Dogespierre Has Left the Building

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Text: J.P.Morgan, Eye on the Market. MAY 2025, Dogespierre Has Left the Building: DOGE's impact on government spending, Trump Tracker, Spanish power outage. An image of Elon Musk dressed in 18th Century clothes with a red, white and blue sash. A guillotine stands behind him.

(SPEECH)

Good morning, everybody. This is Michael Cembalest with the May 2025 Eye on the Market podcast. This one is called "Dogespierre Has Left the Building"-- obviously an Elvis reference. We're going to take a look at DOGE's impact on government spending, now that Elon Musk is stepping back a bit from his government service to focus on his core businesses.

We're also going to have a few comments on our Trump Tracker. And if I have time at the end of this podcast, I'd like to say a few words about the Spanish power outage. So first, just a few updates from our Trump Tracker, which you can access in the header of the Eye on the Market itself.

The current data continue to hold up. If you look at the Dallas Fed Weekly Economic Index, coincident indicators from the Conference Board, certain retail spending indices, a logistics index, the contemporaneous data is holding up OK. It's the leading indicators that are all slumping. New orders, less inventories, CEO optimism and capital spending trackers, anything having to do with shipping volumes from China to the US obviously are all weakening because of the tariff situation.

And so I would say the next four to six weeks are going to be a really important collision between the hard current data and the falling forward-looking data to see which one of those wins out. So far, import prices into the US are roughly unchanged, even for categories that have been subject to 25% tariff hikes.

So far, importers and consumers in the US are paying for the tariffs, not people exporting to the US. And our latest estimates show a likely increase in tariff collections as a share of GDP that may reach the highest level on paper since the Civil War. Market-based US recession indicators are all over the place, anywhere from 20% to 60%.

And as everybody knows, the markets were down at one point around 20% and then they've recovered roughly half of that. And we do see some consumer stress rising in the form of a rising number of cardholders making minimum payments. But we'll see. Again, the current data are holding up OK. A lot depends upon what plays out over the next four to six weeks.

The main topic for this month's podcast is DOGE.

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A painting shows a man in green pants and white shirt. A soldier on a horse is next t him. Behind him, a man waves the French flag. In the background, French troops stand in lines, at attention.

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And I want to start with just a couple of reminders about Robespierre, because I'm going to make a pun in a minute. But Robespierre during the French Revolution was the inspiration for and key contributing member to the committee for public safety in France, not named for any proper reason.

Because they indiscriminately guillotined a bunch of political opponents, peasants, tradesmen, and other citizens that got caught up in the mayhem. Robespierre's legacy is complex. His movement did some good things. It ended French feudalism. It temporarily ended 800 years or more of an uninterrupted French monarchy. And they had some mass conscription, which saved France from being invaded.

The problem is that Robespierre's reign of terror left France deeply destabilized. They were trapped in an endless cycle of violence, led to the rise and then fall of Napoleon twice, the Bourbon Restoration of French Kings. And one way or another, France was still ruled by Kings until the Third Republic was established in 1870. So a mixed legacy for Robespierre.

And I think we're also going to end up over time having a mixed legacy for Dogespierre, which is my name for Elon Musk. And the similarities to Robespierre is that Elon Musk and his DOGE team also brought down the proverbial guillotine, this time focusing, though, on US government spending with a bunch of indiscriminate cuts to federal employment contracts, leases, real estate leases, and grants.

And now that Dogespierre is reportedly stepping back from government to spend more time on his core businesses, we can take a look at what DOGE has accomplished so far with respect to government spending.

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A line chart with the title, $160 billion of savings in context. 0.5% of GDP. What does the Federal government spend money on? On the y axis is percent of GDP with ration of entitlement to non-defense discretionary. It goes from 2% at the bottom to 12% at the top. On the x axis are years from 1965 to 2025. A blue line represents entitlement spending, and it goes up from 2% to around 11% in 2025. A gold line is nondefense discretionary spending, and it starts at 4% in 1965 , goes up and down just a bit, then ends at 4%. A dot at 2% at the end, in 2025, is labeled DOGE decrease.

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Now, DOGE reports about $160 billion of savings. And in context, that's around a half a percent of GDP.

