DOGE Disinvestment Under Uncertainty

In theory, I am a fan of the DOGE initiative. While businesses have a strong incentive to produce high quality products at low prices (otherwise, they will lose customers), the public sector has rarely had an incentive to become “lean and mean”. The public sector does supply public goods and many poor people rely on these services but the tax price for paying for these goods has been high in part because the government has not had strong incentives to innovate or to pursue cost control measures. As our government’s deficit increases, the growth of government is not sustainable. During a time when the population is aging, our seniors are entitled to an ever growing stream of benefits, and the economy’s productivity growth rate is low. it is the right time to ask some hard questions about how our Federal, State and local governments spend $. In California, we haven’t asked enough questions about projects such as the Bullet Train. For too long (and especially during the Biden Administration), our government grew with few checks and balances. The introduction of DOGE creates strong accountability incentives for every level of government. A growth in public sector efficiency will increase the American Taxpayer’s trust in government and this will offer significant benefits.

But, there are certainly costs to a dramatic “U-Turn” in government spending. In this Substack, I want to focus on public sector disinvestment under uncertainty. Academic economists will see my spin on the old literature on “private sector investment under uncertainty” and the key work of Lucas and Prescott.

A well-known area of research in academic economics focuses on investment under uncertainty. A classic example is the decision to invest in building a new factory. Building a factory incurs significant upfront costs, and the potential revenues from such an investment are uncertain. For instance, if a company decides to build a factory in another country, it might face exchange rate risks. Moreover, if the factory is located in a developing nation, there could be risks such as expropriation, where a new government might confiscate the company's assets. There is also the possibility that future demand for the product—say, sneakers—could be either low or high. In rational expectations economics, a firm must evaluate whether investing in a new factory is prudent by assessing expectations for future demand for the products it would produce. While no one can predict the future perfectly, it is critical to gather information to make an informed investment decision. For example, suppose a business leader is optimistic about future sales or believes the risk of expropriation is minimal. In that case, the CEO is more likely to build the factory in a developing country.

I mention this private sector investment decision example to highlight an asymmetry in any investment decision. At a point in time, the cost of an investment (whether it is building a new factory, or paying USC tuition, or continuing to fund US AID) are certain but the future stream of benefits is a random variable. How is Musk’s DOGE valuing the stream of future benefits for different government projects as it chooses what to cut?

When government spending is trimmed, public investment is reduced. What future benefits will Americans not receive because of this disinvestment?

DOGE has been given a mandate to increase government efficiency. A vital aspect overlooked in the headlines is the type of information DOGE possesses and utilizes when making decisions. As DOGE plans out its $ spending cuts, what does DOGE know, what does it not know, and is it aware of its knowledge gaps? How does uncertainty affect the decisions made by DOGE?

Is there a pathway to acquiring knowledge in this context? For example, as DOGE evaluates entities related to subsidies for universities or international aid programs, I claim that DOGE has much better data regarding the costs associated with various programs than it does regarding the likely benefits of such expenditures.

Take a fictitious example of maternal health investments in Nigeria. Suppose the United States allocates $75 million to fund a maternal health program in Nigeria. While the costs of this program are transparent, the benefits are uncertain and will manifest in the future. Suppose that these investments might save 500 lives. Some of these individuals may later migrate to the United States, contribute to the economy, innovate, and promote the values of both democracy and free markets.

If those whose lives are saved by this program go on to thrive, how much will we benefit in the future? How do we quantify the dollar value today for the likelihood of such outcomes? Is DOGE assigning zero value in benefits to us from the lives saved by our foreign aid investment?

In economics, we teach students that project evaluation should consider costs and the flow of benefits, which are often uncertain. During the Biden Administration, as the U.S. provided aid to developing nations, we must ask, what were we achieving? How many lives were saved? Specifically, how many of them could contribute to the American success story in the future?

