashing existing departments is getting spending increases under control? How would caps on discretionary allocations work or how could they work?
Simon Rabinovitch [00:16:12] Right. So this was you know, I laid out a few different things that that really the Doge, if it is serious, which is an open question, but if it is serious, they could think about doing things like this. And so, number one is this idea of caps on on, again, that were discretionary spending, which, by the way, I mean all discretionary spending refers to and why that’s used as a technical term is that you’ve got the mandatory programs like Social Security and Medicare. Congress cannot fiddle with the funding allocations for those in any given year that is absolutely prescribed by law. And so that that is mandatory. The discretionary spending is the annual budgeting process. How much do they want to allocate to science, how much to parks, how much to transportation, etc.? And so what is a budgeting technique that has been used over the years really starting in the 1990s is the idea of just putting hard caps on discretionary spending. So tying the hands of Congress and saying, you know, you’ve got to stay within these set parameters every year for as long as the agreement runs. And you know, you can have a debate about whether you want to give more of the pie to this or more of the pie to that. But but the pie itself is set at X amount. And so what I suggested is that, you know, you just basically set the cap at the rate of expected inflation. So you say that the federal government budget is, you know, it’s it’s big right now. It does not need to grow as a share of the GDP. But we understand that doing outright cuts, you know, that imposes real hardship. People on people. You’ve got government departments and agencies that have expected that they’ll have this amount of funding. So if you start to do outright cuts, that’s really painful. But as a simple starting point, you could say just cap discretionary spending growth at say, 2% a year in line with inflation. Do that until about 2035. And if you do that, that works out as a savings of roughly $500 billion over the next decade relative to what the forecasted path of federal spending actually is. So it’s, you know, $500 billion over a decade. That’s a pretty good start. It’s $50 billion a year. It’s not you know, it’s still a far cry from the $2 trillion target. But but I think I think that’s a very healthy starting point. And like I say, it’s one that ought to be palatable to Congress because it would not impose undue hardships on people. And I think that’s just a, you know, a useful and practical starting point.
Krys Boyd [00:18:52] And those caps are not a novel concept, right? They have been in place in various forms in the past.
Simon Rabinovitch [00:18:58] They have, yeah. So it’s a it’s a process that started in the early 1990s and, you know, when Clinton was president. And I think that’s another important point is that, you know, those is getting a lot of attention because Elon Musk just gets a lot of attention. But you’ve had successive administrations, you know, who after election or during the election campaign have said we’re going to fix government. You know, you had Al Gore with it, his his, his his group to reinvent government. So so, you know, going back to the early 1990s when there were big fiscal concerns in America, that was when you began to have discretionary caps. And they’ve been used, you know, over over time, over the past couple of decades. So it’s not it’s not a novel policy.
Krys Boyd [00:19:46] The next big budget area, you notice potentially ripe for adjustment is entitlement spending. Are programs like Social Security and Medicare on the table? In terms of the cuts, Musk and Ramaswamy might at least be allowed to suggest?
Simon Rabinovitch [00:20:03] Well, I think they’re free to suggest anything. So so politically, I suspect we will not see this because because Donald Trump has said he does not want to touch the entitlement programs. And so therefore, I mean, I think Musk and Ramaswamy will be loathe to do so. But I think this is the fundamental point is that if you’re going to have a commission that’s going to be coming up with ideas, it would be patently absurd not to look at Social Security and Medicare. They account for, you know, more than a third of the budget. And you will either absolutely giant programs and their share of spending is only going to increase because obviously as the population gets older. The demand for medical medical care increases, the burden on the pension system increases as well. So, you know, these are big, big albatrosses around the government’s neck. So politically, it would be challenging for Musk and Ramaswamy. But bear in mind, I mean, they’re just making recommendations. They’re not passing laws or anything. I guess the bigger point is that politically it would be difficult for Donald Trump. Having said that, I mean, Donald Trump is a guy who, you know, as we know, he’s sometimes says one thing and then does something else. And he’s a second term president. And, you know, it would take a great degree of courage and bravery to begin to actually implement serious reform. But, you know, maybe maybe Trump will surprise us and he’ll be the person who will, you know, partly go back on his word and look at ways to make it more sustainable. And I guess the basic point that he would have to make and would have to hopefully persuade the American people is, you know, he’s not these kinds of changes and reforms would not be done because he’s a Grinch or I mean person are trying to take things away from people, but precisely the