And those spending cuts are all in the category of what's called non-defense discretionary spending. And as you can see from the chart here, it does move the non-defense discretionary spending line down a little bit. But it's not that meaningful a number in the context of overall spending. And the ratio of entitlement spending to this other category is still massively high.

So in context, it's kind of a small number. And now the big picture is some kind of fiscal tightening effort has broad support by a lot of analysts and economists, given the day of reckoning that's going to happen in the 2030s. We've written about that a lot. The day of reckoning is when federal tax revenues are surpassed by entitlements and interest on the federal debt.

And obviously, that's a very problematic crossover point supposed to occur in the 2030s. But while DOGE has drawn attention to some wasteful spending, broadly speaking, it has overpromised and under-delivered on actual verifiable cuts. And I think it's fair to say that substantial deficit reduction by some kind of unilateral executive decree like DOGE was never really that realistic an outcome, since Congress really holds the power of spending rather than the executive branch.

And also, given DOGE's somewhat indiscriminate approach, it may take many years to fully assess some of the negative multiplier effects of cuts to public health, aviation, energy, cybersecurity, taxation, education, and some of the other departments that have been targeted.

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A pie chart with the title DOGE savings by category. The speaker explains the chart.

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So just to spend a little bit of time digging into the numbers, DOGE estimates about $160 billion of savings.

They have itemized around $65 billion of the $160. So about $95 billion or so is not itemized or explained. There's $33 billion of cuts to grants, $30 billion in federal contracts, a de minimis amount of leases. The big part of the gap between the itemized savings and the total public savings are workforce reductions.

So we took estimates from [INAUDIBLE] and triangulated a few other things. And it looks like around 225,000 people have been terminated, plus another 75,000 in deferred resignations. And if you use some Office of Personnel Management estimates of the cost of federal workers, that could save about-- let's just call it $55 billion a year.

So that would leave another $40 billion or so of savings that DOGE has talked about having achieved as still unspecified.

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A line chart has the title Federal employment. Federal employees as a share of all employees. The y axis shows percents from 1% to 8%. The x axis shows years from 1908 to 2019. A blue line starts at about 3% in 1908, goes sharply up, then comes down in 1949. Then it goes steadily down, with brief upward blips, until the present. A final blue dot, which is very slightly lower than the end of the line shows DOGE workforce reduction, 2025.

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And reducing about 300,000 people is 12% of all federal employment, but it's only 0.2% of all employees, since federal employment was already close to an 85-year low as a share of all employees.

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A photo of a man in mid 19th century clothes. He has dark hair and mustache.

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And then as this is all going on, I was reminded by quite a few people who I was talking to of a quote from Russell Vought, who's Trump's Office of Management and Budget Director. In a 2023 speech he said, we want the bureaucrats to be traumatically affected. When they wake up in the morning, we want them not to go to work, because they are increasingly viewed as the villains. We want to put them in trauma.

As an operating approach for DOGE, that feels like it would be somewhat of an indiscriminate thing to do, which might explain why they fired and then had to rehire people in the FAA and nuclear weapons and plants inspection and things like that. And so I put out Edgar Allen Poe's face on this page, because I can imagine if Poe were alive today, he would write some kind of short story in which Russell Vought's life is increasingly impacted by DOGE spending cuts until it becomes unbearable to him.

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Text: Likely overestimation of DOGE spending cuts.

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So if DOGE had actually accomplished a $160 billion of non-discretionary spending cuts, even though it's small as a share of GDP, it would be reasonable with respect to looking at other prior efforts to cut discretionary non-defense spending. The problem is that a whole bunch of mostly conservative people who have looked at this believed that the DOGE spending cuts are inflated by large errors and inclusion of savings from contracts that haven't even been agreed to yet.

So if you find a contract in the system that was kind of being negotiated and then you cut it, it's a weird thing to say that you then saved money if the thing had never been agreed to. So I won't go into all the details, but these are some pretty harsh criticisms about the DOGE estimate from the libertarian Cato Institute that never met a spending cut they didn't like. Said DOGE is spinning their wheels and is overstating savings.

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The Libertarian Cato Institute said DOGE is, quote, "just spinning their wheels, citing in many cases overstated or fake savings What's most frustrating is that we agree with their goals. But we're watching them flail at achieving them"

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They said, what's most frustrating is that we agree with their goals, but we're watching them flail at achieving them.

