Paul Diggle
Hello, welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle
Luke Bartholomew
And I'm Luke Bartholomew.
Paul Diggle
And we're recording this a couple of days before the inauguration of incoming president, Donald Trump. What we want to do today is discuss and understand the role that Elon Musk, the world's richest person, and the Department of Government Efficiency (Doge), a pun on the Doge meme and the associated crypto currency, what role they could play in the Trump administration. Because the impact of both Doge, and Musk more broadly, is potentially profound but may also amount to very little. So that's what we're going to do today. Luke and I are joined by Lizzie Galbraith, political economist here at abrdn. Welcome back to the podcast, Lizzie.
Lizzie Galbraith
Thank you very much.
Paul Diggle
So why don't we start by talking about what Doge is then, and perhaps equally as importantly, what it isn't?
Lizzie Galbraith
Yeah. So despite the name, as you've said, it is the Department of Government Efficiency. It isn't actually a government department. And that is a really important distinction to make, because unlike a true government department, it does not have the authority to actually make any changes to government budgets itself. Congress has that power and will continue to do so. So what this is, is effectively an advisory body, and we're not entirely sure of what the eventual structure of it is going to be. It appears that it may be partially funded by Musk himself. But regardless of that, it's going to be able to make suggestions about what to cut and where to deregulate, but it isn't going to be able to actually make those changes itself. We are going to still need to see these changes moved through Congress, in most instances, or potentially through executive order, depending on what the recommendations are. But nonetheless, despite the name, it is crucially not a department.
Luke Bartholomew
Well, whilst we’re on the name, and I know it is named as such, as Paul said, so that they could have the Doge pun on the meme and the crypto coin. But I do wonder whether it's not just the ‘department’ that's a bit of a misnomer in the name, but also ‘efficiency’? And the reason I say that is ‘efficiency’ sounds like a technocratic, neutral thing – it's about getting rid of waste, inefficiency, perhaps fraud as well. But look, the kind of cuts that seem to be in scope, that Musk is talking about, are much more like a profound reshaping of the size and the role of government. That's much more than just efficiency. There's a huge amount, for better or for worse, of political content to that – that efficiency, sort of, just sort of smuggles over. So on that note Lizzie, what are, sort of, some of the numbers that Musk has talked about in terms of what he wants to achieve from spending cuts, federal headcount reduction, and perhaps most importantly, are those at all realistic?
Lizzie Galbraith
Yeah. So this is something that has evolved somewhat over time. Musk had originally said, when this new body was announced that he was going to be looking for $2 trillion in reductions to government spending. And again, he wasn't entirely clear over the time frame, but it's been assumed by most people that he's talking about annual reductions. This was seen as an incredibly large and probably unachievable number. But it's since now reduced to a $1 trillion reduction target. And he has, again, implied that he is talking about annual government spending in that he is talking about roughly halving the current annual deficit that the US government has. So we think this, again, is a very, very large number when you consider all of the political challenges that come with such a large reduction in the US government budget. So as an example, social security, which is an area of US government spending that Trump has pledged not to touch, is worth $1.4 trillion a year. Medicare, again, something that Trump has pledged to avoid cutting, is $870 billion annually. And then you get onto things like defence spending and veterans affairs, which collectively are worth over $1 trillion, where Republicans actually want to increase spending. So taken together, it's very unlikely that you can see cuts of $1 trillion made to the current US total budget, which is something like $6.7 trillion, when you have roughly two-thirds of that budget, politically quite difficult to touch, and just shy of $1 trillion currently coming in interest payments as well.
Paul Diggle
Is there a history, Lizzy, of efficiency commissions, of attempting to make large-scale cuts to government spending in the US that are relevant to tell us about what Doge might do?
Lizzie Galbraith
So there has been various attempts over modern US political history of commissions being announced by incoming presidents, and Congress in fact, trying to create spending cuts or at least caps on spending. And they have tended to involve a Republican president coming in and making pledges around efficiency. The most famous is Reagan's Dream Commission, which made very similar pledges to Doge – in fact pledging to use this appointed body to try and independently identify areas of waste and excess expenditure and cut down the size of government expenditure. And then more recently, you could also say that the intended spending caps that Congress put on President Obama after the debt ceiling crisis would also be somewhere that you could look at, for maybe an indication of what would be coming down the track. And the broad theme across all of these is that, actually, it would prove incredibly difficult to make the kind of cuts that either Congress or the president at the time was intending to make. You just get into political fights. People have their own particular issues that they don't necessarily want to give up. And of course, there are an awful lot of interests that come into this as well – people don't want to let their particular constituents down. And very, very few of the promised cuts have actually been made when you look at previous commissions. They do tend to under underperform on their promises quite significantly.
