Millei+DOGE: Austerity is cool again?

An intro to Economics & why Fake Keynesian Economics & MMT failed

The year was 2016. I walked into a bookstore on a mission: to find a book on Austrian economics. After navigating through a maze of young adult vampire erotica (seriously, how much demand can there be?), I finally stumbled upon the Economics section.

The selection was small, but it was enough to get my hopes up. I scanned the shelves and saw the usual suspects: Capital by Thomas Piketty, a few titles by Paul Krugman, some Karl Marx classics, and other books in the same ideological vein. Despite my efforts, I couldn’t find a single book on Austrian economics. No Ludwig von Mises. No Friedrich Hayek. Not even a stray copy of Milton Friedman’s Free to Choose or anything that didn’t champion expansionist fiscal policy. The only remotely dissenting voice in the whole section was Adam Smith’s Wealth of Nations.

To the bookstore’s employees, any school of thought against deficit spending simply didn’t exist. This felt odd, given the context. The world was still grappling with the aftermath of the 2008 financial crisis and the European debt crisis, where austerity measures were hotly debated and widely implemented. You’d think there’d be books explaining why countries can’t run endless deficits or print endless money right?

Maybe people like me just didn’t go to bookstores like this one for economics books. Or perhaps minimum-wage bookstore chain employees with blue hair were not in agreement with the Austrian school. I could never quite figure it out.

Fast forward five years. The COVID-19 pandemic prompted governments to patch up their economies with massive stimulus packages and money printing. At first, it seemed to work: spending and investing got a short-term boost but then inflation surged to levels unseen in decades. As inflation hit harder, political tides shifted. Left-wing governments were replaced by center-right or right-wing administrations. Then last year, Argentina elected Javier Milei, who ran on a platform promising drastic cuts to government spending and tearing down burdensome regulations.

To the surprise of many skeptics, early signs are indicating that Milei is delivering on his promises. The Argentine economy is showing signs of recovery, and his bold reforms have the world’s attention. Among those taking notes? Elon Musk in his new role as co-head of the Department of Government Efficiency (DOGE), vowed to bring a similar approach to the U.S. under President Trump’s second term. Musk, alongside Vivek Ramaswamy, promise to tackle wasteful government spending and gut regulations much like Milei has done in Argentina.

Critics, of course, are circling. Some doubt Musk and Ramaswamy’s ability to significantly cut spending, while others warn that even if they succeed, such measures could harm the economy. Based on the different schools of economic thought, what should we expect from such drastic cuts? Could this be the start of a new economic renaissance, or are we hurtling toward disaster?

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TL;DR:

The Austrian school has largely been dismissed as an economic theory because it’s seen as being incomplete; although it does a good job of understanding the causes of financial crises and inflation, its prescribed solutions are seen as impractical that no politician would ever try in real life. The thing is, no economic school is complete.

Javier Millei, has been enacting many policies consistent with the Austrian school, and has thus far brought down inflation, and improved the creditworthiness of Argentina. Elon and Vivek are going to attempt likely a scaled back version of this in the US. This could potentially save billions in wasteful spending and unlock growth, or make matters worse.

If you find this interesting, you should check out Millei’s interview with Lex Fridman

Introduction to Economics 101 by not an economist

My interest in Austrian economics began like most people. I was on a school exchange in Paris for a semester, I only knew 3 people in the city, my class schedule was far too empty and courses were only pass-fail. When I wasn’t taking weekend trips to Lisbon, Prague or Barcelona¹, I had way too much time on my hands.

I decided to fill the time by reading Nassim Taleb. When he wasn’t picking unnecessary fights on Twitter, I found his insights compelling. In The Black Swan and Antifragile, Taleb made scathing critiques against the New classical and New Keynesian schools of economics. He argued they misunderstood statistics, relied on unrealistic assumptions, and were often disconnected from the real-world consequences of their bad decisions. These schools have heavily influenced government policy since the U.S. abandoned the gold standard in 1971.

At the time, watching a few Taleb videos on YouTube inevitably led to the algorithm recommending content on the financial crisis, European debt crisis, and other economic calamities. If you indulged long enough, you’d end up watching hour-long debates about government responses between 2007 and 2012. Some of these videos included Austrian economists (Austrians) dunking all over Paul Krugman, a well known Nobel Prize winning economist, who was highly dismissive of the Austrian school. He’s not alone, the Austrian school has long been disregarded as a framework to inform government policies.

I will now attempt to summarize some of the main economic schools if you are already familiar or don’t care, feel free to skip below to What is Millei doing? I am not an Economist, just a fun guy so I am making many over simplifications. Feel free to correct me/call me dumb in the comments below.

Classical & Neoclassical School of Economics

For most of human civilization the explanation for why you or your country was poor was because it was Gods will. Broke? God. Ugly? God. Fat? God but maybe you should eat a bit less this winter until Easter comes around.

