How Will DOGE Impact the Market and Economy?

We are nearly four weeks into the new Trump Administration. To say that things have been moving at lightning speed would be an understatement. Politics being what it is these days and varied feelings towards President Trump in particular, it’s hard to wade through the real-life impacts of his agenda. Even more, so about the controversial question, “how will DOGE impact our nation? But we have enough information at this point to speculate on potential positive and negatives for our clients and their portfolios. In this article, I want to address the impacts we expect to see from DOGE on the market, the federal deficit, tax rates, social security, and international tariffs.

What Is the Department of Government Efficiency (“DOGE”)?

President Trump signed an executive order on his first day in office (January 20, 2025) establishing the Department of Government Efficiency. In its own words, the goal of DOGE is “…modernizing Federal technology and software to maximize governmental efficiency and productivity.” There have already been legal challenges of this executive order and whether DOGE is constitutional. While we are not constitutional experts, there are some important things to highlight that suggest to us that DOGE will “survive” to do the job it was created for.

Will DOGE Survive?

First, the Department of Government Efficiency is NOT a newly created entity. The original entity, called the “United States Digital Service” (“USDS”) was created by President Obama in 2014. It’s purpose was “delivering better government services to the American people through technology and design.” The major thrust of the original USDS was to improve the online experience of Healthcare.gov as part of the rollout of the Affordable Care Act.

President Trump took the existing USDS agency and repurposed it towards a government-wide efficiency mandate. He renamed it to the “United States DOGE Service” using the same USDS acronym. Our view is that the repurposing of an existing Executive Order helps its ultimate survival. The USDS was unchallenged during the 10 years since President Obama created it.

Second, there are concerns that billionaire Elon Musk is wielding too much power and hasn’t been subject to Congressional approval. Here again, however, there is a past precedent in presidents appointing people to key positions which weren’t subject to congressional approval. We can think back to the depths of the Great Financial Crisis of 2008-2009. Back then, so many aspects of the US economy were under siege that a newly elected President Obama appointed several “czars” to tackle key economic issues. Of course there were criticisms of these “czars.” Ultimately they were unchallenged because presidents prior to President Obama had appointed people to similar roles. 

The question we ask ourselves is, “Will DOGE survive?,” not “Should DOGE survive?” We will all have opinions on the “should” question. But as your financial advisor, the key question that will affect clients is the “will” question. And our assessment based on the items above is that the chances are good that DOGE will survive and attempt to do what it’s tasked to do. With that in mind, here is how we see DOGE potentially affecting the economy.

Lower Government Spending: Near-term Pain for Long-term Gain?

Government spending directly affects our economy’s growth. While there’s a lot of academic debate about the exact impact of government spending on the economy, the linkage is real. It’s why the government pumped so much money into the economy in 2020, as the COVID pandemic washed ashore. And high levels of government spending is likely a key factor in why we haven’t had a recession the last two years, despite many traditional indicators saying that recession was on the horizon.

Here is a comparison of increases in economic output – measured as Gross Domestic Product (“GDP”) – and the corresponding fiscal deficit that same fiscal year. As you can see, there’s a pretty close correlation between these two factors. The GDP going up almost dollar-for-dollar with fiscal deficits if we average out the last 7 fiscal years.

DOGE is tasked with reducing government spending. And while Elon Musk has made sweeping remarks about wiping out the deficit, it’s highly unlikely that will happen. But what if DOGE can identify $750 billion of savings? What would be the impact of that? [Note, $750 billion is nothing more than a theoretical estimate we are making.]

The size of US economic output, as measured by GDP, is currently $29.7 trillion. If we assume that there is a dollar-for-dollar impact on GDP from higher/lower government spending, with no offset from higher growth or lower taxes, then we can estimate a -2.5% impact to GDP from those cuts.

To put this potential GDP decline into context, the peak-to-trough GDP drop during the Great Financial Crisis of 2008-2009 was -3.6%. Thus, this level of spending cuts would hurt. Even if we assume all of this spending is “waste & fraud,” it’s real money that gets into the economy.

As we argue in a later section, the long-term benefit of lower fiscal deficits is unquestionably positive for long-term outlook. But clearly, getting from “here to there” may involve a short-term recession and/or unemployment cycle. 