Paul Diggle
And what Doge will ultimately be able or not able to do on spending cuts is going to have potentially quite significance for the US fiscal deficit, because at close to 7% of GDP, the deficit is very large for this point in the cycle. It's unusual to be running that size of a deficit when the economy is at, perhaps, beyond full employment. And of course, another part of Trump's agenda involves potential tax cuts without offsetting the spending decreases that will mean a larger deficit. But on the other hand, if Doge can make large-scale spending cuts, the deficit picture could be fine – it could actually be coming down. And remember too, that a lot also turns on the tariff increases and how revenue raising they are, or aren't. And if the government is able to raise a lot of revenue through tariffs, and that's another offsetting downward influence on the deficit.
Luke Bartholomew
I think the other thing to say on the deficit is that in the past, when Musk has talked about the economy and economic data, he's providing commentary on X, he seems to have this view that deficits and inflation are causally linked in some way – and perhaps the high inflation in the US recently has been due to large deficits, and perhaps this will be a source of future inflation as well if the deficit isn't brought down. So, now I don't want to go all the way to say that Musk has a fiscal theory of the price level – you know, this idea that there's a systematic relationship between expectations of future deficits and where inflation gets to, which some economists find useful. But he does seem to have a clear sense that deficits are macroeconomically damaging in some way. So it would be interesting to see if, you know, Doge isn't able to bring the deficit down, there still are large deficits under the Trump administration, how he responds to that. And I guess another economic idea he has is that economic growth is being held back by regulation in the US and regulatory agencies. And that's another thing that Doge wants to go after. So, Lizzie, what are some of the government agencies, areas of regulation that the Doge wants to cut?
Lizzie Galbraith
So this is a really nice example, I think, of where some of the political challenges may come in that regard. So, a particular target agency from Musk has been the Department for Education, which in the US is mostly concerned with the distribution of grant funding. It doesn't actually run education itself. That tends to be a state-level issue. He's talked about abolishing the department altogether. That is something that would need Congressional approval and looks to not have a particularly high level of support. But it's also notable that even if you did abolish that department, it is the smallest government department. It only has just over 4,000 employees. So you're not necessarily really changing the overall direction of travel by targeting it, even if you were able to get a very significant reduction in its headcount through Congress, which is not necessarily an assumption that I'd be willing to make. And some of the other agencies that Musk has spoken about are also really quite small, although very consequential – when you look at some of the regulatory powers that they hold. So some of the other areas I'd be expecting the commission to look at would be the Environmental Protection Agency, which did see very significant budget cuts under the previous Trump administration. So that, I think, is a more likely area where you would see cuts made, as well as international assistance programs – so kind of foreign aid, that tends to be an area where, I think, cuts are relatively politically inconsequential and therefore would be an easier place to look for cuts. But you'd also be looking at things like the SEC and consumer protection agencies, for example, as part of that broader effort to deregulate. And so, I think, areas that involve some financial regulation, for example, we've seen Republicans complain that they feel it's too burdensome at the moment, and therefore, that deregulatory agenda may well cross over into Doge's efforts as well.
Paul Diggle
And it's worth, I think, reflecting or at least questioning whether cutting government agencies and therefore government headcount, you know, cutting down the number of bureaucrats, is actually a way to make an operation more efficient. Because there is also a sense in which a bigger, more well-resourced government operation could be a more efficient operation. You know, you could have more planning officers able to process planning applications more rapidly. And that's how you get efficiency. So by maybe that's back to your point, Luke, is that efficiency itself is, I think, a contested political question without necessarily easy answers. But Lizzie, another way in which Doge, Musk, Ramaswamy – Vivek Ramaswamy who's sort of the co-chair of Doge with Elon Musk – have talked about potentially cutting down on regulation, making government more efficient, is by using this recent Supreme Court ruling, which is overturned – so-called ‘Chevron deference’. So can you tell us what Chevron deference was, what Supreme Court ruling said, and then how that can actually be used by Musk and others who want to push deregulatory agenda?