opposite. The point is that you’ve got these programs that Americans retirees are absolutely depending on. And the way that they’re being managed right now is basically spending going out like a drunken sailor. It’s inevitable that there will be a point somewhere down the road where they will have to have dramatic cuts because it simply is not sustainable. The challenge then is if you get to it early enough, are there ways in which you can begin to reform the system in such a way that the pain is relatively minimal, the adjustment period is good and long and gradual, and yet the effect of the reform is actually quite powerful. So that that was you know, one thing that I looked at was, you know, a relatively simple fix, which is you just raise the age of eligibility. So you look at, you know, when it is that that people are able to collect their Medicare benefits. Right now, at 65, if you raise that to 67, but you phase it in extremely slowly. So you just raise the age of eligibility by two months per year, you know, such that it takes basically a dozen years to get to that 67 point. So it’s it’s not even a, you know, somebody who’s 55 today would not have to worry about these reforms that would really only begin to bite for people who are, you know, in their 40s and 30s getting plenty of time to plan and to get ahead of things. And of course, life expectancy is increasing, working life span is increasing as well. So going up to 67 from 65 is not a not necessarily a huge change. And that works out to a savings of about $50 billion per year. That’s on the Medicare side. Social Security, if you raise the age from 67 to 70, equally phase that an extremely gradually. That gets you about another $50 billion a year. So, you know, these are savings that begin to add up. In total, you’d be looking at about $1 trillion of savings over the course of a decade. That is substantial.
Krys Boyd [00:24:05] And again, at least with Social Security, this is not unprecedented. I have boomer colleagues who are starting to retire. And for them, the age for full benefits is 65. I’m a Gen Xer, so for me it would be 67. We adjusted to that. We’ve almost forgotten that that change exists.
Simon Rabinovitch [00:24:25] That’s right. And, you know, in some ways, this is why I don’t exaggerate and say a superpower. But it’s certainly a power that that America has that other countries struggle with. You look at, you know, one of the reasons that the Emmanuel Macron government is in such trouble, his presidency is imperiled in France, is that, you know, they are trying to nudge up the retirement age to 62 or so. And that led to, you know, massive street protests. I think Americans are you know, they understand hard truths and the reality of, you know, if something can’t go on forever, then it’s got to stop at some point. And so, yeah, there have been you’re exactly right. There have been changes that have been made in the past. And, you know, maybe you don’t go from 67 to 70, maybe you go from 67 to 68 for Social Security or maybe phased in over a longer period. Like there’s different tweaks that can be done to make it slower or faster, to make the target more or less ambitious. But I do think that, you know, provided that the message is delivered honestly and transparently and that there is a serious discussion, you know, I think it’s conceivable that you could have another round of reforms like this.
Krys Boyd [00:25:42] What about raising the amount of income subject to the taxes that fund Social Security and Medicare? How feasible is that?
Simon Rabinovitch [00:25:51] Well, look at that. It’s a good recommendation. And and I should say, by the way, that, you know, all of these recommendations, including the ones that I’ve made, there are multiple groups out there that do this kind of work. So you could look at the Committee for a Responsible Federal Budget, you could look at the Tax Policy Center, you could look at the Penn Wharton budget model. You know, they’ve modeled all of these different recommendations and have looked them in quite a lot of detail. And exactly your point. You know, raising the tax rate for Medicare contributions would be something that that, you know, it would be a challenge for Donald Trump to do because certainly a large part of his constituency voted for him, expecting him to lower taxes, not to raise taxes. But if you if you wanted a relatively simple fix for making the program a little bit more sustainable, you know, some combination of a slightly higher payroll tax for those on higher incomes, you know, higher tax that goes towards Medicare and Social Security, as well as possibly doing kind of means testing for benefit payouts. So somebody who’s earning more than $1 million a year, maybe they don’t need to collect benefits to the same extent as somebody who’s below the poverty line. So there are tweaks that you could do both with revenue raising as well as with expenditure that would make things more sustainable. I mean, just to say that the challenge with these sorts of changes and why it’s not it’s never a slam dunk is so, you know, one of course you’ve got the politics of Trump not, you know, vowing to cut taxes, not to raise taxes. And two, you do run the risk depending on how you run these programs. If the the the you know, the wealthy feel like they’re paying a huge degree into them, but they’re not actually driving many benefits from them, then then you begin to have support bleed away. So that that is you know that there is a concern. And that’s why I thought that, you know, raising taxes is is a solution. But raising the age of eligibility, I think in some ways is a more palatable way of going about it.
