Economic Monitor – Weekly Commentary
by Eugenio Alemán

Looking for efficiencies in government spending: Look elsewhere

November 22, 2024

There has been a lot of talk about (in)efficiencies in government spending, both before and since the election. Much of the conversation has been driven by Elon Musk, who will co-head the Department of Government Efficiency (DOGE, not an actual government agency). Musk has boasted he could find $2 trillion to cut from the federal budget. He has also complained about what he views as excess regulations. In the Musk narrative, blame for government inefficiency has fallen on federal employees.

So there is no misunderstanding, one of us was a federal government employee for one year and two months. Furthermore, we agree with Mr. Musk that there are lots of regulations that do not make sense – some may be the same as the ones Mr. Musk is talking about, but others may not be. It would be very inefficient to mention some of them in this write-up. But most of the issues with regulations have to do with the fact that regulations are, typically, time-dependent and/or stuck on time. That is, governments pass regulations to try to ‘fix’ a particular issue, and these regulations, sometimes, outgrow their useful life, or were implemented to fix something that is no longer a problem. However, those regulations remain on the books, and government employees are responsible for enforcing them. Blaming federal government employees for doing their job doesn’t seem the most efficient way to fix the problem.

These issues happen more times than we are typically willing to accept but the political system has serious problems making the necessary changes to the regulatory environment as the economy changes. This is also true with other issues in politics. But we hear today that the problem is because there are “too many federal government employees,” which seems to be a politically charged argument. However, by analyzing the numbers, and as we always say, we live and die by the numbers, the story is very different from what many politicians say. The number of federal government employees today is almost the same as back in the 1960s while the U.S. economy is 4.4 times larger than in the 1960s.

Today, total government employment is about 23.4 million (or about 14.7% of total nonfarm payrolls), but that includes federal, state, and local government employees. Federal government employees are ‘only’ about 3 million out of the 23.4 million. Furthermore, out of these 3 million workers, about 610 thousand are U.S. Postal Service workers. As a percentage of total nonfarm employment, federal government employees represent only 1.9% of total nonfarm employment. If we exclude postal workers, the percentage falls to 1.5%.

Another way of looking at this is measuring real GDP over the number of federal workers, which could be thought of as a measure of efficiency. That is, does the number of federal workers increase as the economy grows? We already saw that this is not the case, as the number of federal workers has remained almost unchanged since the 1960s but the graph below shows that federal workers are extremely efficient. That is, because the number of federal workers has remained almost unchanged since the 1960s, the U.S. economy has required fewer and fewer federal government workers per unit of output. This means that federal workers have become more and more productive (as shown in the graph below). Certainly, technological advances have played a role in this trend, and we expect AI and newer technologies to put further pressure on the total number of federal government employees. However, it's important to note that only 10% of current workers are in administrative roles that are most susceptible to AI replacement. In contrast, almost 70% of workers hold at least a Bachelor’s Degree and are employed in occupations that require formal training/education and therefore are less likely to be replaced by AI.¹

¹ https://www.cbo.gov/publication/60235

Thus, if politicians want to punish federal workers for doing their job to enforce the regulations in place today, then we are worried that this is another attempt of lip-syncing from our political class while doing nothing to actually change anything (did anybody hear anything about the fiscal deficit?). In fact, not only are federal workers very efficient given the tasks they are dealing with today, but there are economic series they used to produce that they no longer produce because of cuts to statistical agencies’ funding (for example, the BEA discontinued real Retail and Food Services Sales). Some of these series are highly important series on the health of the U.S. economy, series that we have been using for more than 30 years and that would allow us to do a better job as economists.

From a budget perspective, if we remove the 610,000 postal workers from all government employees, we are left with ~2.4 million employees among the Department of Defense, Veterans Affairs, Homeland Security, and other federal agencies. In 2022, compensation for these ~2.4 million employees amounted to $271 billion, which represents only about 4% of the $6.75 trillion federal spending budget. While we acknowledge that somebody may find some inefficiencies within this group, it is important to note that their compensation constitutes a relatively small portion of the overall budget, insignificant in the grand scheme of the serious fiscal issues we face as a country. In contrast, interest expenses, which account for approximately 13% of the budget and are growing, represent a much larger financial burden. However, there is little the government can do to reduce this burden, which is why economists talk about cutting costs and/or increasing tax receipts to improve the primary deficit, which is the deficit less interest payments on the debt.

Federal Civilian Employment by Branch

Addressing the fiscal deficit is undoubtedly a complex task, but at some point, our political system will have to address it by a combination of a slowdown in government expenditures as well as an increase in tax receipts as a percentage of GDP. Unfortunately, most estimates suggest that in 2024 and 2025 the deficit will approach $2 trillion which would be the highest it has ever been if we exclude the $3+ trillion deficit of 2020 in response to the COVID-19 pandemic.

At the same time, the federal government is experiencing a historically large baby boomer retirement binge that is crippling the ability of the statistical institutions to perform as they should. Furthermore, some people argue that the federal government pays too much. Well, the US government needs to attract the best of the best and needs to compete with the private sector, which also pays a lot of money to attract the best. Thus, this seems like a moot point, used with political underpinnings.

We hope the government efficiency commission is efficient enough to correctly determine what the real issues are and proceed to try to fix these issues. However, starting the discussion by blaming the messenger does not bode well for the future of such a commission or the future of the economy.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.