Lizzie Galbraith
Yeah. So Chevron was a ruling that was originally made under Reagan. And it effectively allowed the regulatory agencies of the government to, basically, be able to decide how to interpret government laws. And as a result, we saw a trend over the last 30 years or so in which Congress made fairly light touch laws and then allowed the regulatory agencies to, kind of, fill in the blanks in terms of how they would interpret new regulatory powers, what they would use them for. And the courts basically backed that decision and gave the regulatory agencies latitude to make those decisions and to use their own judgment in their interpretation of those rules. Now, last year the Supreme Court overturned that ruling. And as a result, we are now in a position where a number of regulatory agencies in the US may well be, under the new interpretation of the law, overextending their powers. Now, one way that you could see Doge become quite effective as a means of deregulating is to identify some of the areas in which you have regulatory overreach as the law now stands, and identify those points, tell Congress about them, and then get Congress to effectively force those agencies to curtail their efforts back to the letter of the law. So that's a way that you would see, potentially, Doge become quite effective as a means of deregulating and could well be far more effective than just as a simple cost-cutting vehicle.
Paul Diggle
And what are those areas, what are those agencies?
Lizzie Galbraith
You would definitely be looking at the Environmental Protection Agency, where under both Obama and Biden, you've seen quite a significant increase in environmental regulation. I think you would also probably be looking at the Consumer Financial Protection Bureau, which again, was a body that was created under Obama. So it has this same history of existing in a time where Congress was able to, just sort of, allow the regulatory agencies to fill in the blanks on their legislation. And I think you’ll also be looking at, potentially the IRS – the Internal Revenue Service – and potentially the Securities and Exchange Commission, maybe the Federal Trade Commission as well, to a certain extent. Then, Musk and Ramaswamy have both talked about wanting to hire lawyers to try and identify some of these areas. So I don't think they necessarily know exactly what they're looking for yet. It's not an exercise that's been done yet, the ruling is relatively recent. But you would be looking at some of these – in particular, I think, the environmental and consumer protection laws that are more recently introduced, because of the way that Congress was passing legislation at the time, as being likely targets.
Paul Diggle
And financial market regulation and World Bank regulations another obvious area, perhaps pursued less via the overruling of Chevron deference, but more through, for example, appointing a new Fed vice chair for supervision. Michael Barr, the previous holder of that role, has just stepped down from being vice chair for supervision. And then a new person in that role could pursue an agenda of lower bank capital requirements, for example. Another way, away from Doge in which deregulation can happen under the Trump administration. But why don't we pivot a little bit, Lizzie, to talking about Elon Musk more broadly as a key policy influence, even geopolitical actor in the Trump administration, away from just his role in the Department of Government Efficiency? Because, you know, through his wealth, his influence, some of his companies, he does wield enormous political, policy, geopolitical power and influence. You know, X (formerly Twitter), as a platform to amplify certain messages is enormously important. Starlink, Musk's satellite internet company is effectively a geopolitical, a military technology with foreign policy reach. And that was acutely obvious when Musk turned down a request from the Ukrainian government to turn on Starlink over Crimea in 2023. So Ukrainian soldiers had been using Starlink and that internet connectivity in the battlefield, asked for that to be extended over Crimea. Musk, balked at that request because of potential ramifications that could have and that maybe had an influence on the ground. So whether deliberately or, sort of, just by dint of the power of that technology, he's sort of exerting foreign policy reach as well. And then of course, an area that's recently come into focus over the past weeks and months has been Musk’s interventions in European politics, both on the continent and in the UK. Can you tell us a little bit, Lizzie, about what's been going on there, and perhaps what Musk's intentions could be?
Lizzie Galbraith
Yeah, so he's certainly become very interested in, I would say, particularly, British and German politics over the last month or so. And there are lots of theories as to how this has happened. He's certainly been very active on his account on X in tweeting about both. And in the case of the German election, he has become directly involved in that he has publicly endorsed Alternative für Deutschland – the far-right party running in that election. And I think it is interesting. We don't know exactly how much Musk is doing this in line with the incoming Trump administration, but it is notable that, both Donald Trump junior and, the incoming vice president, JD Vance, both were at pains to say that this is not official policy, that they are not backing a particular party in this election. So I think there is an extent to which, Musk is, you know, still his own person and is not a spokesperson for the US government. He is, to a certain extent, pursuing his own policy and political agendas. And we should be kind of mindful that he is not the US government – they are separate entities. But of course it is, it does matter, as you said, he is a very influential person, both in terms of his position close to Trump and also the money that he has available to donate as well. Although, as a result of his intervention in the German election, we have now seen a renewed debate within the EU about whether or not electoral donation laws need to be tightened up. So there is already a consequence to that action, in a sense. In the UK it's slightly different. He appears to have become, originally interested in some legal cases in the UK – both the conviction of Tommy Robinson in, what he would term a freedom of speech case but the courts obviously disagreed with that assessment; and then the historic child abuse cases in England in particular. He's been calling for an inquiry into those gangs and the government has been, so far, not willing to commit to a second inquiry in that regard. So there are particular issues that he does seem to be very interested in. He's not necessarily interested in the full swathe of British politics. And he does, as well, seem to have relatively complex relations with the parties that he seems to be, most interested in, notably, disavowing Nigel Farage’s leadership of Reform a few weeks ago as well. So I think he is quite a complex, potentially quite an unpredictable, figure in British and in European politics. I would imagine that he's going to remain interested in some of the dynamics at play here. Although to what extent he's able to directly influence governments and voters, I think, is a bit more of an open question. I wouldn't necessarily say that he's having a dramatic impact on the German election, if the polling is accurate. We'll find out next month. But he's certainly a very vocal, very vocal observer and he is able to shape political narratives and to dominate the headlines, which is something that, I think, governments are going to be very mindful of as they try building relationships with President Trump.