Krys Boyd [00:28:12] Simon, how might the Department of Government Efficiency root out waste and fraud in Medicare to a greater extent than is happening already?
Simon Rabinovitch [00:28:22] Well. So there is there is certainly a lot of waste and a lot of fraud. And to be clear, I mean, this this comes from all angles. You know, it’s a it’s a Byzantine health insurance system in America. And, you know, there’s lots of ways that they can basically game the system. Studies have looked at, for example, Medicare Advantage, which is, you know, one of the insurance pockets, how people on Medicare Advantage are, quote unquote, sicker than any other peer group in the population. And it’s not that they’re actually sicker. It’s that the insurance companies that are running it are consistently overbilling the federal government. So there could be, you know, much closer scrutiny of billing. There could be much more competitive bidding between different health care providers. And there’s basic fixes as well, like, for example, medical service costs. Right now, if you get the same service in a hospital outpatient department as you do in a clinic, it costs a lot more coming from the hospital. So, you know, another simple solution would simply be to have cost uniformity, you know, regardless of delivery, place of delivery of service. So there’s lots of different things that can be done. Now, I would say this. I am not a health care economist or expert, and it gets incredibly complex when you begin to look at the different details in different programs. And anybody who’s ever had to do anything related to health insurance, whether finding a claim or opting for, you know, this policy or that policy, I think is probably quite aware of the complexity. What I what I would emphasize is that does does not have to the Department of Government Efficiency does not have to reinvent the wheel here. You have institutions, agencies that are doing this exact thing. I mentioned the Committee for a Responsible Federal Budget, CRFB, you know, they looked at a whole bunch of the different ideas that I laid out, and their conclusion was that implementing them would save the federal government about $550 billion over a decade. So, you know, another $50 billion plus a year. And that’s not these are not reforms that take Medicare or Medicaid away from people. They’re simply reforms that make their delivery a little bit more efficient that, you know, maybe take a bit of profitability away from insurance companies but don’t actually harm patients at all. So there is a lot of waste, a lot of fraud that can be tackled.
Krys Boyd [00:30:56] Medicaid, Simon, is complicated to address in that costs are shared between state and federal governments. How might a federal payment cap affect the way Medicaid does business?
Simon Rabinovitch [00:31:09] So, yeah, as you say, it’s a it’s a shared expenditure. The challenge for the Federal government is that it’s basically on the hook for funding, but it doesn’t have much say in how the Medicaid spending is delivered at the state level. The states run their own Medicaid programs, which then determines, you know, place of delivery service that that’s delivered coverage of cost, cleaning of cost, all of that. But the federal government, its commitment is basically open ended. So when spending rises at the state level, federal spending goes up, too. And so I think, you know, from a very basic perspective, it’s clear that you have a misalignment in incentives here. And so, you know, if the state is somewhat less responsible, in fact, in some cases they over claim for for federal government service coverage, you can get into a situation where the federal government spending goes up and up and up. And so, again, it’s just a very, very simple fix to this. And it’s one that’s been played with in the past, is that you just set a federal cap on payment. And again, it depends on how much how painful or not you want things to be. You could get a huge amount of savings if the federal government, you know, just basically aims for outright cost reductions. But if you want to be a little bit more a little bit softer again, to make things more tolerable, you just you know, you cap federal spending according to the rate of inflation and say, therefore, you don’t have this spiral upwards, this this ever spiraling upward federal spending. So if you were to cap it at the rate of inflation, estimates are that, you know, relative to current projection, it would reduce the federal deficit by almost $1 trillion over the next decade. So that that’s a huge amount of savings. And again, it’s not this should not be unreasonable. And the problem, of course, is that capping it at the rate of inflation is, you know, that is a challenge because medical costs have been going up by more than the rate of inflation. But this would be an incentive to state governments to say, you know, you’re only getting so much money from the federal government and you’ve got to manage things very, very carefully. So it’s tying their hands a little bit, but it would actually deliver big benefits for the American people.
Krys Boyd [00:33:36] Your other suggestion is having the federal government sort of turbocharge its existing process of negotiating prescription drug costs funded by its own programs. Can we do this effectively without pushing the drug companies to make up the difference by raising prices from private payers?
