Hair of the DOGE

I am become slave of some defunct economist

why is this whole thing so embarassing

… the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval (…) soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

John Maynard Keynes, “The General Theory of Employment, Interest and Money”

Elon Musk , the richest man in the world with a net worth of over 400 billion dollars, is also acting as what basically amounts to US President. The head of the extraordinarily embarassingly named “DOGE” (Department Of Government Efficiency) is on a mission to cut government spending by all means necessary - regardless of the consequences, what he’s cutting, or even the law of the United States.

Much ink (and saliva) has been spilled about Elon Musk’s less-than-tasteful bussiness decisions, extremely uncomfortable personal antics, seeming “altered mental states”, and ideology (fascism). But beyond whatever his politics are (fascist), the real question is: what is his plan for the economy? What is he trying to achieve here?

Lank Lewe Vryheid!

Elon Musk’s favorite head of state is Javier Milei, President of Argentina and regular fixture on this blog¹. According to Musk’s (not very coherent) ramblings, Milei is something of a role model and example to Musk - the “chainsaw plan” is part of Musk’s imagination. Heartwarming! But are they actually doing the same thing?

Well, no. The first, most obvious comparison is that Milei is cutting things he has legal authority to cut and Musk is not. Back in 2023/24, Milei passed (first by a sort-of-legal presidential decree, and later via an actual law passed in Congress) the Bases Law, that gives him a bunch of emergency powers - including to shut down, merge, reorganize, privatize, and downsize a series of government agencies, as well as revise a long list of government contracts (particularly employment and contracts for public works). These powers, being negotiated with multiple opposition parties, have clear boundaries - he cannot mass fire the staff of, say, the organ donation insitute (INCUCAI). This was mostly used to fire 30,000 people in 2024, most of them hired in 2023, as well as signifcant cuts to, well, investment in infrastructure of various kinds, which fell more than 80% in real terms in 2024. Musk, meanwhile, is operating in a completely lawless and illegal way, and has so far lost multiple court battles and been forced to rehire more than 25,000 terminated employees.

The second, also very obvious, comparison is that Milei’s other actions early in his term (particularly devaluation of the peso and large hikes to utilities and administered prices) resulted in a large acceleration of inflation for the first six months of his presidency. Because pensions and welfare, which make up the bulk of spending (like in basically all countries), are adjusted for past inflation, then they took a large hit until inflation stabilized mid-year - particularly because the inflation adjustment formula was changed in April of 2024 to increase every month (rather than quarterly) and for the last available price index. For the early months of 2024, thus, inflation-linked cuts drove a large chunk of Milei’s adjustments, and continue playing a significant role in non-discretionary programs because Milei’s 2025 budget has not been passed by Congress, meaning that he’s working with the 2024 budget laid out with much lower inflation projections, such that the nominal figures are lower. This is obviously not a dynamic that Musk can count on, because the US does nto have any sort of inflationary pressure on that level and because failure to pass a budget simply shuts down the US government rather than force it to use an old one. It should also be noted that spending in welfare and pensions is growing rapidly in real terms and has been since Q4-24, and that Milei has on occasion given special bonuses to retirees and welfare recipients - because, for fairly obvious reasons, it’s good politics.

And of course, there’s the issue of why the deficit is high in both cases. Argentina simply had extensive spending in economic subsidies (which the US does not have) as well as a really weird and distortionary tax system, coupled with big cuts to income tax during election season 2023, and issues with unfunded social security liabilities. Meanwhile, the US deficit is high due to weird stuff to do with tax rates and tax enforcement (which Musk gutting the IRS would worsen) as well as simply spending lots of money on Social Security and Medicare/Medicaid - which would be a massive political error to cut: in the words of one Republican politician, these programs are “not just for Black people in the ghetto, these are our voters”.

I mean, it should obviously come as no surprise that Musk’s extremely inept economic policy agenda has only a superficial relationship to Milei’s economic policymaking. What does come as a surprise is how serious he is about the premise that the United States is going to go bankrupt - it’s not - and how bad the economic situation is. For a comparison, Milei’s very traditional “shock therapy” adjustment plan comes to an economy that has not grown in 12 years (and, per capita, has shrunken for 15), and where monthly price inflation was 12.5% a month for half a year. In comparison, the US real sector was the strongest of all major economies in 2024, and annual price growth was something like 2.5% annual - meaning that prices in the US increased, in all of 2024, as much as prices in Argentina did every six days in just November of 2023. And compared to December of 2023, prices matched the US’s 2024 tally every three days. So not the same situation!

I am become Me(me/llon)

Of course, if the situation in the US is not as dire as that of a country at the door of hyperinflation, then what the fuck are Musk and crew thinking?