This changed when a Scottish philosopher by the name of Adam Smith decided to scrutinize the concept a bit more closely. He summarized his thoughts in a book called The Wealth of Nations (1776). Long story short, he didn’t think God was solely responsible for distributing wealth. He came up with a bunch of theories and explanations that would form the basis of the study of Economics. His view and general recommendation was that unencumbered markets were better at facilitating commerce than governments, if one country was better at producing wine, they should trade with a country better at producing silk, this way each country can optimize their production. Basically governments should let the markets cook. An efficient, free trading market without the government intervention is the invisible hand. The invisible hand knows best. People consider this the start of capitalism.

Inspired by Smith, a bunch of other economic thinkers, wrote more on the topic and formed what became known as the Classical school of economics. They dominated the 18th and much of the 19th century, advocating for policies like reduced tariffs and freer trade. While these ideas led to significant economic growth, they weren’t without drawbacks. Every now and then the market would crash, unemployment would rise and inequality would grow. People did not like this. Evidently, they wanted the government to do something when they were starving. By the late 19th century, economists believed that the Classical school might have been incomplete.

The Neoclassical school built off the Classical school and had a different perspective on what drove markets but in terms of policy prescriptions, they weren’t all that different. They still thought that governments should not intervene in the economy. When the Great Depression hit in the 1930s, Neoclassical and Classical theories couldn’t explain the economic collapse, the extended period of high unemployment, or the stagnation that followed. Evidently the invisible hand liked to take extended vacations. Making the Neoclassical school also incomplete.

Not everyone agreed with the Classical and Neoclassical schools though.

Marxism

On the opposite end of the spectrum in the mid to late 19th century, Karl Marx and Friedrich Engels published two seminal works that rival Adam Smith’s Wealth of Nations in historical significance: The Communist Manifesto (1848) and Das Kapital (1867). These books delivered scathing critiques of capitalism, arguing that it was inherently prone to boom-and-bust cycles and increasing wealth inequality. Since this is what was pretty much happening, their assessment looked pretty spot on.

They suggested instead of relying on the invisible hand, the government should take a very active role in managing the economy, laying the theoretical foundation for what would later evolve into communism and socialism. This was appealing to labor movements and left-wing parties in Europe during the late 19th/early 20th century. In 1917, Lenin and the Bolsheviks established the first Marxist state in Soviet Russia by the mid-20th century, more Marxist-inspired governments proliferated globally.

It turns out, people didn’t enjoy living in these kinds of countries as much as Marx would have expected. Marxist may have reduced inequality, but it came at a very steep cost. We don’t need to get overly detailed but boom and bust cycles could still happen, many people died of starvation and restrictions on freedom were not limited to economic choices. Eventually former Marxist states introduced reforms that loosened government control and embraced elements of market economies. While Marxists believe the Classical schools were flawed, their own track record also left much to be desired. Turns out Marxism was also incomplete.

*Keynes Enters the Chat

The Great Depression killed the Classical and Neoclassical schools. Following their suggestions, US President Herbert Hoover did not want to intervene in the economy, allowing the prolonged economic stagnation for most of the decade. In 1936, a British economist by the name of John Maynard Keynes published The General Theory of Employment, Interest, and Money. Keynes said the Classicals and Marxists had some elements of truth but were in some ways very wrong. On the spectrum, Keynes was closer to the Classical schools, believing in Capitalism but trying to improve upon the shortcomings that could result in extended economic stagnation and high unemployment, if the government didn’t intervene.

According to Keynes, markets were not always efficient and the government could drive additional value to the economy beyond just adding demand. Governments should intervene when the economy sucks, run a deficit until the economy improves, then gradually get back to a balanced budget, until the next slowdown occurs. Governments took his teachings to heart and since then, pretty much every government runs at least moderate deficits.

The problem is, governments ignored the piece about reigning in deficit spending when the economy was not in a recession. Whether it’s right or left wing parties, governments always spend as much money as they can. Left wing governments generally spend more and raise taxes. Right wing governments might spend less but cut taxes, which still produces a deficit. If governments don’t want to run a deficit, they need to tax as much as they spend. Since people don’t like paying taxes, governments have a tough time raising them. Cutting spending is also unpopular so governments generally try to avoid that too. So they borrow. This leads to an accumulating and eventually unsustainable debt burden, that never gets paid back.

Turns out maybe the benefit of government spending has its limits, since governments can run multi-trillion dollar deficits for years and the economy can still crash. Once you’ve borrowed as much as you can and but don’t want to raise taxes or cut spending, what can you do? Print money.

Inflation, MMT & Austrian Economics

Inflation. If you are under the age of 35, you probably only learnt what this meant recently. Don’t feel bad, many politicians and economists advocating for Modern Monetary Theory (MMT) didn’t know what this was either (more on them later). Inflation largely happens when the money supply is growing faster than the aggregate value of goods and services in an economy. Each currency is managed by a Central Bank, who’s job is to ensure there is enough money in circulation and the economy is stable. They do this by setting interest rates, and buying/selling certain assets.

When governments can’t finance their spending through taxes and borrowing, they turn to their central banks (Federal Reserve in the US). Since the US abandoned the gold standard in 1971, their is no theoretical limit to how much money the Federal Reserve can print. Even before abandoning the gold standard, many countries got themselves into trouble by printing way too much money, tanking the value of their currency and hurting their economies. Despite many historical examples proving this, a relatively new theory called Modern Monetary Theory (MMT) called this into question.