Simon Rabinovitch [00:33:55] Well, I mean, I think the drug companies themselves would would face a degree of, you know, elasticity of demand in the sense that, you know, if if these drug prices are available and it’s clear to see that whether on Medicaid or on Medicare, that this is the price of drugs and yet they’re charging via private insurance plans that much more, you know, one would expect to see to see push back. The Biden administration did talk about the idea that with their drug negotiations, they wanted to see these being prices across the board eventually, not just for for people on on Medicare. So, yeah, no no doubt the drug companies would try to do that. There would be lots of groveling, lots of complaining, saying that this is hurting innovation, etc.. But, you know, it’s one of these things where it’s it’s it is absurd. You look at drug costs in America relative to drug costs in virtually any other country. And and it’s you know, it is clear that Americans are paying far too much for prescription drugs, especially for drugs that have been on the market for a long, long time, where there’s not novel innovation taking place. So now it’s an open question mark. A question mark in the sense that the Biden administration was very active. They were the ones that introduced gradually this idea of negotiating the prices of prescription drugs covered by Medicare. The Trump administration has been less gung ho about that. But I think it’s also very evident and we’ve seen this in the last week, you know, in very unfortunate circumstances, that there is a huge degree of frustration and anger with the health insurance industry, with the medical industry in general. So Donald Trump, who, you know, is nothing if not a populist, surely recognizes that lowering the cost of prescription drugs is something that there would be an awful lot of popular support for.
Krys Boyd [00:36:02] You also suggest the Department of Government Efficiency look at more effective collection of revenues. What sort of investment in the resources of the IRS makes sense to you?
Simon Rabinovitch [00:36:15] Well, just in general, investment in the IRS makes sense. And this is something that, again, under Joe Biden, we saw a fair bit of this part of the. Slightly mislabeled misleadingly labeled inflation reduction act was about funding for for the IRS. They had initially earmarked $100 billion for that. That was partly clawed back. But what that money is doing is it’s allowing the IRS to. You know, number one, to modernize itself. You know, if you look at you can look at images of the tax collection process of IRS and stacks and stacks of paper and, you know, mainframe computers running on COBOL language, you know, dating back to the 1960s. And there’s no reason that any kind of government agency should be stuck in the past like that and handling paper. It it’s you know, it’s why if you’re filing for a tax refund, it sometimes takes years to get that back from the IRS. It’s just really, really. I want to say badly run, but it’s just run on really, really old technology. It’s it’s fighting with one hand tied behind its back. So number one, funding for the i. R. S, it modernizes that it enables it to be much more efficient, which then enables it to do much better customer service. It allows for automatic e-filing of taxes. It just makes the overall. No, your people don’t like paying taxes, but it makes the tax process that much less painful. The second thing is that, you know, there’s different estimates of what is known as the tax gap. But, you know, some estimate that it’s, you know, approaching $1 trillion. And it’s the the tax gap is the gap between what Americans should be paying in taxes and what they’re actually paying. And typically, that has to do with. You know, different tax evasion schemes. And typically, these are ones that benefit, you know, wealthier, higher net worth individuals, not lower income folk. And so more funding for the I. R. S means that it’s able to conduct audits more thoroughly. Audits are labor intensive, time consuming, especially when you’re going after people that might have extremely elaborate tax avoidance schemes. And so that’s what funding for the IRS does. That means that you’re able to raise more tax and to make the overall tax system more efficient without actually raising taxes. So that’s why it’s it’s certainly an important thing for. For Donald Trump to consider. Treasury has estimated, you know, what a more efficient IRS would mean. And by its numbers, it would bring in upwards of $850 billion in extra revenue over the next decade. That’s a lot of money.
Krys Boyd [00:39:06] Could this be a hard sell to a guy like President elect Trump who has displayed a pretty strong, let’s call it, antipathy toward the IRS?
Simon Rabinovitch [00:39:16] Absolutely. Absolutely. So I’m under no illusion it’s a hard sell to Donald Trump. It’s a hard sell more generally to too many people in the Republican Party who’ve already been fighting to claw back some of the funding for the IRS. Nevertheless, you know, we get back to the basic starting point, which is the federal fiscal trajectory. It looks grim. Elon Musk and Vivek Ramaswamy may not be the same years, but it is absolutely correct and appropriate that there be serious consideration given to the question of the federal budget. And ultimately, if you want to fix these things. You know, there’s no silver bullet, there’s no magic wand. You’ve got to do things that are that are going to be a little bit uncomfortable, a little bit painful. And so I think the ideal scenario is that you do a little bit here, a little bit there. You don’t have massive, massive cuts, but you just try to find ways to to kind of set the federal budget back on a better footing. And clearly, Donald Trump does not want to raise taxes. Yeah, that’s been a core part of his of his campaign, of his entire political philosophy. Well, if you don’t want to raise taxes, you still have to find ways to generate more federal revenue. And that’s why funding for the IRS, you know, it’s a good common sense idea.
