How to Cut $2 trillion: A Blueprint From Ronald Reagan's Budget Cutter

While Bill Bonner is travelling for the next few days, we present an excerpt from David Stockman’s new book, which you can find here. David was kind enough to allow us to run an excerpt, which we’ll publish in two parts. Part One is below. You can also find more of David’s work at his website.

By David Stockman

Chapter 1. America's Fiscal Doomsday Machine Must Be Stopped

The DOGE $2 trillion budget savings goal is crucial to the very future of constitutional democracy and capitalist prosperity in America. In fact, the soaring public debt is now so out-of-control that the Federal budget threatens to become a self-fueling financial doomsday machine.

For want of doubt, just recall this sequence. When Ronald Reagan was elected in 1980 on a call to bring the nation's inflationary budget under control, the public debt was $930 billion and about 30% of GDP.

By the time Donald Trump was elected the first time it had erupted to $20 trillion, which has now become $36 trillion and 125% of GDP. Moreover, by the end of this decade the Federal fiscal equation will be going supercritical without sweeping budget reductions at the level of the DOGE target. Thus, by FY 2034 the annual baseline deficit according to CBO will total $2.9 trillion and 7% of GDP.

Yet even these enormous figures are based on a Rosy Scenario fairy tale. Namely, that Congress will never again adopt another spending increase or tax cut, including the impending $5 trillion extension of the expiring 2017 Trump tax cuts. It also conveniently assumes there will be no recessions, no inflation recurrence, no interest rate flare-ups nor any other economic crises for the remainder of this decade and forever thereafter.

Furthermore, it presumes that these surging red ink totals and soaring debt service expenses would be copacetic in the bond pits just the same. That is, CBO inexplicably projects that 7% of GDP deficits and annual interest expense of $1.7 trillion or 4.1% of GDP by 2034 would be compatible with a weighted average yield on nearly $60 trillion of public debt of just 3.4%.

Yes, and if dogs could whistle the world would be a chorus! Give the average yield just another 250 basis points, however, and now you have $3.1 trillion of annual debt service expense and a $4 trillion annual deficit by 2034. In short, there is a doom-loop building inside the Federal fiscal equation and nothing short of the DOGE target of $2 trillion of annual budget savings by the end of this decade can reverse its explosive materialization in the years beyond.

If sweeping budget retrenchment does not occur soon, in fact, soaring interest expense will ignite a veritable fiscal wildfire. On paper, the public debt would power upward unabated to $150 trillion or 166% of GDP by mid-century (2054) under CBO's current Rosy Scenario projections.  Of course, long before the debt actually hits this staggering figure, the whole system would implode. Every remnant of America as we now know it would go down the tubes.

So we need to be clear that the DOGE team of Musk & Ramaswamy must focus on savings of $2 trillion per year commencing relatively soon. That’s because the nation's fiscal doomsday machine will be accumulating interest expense so fast as to make $2 trillion of savings spread over a longer period---such as a decade---little more than a rounding error. To wit, Federal interest expense has already passed the $1 trillion per year mark, will exceed $2 trillion per year in the early 2030s and would top $7.5 trillion per year at minimum by our calculations by mid-century.

Stated differently, if something drastic is not done now---like a $2 trillion annual budget savings by the end of Donald Trump's second term---America will be paying more interest on the public debt within 25 years than the entirety of today's Federal budget. That's right: Debt service will exceed current outlays for Social Security, defense, Medicare, education, highways, the national parks, Head Start, interest and the Washington Monument, too.

Obviously, the sprawling Federal government and its prodigious expanse of spending and debt literally defies easy comprehension and graspable solutions. After all, the current annual budget of $7 trillion amounts to Federal spending of nearly $20 billion per day and $830 million per hour. And when you talk about the 10-year budget outlook, comprehension literally fades away completely: The current CBO spending baseline for 2025-2034 amounts to $85 trillion or just shy of the annual GDP of the entirety of planet Earth this year.

So based on experience we suggest that the DOGE team needs to build its $2 trillion case around a target year and several big buckets of savings by broad type. The latter can then be used to fashion a detailed but comprehensible blueprint for arraying and conveying the desperately needed house-cleaning of the Federal budget that the DOGE has been tasked with accomplishing.

In that context, FY 2029 makes the most sense as a target year since it would represent the 4th and outgoing Trump budget; and also one which would give sufficient time for phasing-in some of the sweeping cuts that will be needed, but not so far in the distant future as to be largely irrelevant to the here and now of fiscal governance during Donald Trump's second term.