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The right-of-center American Enterprise Institute questions the DOGE approach of assuming that uncertain events are certain and then claiming maximum possible savings. In one instance DOGE estimated savings to the penny on contract for HR services that hadn't even been accepted and negotiated yet: a George Washington University professor who studies Federal contracting described the approach as "garbage"

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The right-of-center American Enterprise Institute questions the DOGE approach of assuming that uncertain events are certain and then claiming the maximum possible savings. From the fiscally conservative Manhattan Institute, they go even further. DOGE is not a serious exercise.

And then someone who is an executive partner at Madison Dearborn in Chicago believes DOGE savings could be overstated by up to 80%.

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From fiscally conservative Manhattan Institute, quote, DOGE is not a serious exercise", with its analysis estimating that DOGE only saved $5 billion to date, and that it will end up costing more than it saves. Harry Kraemer, executive partner with Madison Dearborn Partners and professor at Northwestern University's Kellogg School, believes that DOGE-related savings could be overstated by up to 80%.

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So it will take time to find out how much money was really saved. I think some of these estimates here are too conservative. But $160 billion might be at the very high end.

What's interesting is in the Eye of the Market, in the Surprises List for 2025, rather than the $1 or $2 trillion that Musk originally had cited, my estimate was for $150 billion of spending cuts. So almost exactly what DOGE says they have achieved so far. Then we also have to think about the negative feedback loop effect of firing IRS workers.

I mean, a lot of people are automatically withheld, and you don't necessarily need IRS people auditing employees whose earnings are automatically withheld. But there's a lot of people that are not subject to that automatic withholding. And the Yale Budget Lab and the CBO, a lot of entities make estimates of what happens when you cut IRS staffing.

So cutting around a quarter of the workforce of the IRS is going to erode voluntary compliance and reduce the tax dollars that you get because of fewer audits. And one of the Yale numbers was a reduction of about 22,000 employees would save $2 billion in salary costs and cost to $22 billion in terms of less tax collections. So your net revenue loss is $20 billion from that. So I think there are some cost things hanging out there from the IRS filings that will reduce the DOGE savings as well.

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Another angle: "70% of the IRS positions cut so far have been in enforcement and the CBO estimates that for every $1 cut to enforcement the Treasury loses $5 to $59 in revenue from uncollected taxes.

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Let's see. You've also got a question about the Impoundment Control Act of 1974.

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Zero-sum game reallocation of Congressionally appropriated spending

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There are limits on a President's ability to say, well, I know that Congress appropriated money for that purpose. I'm just not going to spend it. So to the extent that DOGE has taken credit in its $160 billion number for a figure that-- where a spending category that was raised, but then they decided not to spend it, it's possible that the judiciary will eventually force them to spend it on something else to comply with the original Congressional intent, in which case today's estimates of DOGE spending cuts would be overstated.

So there's a lot of stuff that will play out over the remainder of the year in terms of the Impoundment Control Act and exactly what DOGE is doing.

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Trump spokespeople have argued that this Act is unconstitutional and the Administration may challenge it in the courts. Next slide title: Possible conflicts of interest, DOGE and Dogespierre

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And then I think any discussion of DOGE and Dogespierre would be incomplete without talking about, really, a remarkable list of potential conflicts of interest here regarding DOGE spending cuts applied to the EPA, the Office of Vehicle Automation Safety, and other agencies that regulate Dogespierre's businesses.

The EPA has cited Tesla for mishandling hazardous waste. It cited SpaceX for polluting wetlands. And now Trump is proposing, along with the EPA administrator, reducing the EPA's budget by 65%. I will be drinking bottled water from now on, if that happens.

Starlink is competing to replace Verizon on a $2.5 billion contract to upgrade its systems for managing the US airspace. And now DOGE staffers have directed the FAA to sign non-disclosure agreements about some new project that they're spending money on that DOGE is involved with.

Some of the cuts to the National Highway Traffic Safety Administration have disproportionately targeted the division which oversees the risks related to autonomous vehicles, which is one of Tesla's key business initiatives. And other agencies that were investigating Dogespierre according to a House Judiciary Committee press release, include the CFPB, Department of Labor, USDA, Federal Election Commission, Department of the Interior, Department of Defense, SEC. It's a laundry list.