Well, Treasury Secretary Scott Bessent can give us a clue. Recently, while denying that the United States would have a recession in 2025, he also clarified that there would have to be a “transition period” and that the economy needed “detox”. I think that last word is key because it harkens back to an important figure in the Great Depression (that’s about how well things are going): Treasury Secretary Andrew Mellon. Mellon, a wealthy banker, was Herbert Hoover’s econ maven, and this was his advice during the onset of the Depression:

Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

This viewpoint (called, not very creatively, liquidationism²) is actually very old - older, in fact, that most modern macroeconomics. The idea at play here is pretty straightforward: a recession will lead to “liquidation” of bad businesses and therefore will result in a transitory recession that ends once the bad firms are purged and the good firms can expand. The core of liquidationism (or “detox”, Bessent’s more cosmopolitan yupppie version) comes from Austrian Business Cycle Theory (or ABCT), the macroeconomic varietal of Austrian School of Economics. Austrian economics are, in short, a heterodox (read: considered crankish) subset of economics that, instead of relying on the general methods of economics, they use a more uh unique way of doing it called praxeology, which I dont’ really understand but it mostly puts individual action and individual preferences on the driver’s seat, and rejects more formalized models in favor of deduction and logic.

The core premise of ABCT is that consumers have time preferences for savings (that is, want to spend now and save some share of their income), and those savings are used by banks to finance credit to entrepreneurs. The pool of savings, therefore, finances current production so that, in the future, consumption can be higher. It should be noted that. However, because credit can promise future consumption that is greater than the future production (either because of expansionary monetary policy or, if you’re feeling zesty, because of fractional reserve banking) than entrepreneurs plan, then inevitably comes a time when consumers want to spend money, and realize there’s less stuff to spend money on that they have money to buy it with, which causes a recession. That is, monetary-driven malinvestment drives excessive credit into the economy, which boosts short-term output by stocking up on capital goods, but inevitably requires longer-term pain - because many business plans will turn out to have been wrong about the economy’s capacity to consume all those goods. This necessitates “liquidating” capital, which in turn depresses output and employment, particularly since households increase precautionary savings and reduce consumption. In ABCT, therefore, the role of recessions is to wipe away the malinvestment and replace it with something that doesn’t have a name so let’s call it boninvestment. Exactly how this happens is, uh, unclear (more on this later).

There’s an obvious problem: it’s just not true that malinvestment is real. Readers with long memories might remember the forest fire theory of recessions, which is basically the same as malinvestment except it centers the labor market instead of credit. Imagine a world where there’s two types of workers: productive ones (which are always profitable to hire), and unproductive ones (which are only unprofitable to hire during recessions). Let’s assume that whether a worker is good or bad is determined, for each company, randomly and after hiring. This means that all companies are going to have some share of bad workers, even when some of them quit or are fired - because they can’t fire too many unproductive workers outside of recessions. If the economy enters into recession randomly, then this means that, the longer between recessions, the worse the average worker is (because there’s more bad workers than otherwise), and therefore recessions improve profits by shedding large numbers of workers that are unproductive for that company and instead takes in more potentially productive ones.

So, per the “forest fire” theory (called thusly because having controlled burns of dead wood reduces the intensity of wildfires), having more frequent recessions is healthier than having less frequent ones, because it results in milder recessions and more labor reallocation. The problem is that there is just not any clear or convincing evidence that having more frequent recessions is conducive to macroeconomic health (for reasons I’ll outline later) - in particular, small businesses tend to suffer recessions the most (because of credit market imperfections that make it marginally harder for them to borrow), resulting in declines in the number of firms that later inhibit competition.

However, there is some evidence of a milder form: reallocation of workers between firms is linked to productivity gains, so recessions increasing reallocation does boost productivity in the longer term. One example of this is, to the chagrin of Austrians who hated it, the post-COVID recession: because the economy shrank so much, and because stimulus was so generous, then a lot of people had the chance to take longer in their job search, driving a (transitory) boost to productivity as well as somewhat higher wages - particularly at the low end of the US labor market. However, this is not the norm: in fact the evidence points to decreased factor reallocation after recessions: first, for the “good” reason that less productive, low-churn projects shut down (bringing down churn rates but, paradoxically, bringing up productivity), but also the “bad” reason that recessions are bad for firm finances. Additionally, recessions have impacts on the degree of uncertainty that workers face, which results in significant shifts in spending, employment, and financial decisions - meaning that, in layman’s terms, the “chicken factor” of the economy increases during recessions (and people, for example, purchased cars at a lower rate for quite some time). There’s also the fact that post-recession reentry into employment is highly contingent to national macroeconomic conditions and labor market institutions more broadly. So, while earlier recessions did see heightened reallocation at some points, the Great Recession (which is the kind of deep, painful, prolonged slump we’re talking about here) did not - in fact it saw a pretty prolonged period of decreased reallocation.