Luke Bartholomew
Yeah. And we shouldn't lose sight of just how remarkable, extraordinary, frankly weird it is that he's able to be, in your words Lizzy, ‘his own person’ despite being a key adviser and [in the] administration to be out there criticising so frankly, forthrightly, the government of an ostensible US ally. So it will be very interesting to see how diplomatic policy evolves over the future months and years. But perhaps one other area where Musk might have influence outside of Doge and his formal roles is, you know, there are ways in which he potentially could be moderating parts of the Trump agenda or the agenda of people around him. You know, recently he came out very strongly in defence of high-skilled immigration to the US. Obviously, he has deep business interests in electric vehicles. So perhaps a voice to continue to support green efforts by the US government. He's talked before about being broadly in favour of free trade and of course has important business interests in China, as well. So perhaps a moderating voice there. So, you know, what chance do you think that Musk could end up, you know, moderating those aspects of policy that may be, you know, the instincts of the Trump administration be pushing in a different direction?
Lizzie Galbraith
So I think there's a few things to unpack here. I think immigration is a really interesting example of the current debates. Musk is an interesting figure in the Trump administration, or figure orbiting the Trump administration, in that he holds quite different views, as you've mentioned, on quite a few issues, to some of these sort of original MAGA voices, in particular people like Steve Bannon, who does not hold a formal role in the incoming administration, at this point, but is nonetheless quite an active voice. So on issues like immigration, as you've mentioned, Musk's very public position is in favour of increasing skilled migration into the US. That is something opposed by some of the other voices around the Trump administration. And although Trump did come out after Musk made his comments and say that he agreed with Elon, I think it is also notable that Trump had made similar comments, on the campaign trail over the summer before Elon Musk had become directly involved in the Trump campaign. So I don't think we can necessarily ascribe all of Musk's sort of recent agreements with Trump as being solely down to the influence that he is having over Trump. I think some of these views do predate Trump [sic]. And if you look at Trump's comments, his focus has very much been on illegal migration into the US. And he's been far less vocal on any issues he, as he sees them, related to legal migration. So I think we do have to be careful in ascribing all of Trump's perceived moderation on certain issues to Musk. But likewise, as you said, he does also hold slightly contrary views on things like EVs, tariff, tariffs in particular. He would be exposed to a significant increase in tariffs on China through Tesla in particular. So I think there is almost certainly, a likelihood that he's going to voice those concerns to the president, that he will try and make his case for why policy should be, you know, closer to his own personal views. But I would be very cautious of thinking that that means that policy is going to move in a certain direction. There are a lot of people in the Trump administration, and they hold, in many cases, views closer to the stated policy aims of the president. And I think at the moment there is a clear, sort of, jostling for influence within the Trump team as people try and, you know, state their case to the president. I would be very reluctant to try and say, well, what Elon wants goes in this new administration. I think we need to take policy as it comes, rather than trying to assume that it will be the way that Musk wills it.
Luke Bartholomew
Well, then, perhaps as a final thought at this point, that there's a lot of policy jostling and Musk could lose out. And also, this mention of Bannon and Farage gives us a clue as to where this could ultimately all end, in the sense that both Musk and Trump have a history of falling out with people – Trump with Bannon, Musk very recently with Farage. So I think it is a very, very plausible scenario that we could see the two of them falling out in the not too distant future. But listen, I think that is all that we have time for this week. No doubt we will come back to many of these topics in the future. But for now, as ever, let me remind you to please, like and subscribe wherever you get your podcasts. And all that remains is for me to thank Lizzie for joining us, and to thank you all for listening. So thanks very much and speak again soon.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment, recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up, and investors get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.