Now, in early February of this year, Trump fired the Director of the Office of Government Ethics, which is the department that would oversee and manage such conflict of interest. So there's a lot of remarkable things going on with respect to DOGE, Dogespierre, and some of the agencies affected by DOGE.

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Spending cuts always hurt.

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So the other thing-- to be fair to this whole DOGE effort-- spending cuts always hurt. And there's no such thing as a spending cut that doesn't have any negative impacts at all. That's why they're so hard to legislate. There have been a handful of times when instead of trying to do it at the executive level, like they're doing this time, that they've tried to do it legislatively to actually curtail and cut spending.

So there was the Tax Equity and Fiscal Responsibility Act of 1982, the Gramm-Rudman-Hollings Act of '85 that some of us may remember, the Budget Enforcement Act of 1990, and then the Budget Control Act of 2001, which took place after one of the rating agencies downgraded the United States. Each one of those had negative impacts on the people that were benefiting from that spending.

But the government, the legislature, and the president signed these acts into law because of the overriding macroeconomic importance of having manageable debt levels. So I want to be fair about the importance of some kind of DOGE-like effort. That said, every administration has its own priorities when cutting spending, and the DOGE is no exception.

And so one of the questions that I'm asking myself is, what's going to happen to the number one ranking that the US has regarding health care innovation?

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Impact of DOGE cuts on scientific research.

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DOGE has ordered a 35% cut to the NIH, and Trump's budget for next year reportedly is looking for a 40% cut to the NIH and a 45% cut to the CDC.

And what's going to happen to the US's leading position in terms of health care innovation? Historically, a lot of people don't realize this, but the NIH employed or funded research of 174 Nobel laureates and 214 winners of these Lasker awards, which are for people that have significant contributions to medicine and biomedical research.

So the NIH has had a lot of success in terms of the things that it's funded. And there's millions of people in the United States that suffer from a whole bunch of things who might not have the treatments they now have without the NIH-- rheumatoid arthritis, lupus, Crohn's disease, psoriasis, multiple sclerosis.

And the NIH did groundbreaking work on TNF inhibitors, other kinds of inhibitors, B-cell therapies. The survival rates for melanomas and other kinds of cancers rose sharply after NIH funded research on immune checkpoint inhibitors. The NIH was the one that funded the research on proglucagon, which was the precursor of GLP-1s.

Almost half the adult US population either has diabetes or is obese or both. And now you have the promise of GLP-1s that can help them. They also funded the mRNA vaccine grants, and there's about 50 million Americans that suffer from chronic pain that one day may benefit from some very recent NIH-funded work on something called Piezo channels. So slashing 30%, 40%, 45% NIH, CDC will hurt.

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Unfair barometer, cash withdrawal tracking in 2025. A line chart is entitled Cash withdrawals from the Treasury General Fund. The y axis shows U S dollars in trillions, from 0 to 3, in increments of .5. The x axis shows months from January to May. A red line shows 2023. Gold shows 2024, and blue shows 2025. The red and gold lines are almost exactly the same, and they go up from the lower left corner to the upper right. The blue line starts at the lower left corner, but around February, it rises a little more steeply. The categories from lowest to highest use is nuclear, hydro, gas, wind, solar, and a small proportion of other. During the power outage, all sources dropped dramatically.

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Now, just to wrap up, I have seen a couple of charts that say, well, DOGE hasn't really accomplished anything because we're tracking the cash withdrawals from the Treasury in 2025 by week compared to 2024 and 2023, and it's no different. That's really not a fair comparison for two main reasons.

One, DOGE is spending a lot of money this year on severance payments, partial year of workforce payments, deferred resignation payments, and things like that. 2026 would be a better year to measure the normalized impact of DOGE cost reductions. And then the second thing is, if DOGE spending cuts were large and was offset by other large spending increases elsewhere so that the total spending was unchanged, that's no fault of the DOGE team. That's just a reflection of how much money is spent on other things, whether it's entitlements, interest, or defense.

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Still, the impact is modest even at DOGE estimated levels

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That said, even at the DOGE-estimated level of $160 billion, it's just about 2%, 2.5% of projected 2025, 2026 spending. And if our projections are correct, Trump's reconciliation bill is going to increase the fiscal deficit relative to the CBO baseline by a lot more than whatever the DOGE savings turn out to be.