We'd also suggest three big buckets of savings, which we would short-hand as follows:

• Slash the Fat....by eliminating unnecessary and wasteful agencies and bureaucrats wholesale.

• Downsize the Muscle... by curtailing national security capacities and functions that has grown up during the Forever Wars but are not needed for an America First foreign policy.

• Cut the Bone... by reducing low priority entitlements and subsidies that the nation cannot afford, and which a reasonable view of societal equity does not require.

Needless to say, when it comes to the vast wasteland of the Federal budget there are innumerable ways to skin the cat. But based on our own experience of more than a half-century of familiarity with the Federal budget as both a participant and an informed observer, we judge the following mix to be the most plausible and balanced way to get to the $2 trillion of annual savings by FY 2029.

To be sure, even this relatively judicious mix is sure to ignite firestorms on the banks of the Potomac like never before, but it can be strongly justified and defended for the reasons we will lay-out in detail below.

Annual DOGE Savings Targets By Component:

• Slash the Fat: $400 billion or 20%.

• Downsize the Muscle: $500 billion or 25%.

• Cut the Bone: $1.1 trillion or 55%.

Suffice it here to say that the first bucket alone would leave them screaming to high-heaven in the swamplands of DC. But even that $400 billion savings could be accomplished only by eliminating 16 agencies entirely, slashing another nine departments by 50%, cutting the balance of the nondefense payroll by 34%, terminating $40 billion per year worth of wasteful farmer subsidies, cancelling entirely $60 billion per year of energy boondoggles including all EV credits, and eliminating $150 billion per year of all other forms of corporate welfare and subsidies embedded in the budget and tax code.

We will amplify the details of this $400 billion of inherent Federal budget fat and waste in the chapters below. But suffice it here to say that attacking the usual shock effect lists of outrageous studies, stupid foreign aid projects or even payments to dead people, as is often used to illustrate wasteful spending, will get you barely a fractional decimal point of the savings target, as desirable as eliminating this nonsense might be in its own right.

For instance, a recent "outrageous spending" list showed $4 million was wasted on "Dr. Fauci's Transgender Monkey Study" and $6 million on a "USAID Fund to Boost Egyptian Tourism", among countless more absurdities. Still, eliminating these two items would contribute only 0.0005% to the $2 trillion savings target.

Even some of the larger ideas of this sort, such as timelier elimination of dead people from the Social Security rolls, would not get you very far, either. To be sure, 1.1 million Social Security recipients pass-on to their rewards each year, which departing beneficiaries would be receiving an average benefit currently of $1,907 per month.  So one extra month of dead people on the rolls costs the not inconsiderable sum of $2.1 billion.

At the present time, however, not much excess dwell time actually happens. The rolls are purged every month based on newly filed death certificates, and this encompasses the termination of payments to anyone who died during the course of the month, including the last day. So the average duration on the rolls of Social Security decedents is 15 days, which computes to $1.050 billion of payments.

Of course, if the Musk & Ramaswamy team could come up with some more super-duper software to monitor, report, calculate final month benefits and then terminate decedents in real time, it might reduce dwell time by two-thirds. In turn, this means that getting dead people off Social Security 10 days faster would generate a savings of $700 million per year or about 0.04% of the $2 trillion target. That is to say, there is undoubtedly room for efficiency improvements and elimination of outright waste and stupidity everywhere in the Federal budget, but it unfortunately adds up to rounding errors.

Stated differently, if it doesn't "scream and bleed" politically it won't likely make a dent in achieving the $2 trillion goal. There is just plain nothing antiseptic about slashing the Federal budget.

For instance, even a thundering 50% cut in the current nondefense Federal headcounts of 1.343 million would save just $100 billion annually by the target year of 2029. And that's a comprehensive figure based on the current average cost per Federal employee of $100,000 in pay per year plus $44,000 in average benefits and fringes----escalated for inflation to $160,000 per bureaucrat by FY 2029.

Accordingly, to reach $2 trillion of annual savings will require a deep dive into the three buckets listed above. In the next five chapters we will lay out the most plausible and judicious route to the $400 billion of "Slash the Fat" savings, followed by the details and an America First rationale for cutting $500 billion per year of unneeded muscle from the national security budget in Chapter 7.  Chapter 8 will then delve into $1.1 trillion per year of cuts from the bone of entitlement and domestic welfare that would be needed to reach the $2 trillion DOGE savings target.

But one thing should be clear from the outset. Lists of outrageous anecdotal items provide color about the stupidity and waste that is rampant in the Federal government. But they have nothing whatsoever to do with the fact-based analysis and philosophical U-turns that will actually be required to complete the DOGE mission successfully.