Krys Boyd [00:40:41] We have the Congressional Budget Office making recommendations for reducing the deficit. We have inspectors general in most of federal agencies. What is it that Musk and Ramaswamy might be able to achieve that these existing entities have not?
Simon Rabinovitch [00:40:59] Well, that’s a it’s a good question. I mean, I think the main thing, the main virtue of of doge and what it can achieve is, you know, they have President elect Trump’s ear if you’re going to make these kinds of reforms. You know, you clearly the president can do it alone, but you can’t do it without the president. And Trump has a tremendous amount of power, as we all know, within the Republican Party. So so the fact that he has that power and then they have this apparent influence over Trump, that’s very important. I think it’s also important that, you know, as you know and as I’ve said, you know, you have these committees, you have these committees, you have these auditors, you have these reports. They’ve been around for decades. And oftentimes their recommendations gather dust. They’re not cool, They’re not interesting. They’re not really fodder for public debate or discussion. Well, you know, have Elon Musk kind of every day on Onex sending out, you know, this or that tweet about, you know, where there’s waste or an example of waste. And oftentimes the examples that he’s using, they’re just reheated examples which come from a CBO report or, you know, GAO, the Government Accountability Office report. So you have you have a lot of information that’s out there that’s been getting stale. But now, you know, Elon Musk has this unique ability to catalyze public discussion, to to bring attention to issues that had been getting a little bit moldy. And that’s important. You know, they are the fact that you have me on the show today talking for, you know, nearly an hour about this is a sign that, you know, he’s made the question of budgetary reform and fiscal reform kind of interesting again. And I don’t know I’m not I should say I’m not overly optimistic. I don’t know how long this attention or this interest will last, but it’s there right now. And maybe maybe Doge does have the ability to to catalyze change in a way that other agencies and other budgetary commissions have not been able to do so.
Krys Boyd [00:43:18] So is it your sense, Simon, that these incremental but sustained efforts at cost saving that you’ve laid out today, are they likely to have a greater impact than sweeping cuts that would be very dramatic and say eliminate entire existing agencies like the Department of Education?
Simon Rabinovitch [00:43:37] That is my belief. And so discounting the fact that, you know, they will not be able to eliminate the Department of Education because, you know, Democrats just will not go for that. I think you just think through, you know, what would that actually do? So, first of all, it doesn’t achieve a huge amount of savings. Federal funding for education is a little bit less than $100 billion a year. So, you know, I was talking about, you know, tweaks to eligibility, which which save more than that. So the the idea of just eliminating entire agency, it just does not save enough money. Agency employees, again, they’re just less than 1% of the federal workforce. So you eliminate all of those agencies. You eliminate federal funding for education. You don’t get a huge amount of savings. You do get a huge amount of public anger. And if you want to get serious about reform or you’ve got to keep the people on side. So so the notion that you can just go and eliminate federal spending on education or on highways and not have some kind of public backlash, that’s absolutely absurd. So if you want to be serious about it, you have to, you know, spread the cuts around. You have to look at ways to do spending caps as opposed to outright cuts. You have to look at ways to pare back federal transfer payments to states, just little nips and tucks that over time they really do amount to something substantial. But by our count, the various different proposals that I laid out work out to a savings of about $4.5 trillion over the next decade. So nearly $500 billion a year. Now, that’s not the $2 trillion that Elon Musk talked about. The $2 trillion a year is, as I said, just not realistic, but 4.5 trillion over a decade, that would be a really, really important contribution to putting the federal budget on a better and more sustainable path.
Krys Boyd [00:45:40] Simon Rabinovitch is U.S. economics editor at The Economist, where you can read his article, “How to Make Elon Musk’s Budget Slashing Dreams Come True.” Simon, thank you so much for making time to talk about this.
Simon Rabinovitch [00:45:51] Krys, I really appreciate it. And I hope this is just part of a much bigger conversation because it’s certainly a really important one for the American people to have.
Krys Boyd [00:45:59] Think is distributed by PRX, the public radio exchange. Again, I’m Krys Boyd. Thanks for listening. Have a great day.
