Federal Government

With the Trump administration coming into power in mid-January, there are high expectations for significant changes in how the federal government works, which is an area of great importance and investor focus. One item that's getting the most attention right now is DOGE, which is an acronym for the Department of Government Efficiency. It has high ambitions of slashing federal regulations, which will significantly reduce the number of federal employees and cut government spending. That will be needed to offset the expected loss in revenue from planned tax cuts.

Historically speaking, presidents regularly establish commissions that have created reports with recommendations to make the federal government more efficient and save money. Some have been successful, some not so much.

There have been 164 reports since 1905, when Teddy Roosevelt was president. The most successful was probably the Hoover Commission set up by President Harry S. Truman who wanted to transform federal operations from a wartime government to a peacetime government. He appointed former President Herbert Hoover to chair a bipartisan commission to make administrative changes.

Congress and the executive branch implemented more than 70% of those recommendations, reducing the number of federal departments and increasing government efficiency. Its success was attributed to a mix of government and industry people on the commission.

However, commissions that have relied on experts primarily from the private sector have not fared nearly as well since they have very little understanding of how federal agencies work and how bureaucracy works. That said, the Trump administration may be different. There's some history here. Looking back at his first term, there was a significant decline in the federal regulations. That has a high probability of happening again. In fact, many Wall Street analysts attribute the recent rally in the stock market to expectations of substantial decreases in regulations. With less regulation, there's the expectation of possible increase in corporate profits.

Chart 1, 2:30– This is a chart of the Federal Register. It is a catalog of all the proposed and final federal rules and regulations. It is a rather obtuse measurement since it can be filled with corrections, administrative notices, etc. But be that as it may, the number of pages in the register is often cited as a proxy for the number of regulations.

In 2017, when reducing regulations, the Trump administration significantly cut the number of pages by 36%, the most significant year over year decline in decades. Although the page count climbed in subsequent years, that's attributed to the requirement that when a rule is eliminated, agencies must override it with another rule, adding pages even as it subtracts regulatory burdens.

Chart 2, 3:21– A more acute measurement is the number of pages devoted to the final rules. Here, you can see a sharp decline of almost 52% in 2017 and no significant rebound in the following two years. It's important to remember that the economic effectiveness of regulatory changes isn't dependent upon the number of pages in the Federal Register. Sometimes just one paragraph could have a bigger significant impact than a regulation that might be several pages long.

Chart 3, 3:50– Now, let's take a look at the history of reducing federal debt, since it's not that easy. There is a long history of the government spending more money than it brings in and running up the federal debt, the total amount of money the government owes. The dark blue line shows the value of the federal debt since 1900. It currently stands at $35.5 trillion dollars. The light blue columns show the yearly percentage change. As you can see, there were extreme increases during times of war, like World War I and World War II. You can also see that the last time the federal debt declined was in 1957, 67 years ago.

Chart 4, 4:30– This chart shows the same data from a more contemporary period beginning in 1950. I show it this way since the significant increases of the World Wars do not skew the percentage change. But you can see 1956 and 1957, the most recent years that the debt did not increase.

Here, you can see significant increases in debt in the early 1980’s. This is when President Ronald Reagan had his massive tax cuts and fiscal stimulus, especially for military spending. In the 1990’s, it fell to nearly zero when there was a great concern of the size of the federal debt, which took center stage in a conflict between President Bill Clinton and house speaker Newt Gingrich. Back in the 90’s, the federal debt averaged about $5 trillion dollars. Then President George W. Bush and President Barack Obama used fiscal stimulus in response to the economic downturn of the global financial crisis in 2007 to 2009.

And finally, the federal debt took another significant jump from President Trump's response to the COVID-19 pandemic. Since 1950, there have only been three years when the federal debt declined. So congress, which writes the laws and determines the spending, has a short history on tightening its spending belt.

DOGE's plan is to slash regulations far more than last time. With fewer regulations, there'll be less need for federal workers, especially for those who monitor the eliminated rules. There are expectations for a large decline in the federal workforce. Despite its name, DOGE is not part of the federal government. It is 100% independent of the federal government, and this is where some conflicts may arise.

Congress writes the laws and controls the federal government's purse strings. They do not take kindly to being told what to do. Of the three million federal employees, 85% of them work outside the greater Washington DC area. How eager do you think congress will be in reducing the number of federal workers in their district or states?

There's an old saying about congress –It's easier to convince a toddler to put down a candy bar and pick up a piece of broccoli than it is to convince a member of congress to spend less money in their district than they did last year.

Chart 5, 6:59– Here are some charts on the federal workforce. The data in this chart is from the monthly labor report. It does not include uniform military personnel, and I've read that it doesn't include those that work for the CIA since I guess that's top-secret information. But you can see a large jump in 1940’s for the war effort.

You can see a pop every 10 years for the temporary workers hired for the census. Right now, there are three million federal workers, which is about the same as the average number of federal workers it has been for the last 50 years. There really hasn't changed much.

But since 1940, the population has grown from about 130 million to an estimated 345 million, almost tripling in size. Also, the economy has grown by leaps and bounds during that period. The light blue shaded area here shows the federal workforce as a percent of the total workforce.

Excluding the war effort, it's been on a downward trend since the 1950’s, from 2.5% of the workforce to 1.9%, and that represents a decline of about 25%. So historically speaking, the federal workforce is not nearly as bloated as many critics’ attest.

Chart 6, 8:17– This is a breakdown of the workforce by department. Some of the biggest departments make up defense and national security. The defense, which is at the top of the list, and homeland security, which is third, together make up 44% of the total workforce. It's hard to believe that congress will be willing to see cuts here.

We expect some head butting between congress and DOGE, and some compromises will be reached reducing the impact of DOGE’s ambitious goals. How much of a compromise remains to be seen? There are still far too many unknowns out there.