And as I mentioned up front, given DOGE's indiscriminate approach to cutting certain things, it may take a really long time before we know what the negative consequences are in terms of public health and aviation and cybersecurity and taxation and things like that. So that is our quick look. Now that Dogespierre is going back to the private sector to focus more on his core businesses, which is a topic that we will probably revisit in the future.

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Spain electricity generation collapse. A chart shows Spain electricity generation by source in 15 minute increments. The y axis shows power in gigawatts. The x axis shows times from 12 A M on April 28 to 6 A M on April 29, in increments of 6 hours.

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So just a quick couple of comments here as I'm closing. There was a remarkable electricity generation collapse in the whole Iberian Peninsula with Spain and Portugal. At one point, I think electricity generation on the Peninsula went to zero. Here you can see a chart that showed the hours leading up to the collapse and generation of almost a little over gigawatts of power, 20 of it disappeared in an instant.

Now, when you look at this chart and you're seeing power generation in 15-minute increments and you see the grid collapse around noon, right when solar is reaching its peak contribution, I can understand why people would say this has to do with solar. There's something about solar that is inconsistent with grid stability. And I'm jumping to conclusions.

Well, it doesn't make sense to always jump to conclusions on things related to energy. You remember a few years ago, everybody was convinced that wind power was at fault for the Texas outage, when it turned out to be natural gas. I have pages to prove that to you in case you still disagree with me.

So I understand why people are saying that maybe something-- solar has nothing to do with it. And then specifically, I started reading late last night that since solar and wind don't offer any grid inertia benefits, that that's what went on here and there was a loss of inertia. So if you want to learn about what that means, stay on this podcast.

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He takes a drink from a can.

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Sorry, I had to have my ginger ale. So

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Text: Understanding kinetic energy and inertia. A line chart is entitled Recovery from a power system contingency event. He explains.

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most grids-- before we get into the issue of renewables, for many, many decades, the electricity grid was based on something called synchronous generators, where you had power-- you have these large rotating generators that are driven either by fossil fuels, nuclear power, or hydroelectric power.

And these things are rotating generators. They also have some hidden kinetic grid inertia in them so that some place in the grid, if a plant goes offline, instead of having a collapse in frequency and all sorts of problems, some of the hidden kinetic inertia in those spinning generators instantaneously gets substituted for the plant that went down just for a few seconds.

And this occurs-- it's amazing-- it occurs organically based on the electrophysics of how interconnected grids work. And we have a chart in here that kind of shows a pro forma event. Now, this thing has to work quickly, like within 10 seconds, or else you could have a decline in frequency that falls below this thing called the minimum allowed frequency before under frequency load shedding, which is a fancy word for they start power rationing.

And so the benefit of traditional rotating generators is that they offer this benefit of kinetic inertia that can get used in case there is some kind of grid emergency. And wind and solar don't offer that. But that's not a secret. People have known this forever. And in grids like ERCOT, where there are very high renewable shares, they've been working around this and developing substitutions for grid inertia for a really long time.

For example, in ERCOT, they have something called fast frequency response, which is a fancy way of saying that if there's a frequency issue on the grid, they will simply automatically cut off power for 5 to 10 minutes to some large refrigerated warehouse. And that's how they're going to balance the frequency out.

The warehouse companies get paid for participating in this program, and all they're losing is 5 to 10 minutes of power that doesn't really affect their operations. Those kind of programs are massively oversubscribed because it's like free money.

So I would be really, really, really surprised if the Spanish grids, which are even more reliant on wind and solar than ERCOT, hadn't been successfully deploying some of these inertia replacement substitutes for many, many years. And so the bottom line from all this is premature to blame solar and premature to blame specifically the inertia issue related to solar.

There's a lot of things that can go wrong with grids in terms of protective equipment and circuit breakers and low voltage episodes and things like that, which have little to do with any one particular form of generation. But I'm as fascinated as the next person to find out exactly what the explanation is once the Spanish government completes its review.

So thank you for dialing in to this month's podcast, and I look forward to talking to you again soon. Next step is going to be to take a look at the hard data outcomes in April and May as a function of the tariffs and then to see where all the Section 232 tariff investigations on lumber, copper, pharma, and semiconductors eventually go. That's it for now. Bye

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J P Morgan.