But the real problem isn’t on the macro-level aggregates like that. It’s at the micro level and it’s called hysteresis: coined by friend of the blog Larry Summers, the idea is that the level of unemployment durign recessions determines the posterior level of unemployment, because companies that shed worker later bargain for wages with the retained workers, which may be too high to hire more. This means that the economy can enter prolonged periods of unemployment even if reallocation happens, because wages are not set to maximize output - they’re set to maximize cohesion between employees and firms during recessions. In particular, after the Great Recession, workers who lost their jobs were persistently less likely to be employed afterwards due to scarring (see below), and persistently low labor demand, and the economy took a really long time to produce the same number of jobs it had shed.

A similar idea to hysteresis is the scarring effect: the idea that being unemployed has negative effects on job market performance afterwards - for example, from more selective search by companies, reduced experience (since finding a job is harder), or for choosing worse jobs for your career profile (since you’re more “liquidity constrained”, aka broke). For example, a well known fact is that people who graduate college during a recession have worse career outcomes than people who don’t, mainly explained by getting worse initial jobs. They also have worse outcomes in other economic and physical/mental conditions (including, like in every economics since 1995, a bunch of random health indicators).

Lucas, Milton, Murray, Robert (and Conan)

I mentioned that liquidationism’s 15 minutes of fame came during the Great Depression - what exactly was that about?

Well, 1920s and 1930s macroeconomics were, to quote economists, mostly very stupid and concerned with niche, asinine ideas, as well as not really “macro” in any sense of the way - “macro”economics was divided between monetary theory and business cycle theory, and little did the two intersect. Monetary Theory was just a bunch of semantically confused musings on the Quantity Theory of Money, while Business Cycle Theory was basically just a bunch of fun facts about recessions. The broader (and this is very broad) understanding was that microeconomic concepts could be applied to the macroeconomy, particularly Walras’s Law and Say’s Law. Walras’s Law states that, given limited resources and clear preferences, there can’t be “extra demand” lying around - the full amount of resources has to be used up. In this sense, if all markets for goods are at equilibrium, so have to be the labor market, the capital market, and the market for money. Secondly, Say’s Law implied that, because supplying a product created a potential exchange of that product for others, therefore you could not have a sustained “glut” where demand is lower than supply - because the possibility of exchanging two products for each other creates the possibility of demand. Paired with Walras’s Law, this (generally) means that it’s not possible for the economy to enter a prolonged, recessionary slump. But… the Great Depression happened! There was a prolonged slump in output and employment. Why?

The two main theories, at the time, were overproduction and underconsumption. The overproduction theory is basically ABCT/liquidationism - the idea that the economy was overcapitalized and therefore was producing “too much stuff”. Meanwhile, underconsumption meant that the prices of the excess cars and refridgerators being produced were just too high for people to afford them, meaning that companies would go out of business due to insufficient spending. Of course, anyone with the bare minimum of common sense would tell you that, in fact, underconsumption and overproduction are the same thing - particularly, that the economy had shifted from an equilibrium of full use of its capacity towards one where a lot of economic potential was idle.

The guy who sort of formalized this idea was John Maynard Keynes: to most, the hero or antihero at least of this story, but to others the villain. He determined that there would be 3 major markets in economies (goods, capital, and labor) and that the price level, interest rate, and output would be determined simultaneously - so Walras’s Law held - but that it was, in fact, possible for the economy to enter a prolonged period of resource subutilization. In Keynes’s telling, recessions were caused by “animal spirits” making households spend less and save more, which drove down interest rates, prices, and output. However, because rates have a lower bound (0%) and, for various reasons, prices and wages are hard to cut in nominal terms, then there could be a large fraction of products not sold, and of resources not utilized.

But if interest rates are low and workers are plenty, why don’t companies borrow and hire? Well, because if the rest of the economy is in a slump, they’d just lose money - Say’s Law just isn’t true. This means that economies can remain in slumps due to failures of coordination - basically, that you’d need everyone to “shift vibes” and just do stuff. The major driver of this is the liquidity trap, the idea that, with interest rates at 0%, putting money in the bank isn’t profitable (leading to a shortage of loanable funds), as well as an increase in the desire for cash to cover for possible negative income shocks.

So, it just seems that the malinvestment/overproduction theory of recessions is, in fact, exactly the same as the traditional Keynesian theory of recessions - there is no difference between “overproduction” of capital and “underconsumption” of goods. The main factor tying them together is money: in the case of the Depression, countries adopting the Gold Standard meant that they would all hoard gold to prop up their currencies, resulting in a global shortage of it and thus in deflationary pressures (because the value of currencies were the inverse of the value of gold), which dragged the economy into a recession and prevented action to alleviate it.