How Severe Might a DOGE-induced Recession Be?

If DOGE is successful in rooting out excess spending sustainably, the short-term economic impact would probably be negative. The debate is how negative such a downturn could be. 

We believe the post-Cold War experience of the early 1990s is instructive. When Ronald Reagan delivered his famous speech at the Brandenburg Gate in 1987, the US was spending over 7% of GDP on defense. After the fall of the Soviet Union, defense spending also fell significantly. It dropped from 7% to 4% of GDP during the decade of the 90s.

While the reallocation of defense spending to other areas of the economy was unequivocally positive, the short-term pain was hard. The US economy entered a recession in late 1990 and didn’t firmly pull out until 1992. This costed George HW Bush a second term in the 1992 election. The pain was especially difficult in regions most exposed to the cuts in defense spending, such as Southern California. 

By the mid-1990s, the economic growth was vigorous, led by the emergence of the internet. But there were also fiscal-friendly policies put into place by Bill Clinton. This led to a budget SURPLUS by the end of his second term. 

Getting from “here to there” on government spending is the obvious risk we see from DOGE. How severe a downturn might be, how high unemployment might rise, and what counter-measures might be put in place (lower taxes) is unknown at this point.

DOGE Impact on United States Fiscal Outlook

No matter what one’s political views are, I think most of us would agree that our country’s fiscal situation is unsustainable. In May 2024, we wrote an article about the Federal Budget Deficit and the concept of Fiscal Dominance. I won’t rehash everything from that article here. But the key point was that fiscal deficits were (are) so high that they are starting to “dominate” the economy. 

The impact of these high deficits has been to push up long-term interest rates. 30-year government bond yields have flirted with 5% for the first time since the mid-2000s. Rates pushed higher after the November 2024 election. Bond investors worried that President Trump was adding more deficit spending to an already-untenable situation.

We do not believe the deficit needs to be cut to zero. The US economy has done just fine in the past with deficits at or under 3.0% of GDP. Using our ballpark assumption of a $750 billion spending cut, the fiscal deficit would decline from 6.0% of GDP today to 3.6%. This is not assuming offsets from tax cuts (higher deficit) or higher potential growth (lower deficits.) 

If – and this is a big if – DOGE cut the ongoing fiscal deficit to a sustainable level closer to 3.0% of GDP, this would ease upward pressure on interest rates. Meaning, consumer borrowing costs for mortgages and auto loans would come down a bit. More important to clients is that lower deficits would make bonds a more attractive portfolio investment. This would be especially helpful to retirees who have 30-40% of their investments in bonds. 

What Could Be the DOGE Impact on Social Security?

According to the latest Social Security Trustee report, the Social Security trust fund will run out of money in 2035. If no Congressional action is taken by that point, retiree Social Security benefits would be cut by 17% as the system moved to a pay-as-you-go system. We don’t believe there’s any chance benefit cuts would happen, but that’s the worst-case scenario.

The government pays out $1.4 trillion in Social Security benefits each year, adjusted for inflation. As we write this, there have only been spotty assertions by DOGE as to the extent of “fraud” in the Social Security system. This “fraud” can extend to people who shouldn’t be getting Social Security. Usually this looks like benefits paid out to people who have since passed away.

We have no good estimate of what potential savings are. But any savings will only help to keep Social Security funded for longer than currently projected. It’s highly unlikely the savings will be enough to forestall future reforms to Social Security, but as they say, “every little bit helps.” At a minimum, we hope that any savings that are found provide comfort to beneficiaries that their checks won’t get cut.

DOGE Impact on Future Tax Rates

Heading into President Trump’s second term, expectations are high that he’ll extend the Tax Cuts & Jobs Act (“TCJA”). This act went into effect in his first term. As it stands, those lower rates and wider tax brackets will expire at the end of 2025. The problem is that extending TCJA beyond 2025 will make a bad budget situation even worse. The Congressional Budget Office estimates future deficits will be $400 billion a year higher if Trump extends TCJA.