DOGE as a Bureaucracy

I claim that DOGE’s self imposed urgency to quickly cut programs may lead it to eliminate “good projects” that would pass an objective cost/benefit test. My proof of my claim is partially based on the incentives embodied in Elon Musk’s New organization. Basic bureaucracy theory posits that the members of the organization self selects people who believe in its core cause (in this case to cut down Government) and who seek to please the leader (Musk) in order to further their own career concerns. Given what appears to be the DOGE “rules of the game”, the 25 year old workers at DOGE do not appear to have strong incentives to consider the long term benefits of keeping parts of the government funded.

Anticipating that President Trump and Elon Musk are eager to tell the public about excessive government spending, the DOGE team has an incentive to simply focus on the expensive budget items and quickly axe them. While they can quickly identify the most costly projects, do they invest any effort or feel incentivized to investigate the benefits of these programs?

Measuring the Benefits of Government Is Hard to Do!

The DOGE employees can truthfully argue that quantifying these benefits is nearly impossible. If they approached individuals who originally received funds from the Biden and Obama Administrations, these stakeholders would indeed have a vested interest in claiming that they are achieving excellent outcomes for every dollar spent. They genuinely believe in the cause, but their professional roles are intertwined with it, and they would likely be aware of what Doge is doing.

A fascinating issue that economists often grapple with involves causal effects. We strive to be impartial evaluators in the name of academic integrity, attempting to be objective and acting as honest brokers. We aim to look soberly at what happens when an additional million dollars is spent in Nigeria on specific sectors or entities. What is the return on that investment for the Nigerian populace, and how convoluted must the narrative be to illustrate what the American public gains from such expenditures?

The Fundamental Asymmetry in Conducting Cost/Benefit Analysis

Economic logic suggests that we pursue projects that pass a cost-benefit analysis. While estimating the costs of these projects is straightforward, evaluating their benefits poses a significant challenge, especially when the DOGE team has personal incentives to identify projects as wasteful.

Intuitively, we might cancel too many potentially beneficial projects. In the U.S. judicial system, a person is considered innocent until proven guilty. However, under DOGE's operational norms, projects classified as cost items are guilty until proven innocent.

An economist would ask what the implications of this incentive structure are. As DOGE continues its efforts, we are likely to discard too many valuable programs, particularly those for which quantifying benefits is challenging. As an optimist, this creates an imperative for advocates of worthwhile projects funded with taxpayer money to develop quantitative metrics that can persuade skeptics, including those outside elite educational institutions, that their investments are effectively utilized.

Those government employees working on meaningful projects have not dedicated enough time to objectively make their case without lobbying, explaining how their work contributes to society’s well-being for every dollar invested.

There is a challenging counterfactual: What would we lose if the government were smaller? As federal, state, and local governments understand that DOGE can operate with its “chainsaw” in powerful and unpredictable ways, they will likely become more aware of their accountability moving forward. This awareness will encourage public officials to make the case for why their missions should continue to receive taxpayer funding.

Every day, a private sector firm such as Starbucks has to justify why consumers should continue to buy coffee there. Customers are more likely to shop there if the price is lower and the quality of the product is higher. This competitive pressure drives Starbucks and other private sector firms to pursue efficiency and to experiment with different strategies for pleasing consumers. A benefit of DOGE is to bring this private sector ethos that the “Customer is always right” to the public sector as it strives to deliver higher quality service at a lower tax price. In the recent past, the public sector didn’t face this competitive pressure.

Does Research Inform DOGE’s Deliberations?

My final thought here is the haste in government decision making. For DOGE to do its work in a scientific way where it weighs the costs and benefits of major projects, this would take months of investigation perhaps through a type of expert witness/jury process. I see no appetite for this approach. Key counter-factuals concerning what would or would not happen in the absence of these expenditures can be informed by academic research. What role do academic studies play in informing DOGE’s decision making? We both know that the answer is that it doesn’t and this may help to explain why University subsidies are also on the chopping block.