Well, how does one alleviate a recession? Let’s take a closer look at what “recession” means. Paul Krugman has a classic bit on it: imagine a babysitting club where couples pay each other with tokens. Every parent has a number of tokens they can trade with each other for babysitting. Under normal circumstances, the number of tokens would even out - parents who have fewer tokens would look for opportunities to babysit, and parents with more would go out more often. But imagine if there were too few tokens going around: then more parents would be interested in babysitting than those who would be interested in asking for being babysat for. If the number of tokens were to magically go down, then a lot of parents would cancel their plans to not lose out on tokens in case they really needed a babysitter.

If you replace “tokens” with “money”, “babies” with “capital goods”, and “dinner dates” with “consumption”, you have a traditional Keynesian demand-side recession. Keynes’ idea was that, because of the liquidity trap, monetary stimulus would not work - because people would just pocket all the extra cash. This is just not true, because monetary authorities can commit to stimulate the economy indefinitely if they need to, which would directly impact future interest rate expectations and thus stimulate the economy via “vibe shift”. But Keynes did not recognize this (which, to his credit, was only discussed much later), and instead preferred fiscal stimulus: the government could stimulate aggregate demand directly and “wake up” the economy’s idle capacity - with programs like the New Deal and, later, World War Two spending.

Now let’s take another detour into economic history: the core of Keynesian Macroeconomics was the Phillips Curve, the relationship between inflation and unemployment - higher prices meant lower unemployment, and vice versa. This also meant that the economy couldn’t enter a period of high prices and low growth - but it did, in the 1970s. This period was basically defined by bad underlying economics for mainstream Keynesianism, which mostly had to do with the uber-exciting field of econometrics, as well as the fact that Old Keynesian models were kinda sloppy and just overall not very good.

Economists split into two camps: the New Keynesians, who basically decided to do Keynesianism with good math, and the New Classicals, who were sort of like the Bolsheviks because they chose to abandon all Keynesian insights and instead refocus macroeconomics on real factors (technology, preferences, etc.) and not on money or expectations. Their model, called Real Business Cycle Theory or RBCT, was somewhat similar to ABCT, because it mostly discourages action to prevent or end recessions. Anyways long story short after a bunch of back and forth, everyone agreed on some basics (rational expectations, good econometrics, using more microeconomics).

Enter the early 2000s. To quote Robert Lucas, “macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades". The state of macro was good. Enter the Great Recession. For whatever reason (tight money, single family zoning, and bad financial regulations), the US economy entered a pretty severe recession and dragged down the rest of the planet with it. Most economists would have agreed that stimulus was a good idea, particularly monetary, and that letting big banks fail was a bad idea.

Well, most is not all. Under the influence of, at best RBCT, often the brand new heterodox theory of "expansionary austerity” as well as the idea that reducing public debt was expansionary. There is some evidence for expansionary austerity, but only as a fiscal adjustment strategy, and not as a countercyclical tool. Meanwhile the debt thing was caused by… Excel errors. However, this was either not considered at the time - many influential voices advocated for “liquidating” failing banks and companies and against government intervention. Of course, this was a disaster: Europe followed the “lean” path and had an anemic response to the recession and an extremelly prolonged recovery. At the same time, fiscal stimulus does have a stimulative effect on short-term output.

Conclusion

Inducing a recession is obviously a bad idea. If there is scant evidence for any of the proposed benefits and plenty of evidence for its costs, then - why are we even here? Well, I think it’s best to look at it as an extension of a broader political project - a weird performance of SV founder culture where Musk “moves fast and breaks things” as Technoking of the United States.

As part of a broader right-wing pivot in Silicon Valley (related to their terrible business practices), Musk and a select few others have embraced a movement to abandon “liberal” universalism and instead embrace a sort of modern-day futurism: the idea that a corrupt, degenerate liberal culture is holding back the creative power of Great Men - which is just an old subvariant of, well, fascism, and linked to a very libertarian flavor of both democracy skepticisim and racism.

Musk’s plan isn’t to liquidate farmers, labor, stocks, and banks - it’s to liquidate DEI, “gender ideology”, and other such nonsense. In his view, the malinvestment in the economy isn’t the 10 billion valuation of Grundly the Smart AI Calendar App - it’s the hiring of the “inherently inferior” people he wants to root out of government.

1. Note: I’ll put up an update to whatever he has going on later because originally nothing happened besides the stupid crypto scandal, but then immediately after I set out on writing this piece something did happen (IMF deal) so now I have to wait a bit for that one.

2. Not to be confused with the Marxist term of the same name, which I didn’t understand in the slightest when I mistakenly clicked on a few links to see if Lenin had something interesting to say about banking.