How Donald Trump and Elon Musk could cut $2 trillion in spending

Elon Musk has thrown down a $2 trillion gauntlet, claiming he can cut federal spending by that amount. Although the billionaire’s statements about X often generate more heat than light, one can only hope that he will succeed.

The real question is not whether we can Cutting $2 trillion from a bloated $6.8 trillion federal budget – that’s absolutely possible. After all, the government managed to function on $4.4 trillion five years ago, and American civilization did not collapse. The economy was booming, wages were rising and poverty was falling.

However, just because it is feasible does not mean that Musk will actually succeed. Before Washington’s army of spending defenders, including many Republicans, starts whining about draconian cuts, let’s discuss the real question at hand: how to cut the fat without damaging the muscle.

Theoretically, one of the simplest austerity approaches is a general or uniform austerity rule. There are plenty of cuts to be made everywhere in the budget, including the large portion that funds the Department of Defense. The Congressional Budget Office’s biennial Options for Reducing the Deficit lists cuts to the Pentagon budget that would save $995 billion over 10 years.

The best way to cut $2 trillion from the budget is to eliminate everything the federal government does that it shouldn’t be doing in the first place. It’s time we rediscover the practice of thinking critically about government and the role it should or should not play in our lives. Questions like: “Is that the role of government?” or “Should the federal government pay for that?” not seriously considered for years. The power of fighting for first principles has faded among Republicans as it is no longer fashionable to call for small government.

Once you ask these questions, it becomes clear that most of what government does should not be happening. For example, a lot of expenditure goes to activities that, according to our federalist model of government, are the responsibility of the states. So federal subsidies to the states are the first programs I would cut. These subsidies attack federalism, create perverse incentives, and reduce the efficiency and accountability of state and local governments.

Take, for example, federal grants to state education departments. Federal aid encourages schools to shift their priorities to meet federal grant requirements rather than local educational needs. Schools also waste time and money complying with these complex federal requirements. Another example is federal transportation subsidies, which incentivize states to build mass transit systems to get federal matching funds when roads could better serve their communities. There are many more examples.

Chris Edwards of the Cato Institute calculates that “federal assistance to states totaled $721 billion in 2019.” That number exploded during COVID-19 and, like everything else, has remained sublime. According to the National Association of State Budget Officers, federal funds good for 35 percent of total state spending in fiscal year 2023. If I were in charge, I would end most federal subsidies to the states and at the very least propose serious reforms like blocking Medicaid spending.

Next, I would end federal spending on programs and functions that subsidize the private sector. To begin with, it is not the role of government to finance private commercial interests. The case against favoring private companies with federal money also has an economic and ethical angle. From an economic perspective, when the government intervenes by financing certain private companies, it distorts the market’s natural allocation of resources based on merit and consumer preferences. Companies should succeed by serving customers to the best of their ability, rather than by courting political favors—a dynamic that encourages wasteful lobbying and cronyism rather than productive innovation. The beleaguered aerospace giant Boeing is a good example.

The ethical issue is just as compelling. It is fundamentally unfair to force taxpayers to invest in private companies against their will, especially when this arrangement typically privatizes profits and socializes losses (think bank bailouts during the Great Recession). It also undermines support for a market economy, creating the impression that capitalism rewards politically connected corporations at the expense of ordinary Americans.

Several years ago I calculated that federal “corporate welfare” was about $150 billion annually. That number included agricultural subsidies, manufacturing subsidies and government corporations like Amtrak. It also included agencies that subsidize private businesses, such as the Small Business Administration, the Export-Import Bank and the Department of Commerce. That number has undoubtedly grown thanks to the Biden administration’s green energy and the billions of dollars for companies like Intel to build semiconductor factories in the US that they would have built anyway.

Many of the other tax expenditures (targeted tax breaks, often for specific interests) should be eliminated in the same way. Between 2021 and 2024, the cost of these breaks increased from $1.2 trillion to almost $2 trillion, so there’s still plenty to do. These exceptions also make the tax code more complicated, less efficient and more unfair. These new tax subsidies include tax breaks for green energy companies and electric vehicle consumers.

The federal government’s subsidies to healthcare companies should be targeted. Healthcare spending is a major driver of our future debt and should be cut from the budget. Health care subsidies have created a complex web of market distortions that drive up costs and obscure true prices. For example, the pharmaceutical industry benefits from federal research grants from the National Institutes for Health and some tax breaks for drug development. Insurance companies benefit from premium subsidies from the Affordable Care Act, while indirectly benefiting from employer-provided insurance tax breaks. And medical device manufacturers make money through research subsidies, tax breaks and preferential government procurement policies. The result is a healthcare industry in which competition is suppressed, innovation follows political incentives rather than the market, costs are passed on to taxpayers, and market signals are distorted to the extent that providers and patients cannot make informed economic decisions.

End all Corporate well-being must be a priority. However, there is reason to be concerned that Musk will indulge in this cronyism and instead seek to eliminate subsidies for companies seen as enemies, while doubling subsidies for the government’s friends.

The many tax subsidies that go to private individuals are also problematic. They mean that two taxpayers with the same income do not pay the same amount of taxes depending on whether they engage in activities that please the government, such as having children or buying an electric car. Newly elected President Donald Trump’s 2017 tax reforms limited mortgage interest rates and state and local tax deductions, but these should be ended completely.

Also on the cutting list should be tax breaks for health benefits for workers over wages, which puts upward pressure on demand for health care and therefore prices. Another target should be the federal government’s substantial subsidies to Medicare Part B beneficiaries. Beneficiaries pay premiums that cover only a quarter of the costs, while the remaining three-quarters are paid by taxpayers. In general, only a small percentage of all health care spending is financed from consumers’ pockets. Removing the incentive for consumers to consider costs when making healthcare decisions results in overutilization and therefore unnecessary expenditures compared to a market system.

But let’s be honest here. If Musk is really serious about fiscal discipline, he will advise the president-elect to avoid key policies he promised during the campaign. According to the Committee for a Responsible Budget, Trump’s proposed policies would increase the national debt by $7.7 trillion over the next decade, including $1.05 trillion in interest costs (these figures are net of new tariff revenues). While extending many of Trump’s 2017 tax cuts, which expire next year, would boost growth, campaign proposals (such as no tips and overtime taxes, a tax credit for first-time homebuyers, etc.) would be special attention grabbers.

The federal budget will be cut by $2 trillion should be easy. Of course, that will be anything but the case, given Congress’ continued lack of interest in discussing budget cuts and the president’s abysmal record. Let’s hope that this Musk-led effort to cut spending will hopefully reintroduce seemingly forgotten reasons for cutting the federal budget.