The Department of Government Efficiency (DOGE), the quasi-official advisory board led by Elon Musk to recommend workforce reductions and cost-savings in the Federal Government, has a laudable goal. There certainly is a lot of waste in the government. Fraud, too. There are probably many tasks that the Feds currently do that states or private entities could do better. Furthermore, without substantial changes, the Federal budget deficit is unsustainable. There is a lot of fat that must be trimmed from the Federal government budget.
However, there is a right way and a wrong way to reduce budgets. When facing cuts, one wants to right the ship in the least painful manner. Indiscriminately cutting can make the situation worse. In my years as a consultant before graduate school, I saw many firms turn a budget problem into a budget crisis (and, in one extreme case, turn a minor issue into bankruptcy) simply because they did poor budget cuts.
The wrong way to do cuts is what DOGE is now: slash and burn. It’s hard to tell what criteria they are using to recommend cuts. As best as I can tell, the reasoning is “I don’t understand this, so it must be waste or fraud.” They’ve had to walk back several recommendations upon discovering they were recommending firing key personnel . Cuts like these reduce the productivity of the organization and eliminate institutional knowledge, undermining the purpose of the cuts (to right the ship and get the organization running more efficiently). Not only that, but seemingly arbitrary cuts undermine morale, which in turn reduces productivity further. Budgetary problems persist, more cuts are needed, and the organization continues to become weaker. This can lead to a vicious cycle of cuts and cuts, the ship never quite righting.
This vicious cycle is not always maliciously intended. It’s probable that Musk and Trump are doing what they believe through their experience businessmen is the right action. I’ve seen the exact same mistakes made by many firms: bosses seek to “share the burden” of the cuts, asking various departments to all cut by an equal amount. Or, also like DOGE, they lay off probationary employees (who tend to be easier to fire), thus cutting off the firm from young, maturing talent. They target parts of the firm they do not understand, rather than relying on managers to help them make informed decisions.
What’s the right way to make cuts? Fortunately, economics can help us. The optimal way to make cuts is to find the least marginally productive workers and target them for cuts. Who, on the margin, is contributing least to the firm’s output? Are there certain departments not advancing the goal? These are questions that need to be answered.
Of course, just because this method is right doesn’t mean it is easy. Measuring marginal productivity is no easy task, especially when one has an organization like a government where there are no products being willingly sold. Furthermore, someone may appear unproductive, but actually has a wealth of institutional knowledge that would disappear with them.
Righting a sinking corporate ship is no easy feat. There’s a reason so many businesses fail, even those helmed by great leaders. Nevertheless, it is a task that must be done from time to time. And if one is to do it at all, one must do it well. Trump and Musk would be wise to slow down and make reasoned, deliberate cuts, rather than flashy, often misunderstood, cuts for the camera.