The only way we see TCJA getting extended without creating a dangerous Fiscal Dominance spiral as described above, is if there are spending offsets. This is where DOGE’s efforts play an important role.

Future tax rates are hugely important to our clients. When we run long-term projections of how long your retirement savings will last, we currently assume that TCJA sunsets at the end of this year and that tax rates revert higher from 2026 onward. An extension of TCJA implicitly lowers future tax payment projections, which would extend the life of client retirement savings.

This is the most uncertain aspect of Trump’s second term and the role DOGE plays in it. If DOGE doesn’t work and the fiscal situation remains dire. We may not only see TCJA sunset, but may see future administrations raise taxes further to bring the deficit down. That would clearly be negative, and we know this is a worry many clients have. 

Will Higher Tariffs Lead to Higher Inflation?

The last point we will cover is the one we’re least comfortable speculating about. Having read passionate arguments from both sides about the potential impact of tariffs on inflation, I can’t say I know any more about the issue than I did before. This is truly a wild card.

What we believe is that tariffs’ direct and mechanical impact on consumer prices is less important than consumer perceptions. For example, we are in the middle of an egg shortage, which has frustratingly postponed my effort to bake cookies with my youngest daughter. We can’t find eggs! Consumers believe there’s an egg shortage, so they are buying 10x more eggs than they normally do. Which of course creates real shortages and leads to higher prices.

My worry about tariffs is that this thought process will extend to a wider range of products. If consumers believe tariffs will lead to higher prices, then that will pull-forward demand to today. This creates shortages and higher prices. It’s a self-fulfilling prophecy.

How Do Tariffs Work?

Mechanically, tariffs shouldn’t have an enormous impact on consumer prices. Tariffs are assessed at the point of origin. For example, if you buy a $10 widget at Wal-Mart, the original cost of that widget as it was imported into the US is substantially lower than the retail price. Let’s say the original cost was $3 and a 10% tariff is put on that widget. That would increase the cost by $0.30. If fully passed on to the consumer, the retail price would increase by 3% to $10.30, NOT by the full 10% tariff amount.

Obviously, ANY increase in the price of goods is bad. But we think there are offsets that will dampen any impact on retail prices for consumers. The main offset being the motivations of exporting countries. Using China as an example, they produce goods for export to the US. The demand for those goods from China creates jobs for China’s citizens. More jobs means social stability for China’s government. And social stability is the PRC’s goal above everything else. 

So if tariffs are imposed on Chinese goods, there’s every motivation on China’s part to offset the retail price impact in America. Otherwise they risk losing manufacturing jobs to other countries. Obviously, there are limits to how high tariffs can get before they have a real impact on prices. So far, President Trump doesn’t seem troubled by saying he’ll impose outlandish tariffs if the US doesn’t get what it wants.

This debate about tariffs and inflation is very fluid, and it’s a topic we are watching closely.

We Are Here to Guide You Through Uncertainty

We are dealing with an uncertain and fast-moving environment. It’s not lost on us that this is unnerving to clients, especially retirees and clients nearing retirement. The last thing any retiree wants to deal with is the prospect of anything that could upset their retirement plan.

If we were to summarize all our thoughts above, we’d say we’re “cautiously optimistic” that the ultimate impact on client plans will be at least neutral, if not positive. The “good” news – if you want to call it that – is that DOGE has a deadline of July 4, 2026 to wrap things up. At a minimum, we’ll likely have a good idea in months ahead how all this will work out.

While we cannot predict exact impacts of what DOGE and the Trump Administration are going to do, we can and will react quickly to adjust your plan, as necessary. This is the value of getting ongoing financial planning and investment management with Financial Design Studio. As things change – either in your life or in government – we are here to help you react as quickly and positively as possible. “Change” feels acute today because of political noise, but change is always happening. 

As news continues to unfold, we will share our latest thoughts with you. In the meantime, we always want to remind you it’s okay to send us “Hey, what the heck is going on?” emails! We are here to empower you with information, which we hope leads to comfort and confidence.

BONUS: Upcoming Webinar

If you have more question about this topic, you are in luck! We are hosting a Zoom webinar on Wednesday, March 19th 2025, at 12pm CST to share an update and address your questions. You can register for it below!