MMTers believe that a country that issues its own currency, can always print more money so spending is not constrained by taxing and borrowing limits. Taxes are not for determining government spending; their purpose is to control inflation by reducing demand and redistributing wealth. Moreover, they believe that deficits don’t really make that much of a difference to the economy and inflation, since if the government has a deficit, the private sector will have a surplus. Instead of setting interest rates based on the boom and bust cycle, governments should instead have a federal job guarantee that will keep the economy at full employment, regardless of the business cycle. Politicians like Bernie Sanders, AOC, Elizabeth Warren and other progressive/left wing politicians latched onto MMT, because it gave them a blank check to spend as much money as they wanted. Well, turns out, pretty much everything they believed was immediately proven wrong when global inflation reached decade highs starting in 2022. People are very quiet about MMT these days. Now back to at least semi-respectable economic theories.

Unlike MMT, the Austrian school has a coherent understanding of inflation. Like the Classical schools, they are against centralized planning but their explanation for boom and bust cycle has to do with artificial manipulation of credit and interest rates by central banks. They are against government intervention in the economy, believing actions that stimulate the economy in the short term, will eventually lead to more harm in the long term because of misallocated resources. Unlike the Classicals, the Austrians had an explanation for why the depression of the 1930s happened, however their prescriptions on how they would solve the problem, were not that different. This is why although the Austrians may have helped enhance the understanding of the Central Banks role in the economy, no country have seriously considered following their policy prescriptions…until now.

What is Millei doing?

Javier Millei is a self described anarcho-capitalist and student of the Austrian school. He inherited a country with an annual inflation rate above 200%, the most the country had seen in decades, while GDP was contracting. Instead of trying to further intervene in the economy or print more money like his predecessors, Millei has gone the other way. In the 12 months since assuming office, Millei has done the following:

1. Megadecreto: Removed over 300 economic regulations, which includes rent controls, labor market restrictions, tariffs on imports etc. He continues to removes more each week.

2. Shrinking the Bureaucracy: Let go more than 5,000 federal employees (didn’t renew their contracts) and is reviewing additional areas for efficiency. Early in his term he reduced the number of government ministries from 19 to 8.

3. Spending reductions, Monetary policy & inflation control: Monthly inflation has dropped from 25% to 2.7%. As government spending and inflation have come down, the Argentinian central bank has cut interest rates from above 100% when he assumed office down to 35% as of November 2024.

Not only have these changes brought down inflation, they have thus far been well received by the markets. Argentinian bonds are now considered much more creditworthy, and Millei’s popularity among Argentinian’s, remains high². Although his disapproval rate has begun creeping up in recent months, he still has an approval near or above his predecessors through 12 months which ranks well on a global basis.

Thus far Millei-conomics has proven successful in taming inflation and erasing the deficit but for his policies to be successful, he will need to also reduce poverty and deliver the GDP growth he’s promising. Otherwise his term will have been ineffective and the next government will simply undo many of his changes. Millei will need to show that he can do it quickly since October 2025 is when half of the seats in the Chamber of Deputies and a third of the Senate seats will be up for re-election. If voters are not in favor of Millei’s changes, they can vote to severely restrict his power for the rest of his term.

In DOGE we trust?

Elon and Vivek are watching Millei’s actions closely, to see what they could replicate in the US. Keep in mind, the US is not Argentina. Sure the US is running a large deficit, but inflation isn’t remotely near Argentina’s, the economy is not contracting and US treasury bills are still considered among the safest assets. That being said, the federal government has 36 trillion dollars in outstanding debt. That is a lot. US GDP, the largest of any nation, is only 26T per year. The government needs to pay interest on that debt, which amounts to hundreds of billions of dollars each year. Unless the US can pay down this debt, this amount will grow, further contributing to the deficit.

Most reasonable people agree that this growing debt and deficit are problems, where they disagree is how to address it. Reasonable Democrats that don’t subscribe to MMT, will suggest raising taxes, primarily at the wealthy or corporations. We will almost certainly need to do this, but that alone won’t balance the budget. Some reductions will need to happen, the question is from where?

As you can see, there are no obvious places to cut. Useless government waste is not a line item on the budget. You could just eliminate social security and defense spending, but people don’t want to give those up, so Musk and Vivek won’t go far with that approach. The Federal deficit is presently around $1.5T, to balance the budget assuming revenue stays around the same, they would need to cut near this amount.

One of Vivek’s early proposals was to simply cut every government department in half. The federal government employs ~3 million people (not including military personnel and reservists), costing around $300 billion per year (does not include retired workers benefits). Assuming they could do this, which is highly doubtful, not factoring in severance costs, this would save $150B per year. Don’t get me wrong, that’s a large sum but only 10% of what they need. Where is that other 90% coming from?

Social security is difficult to touch, and when it comes to defense spending, it’s tough to see that coming down while the US is involved in multiple conflicts. Still, Elon has been tweeting a lot about the Pentagon’s inability to pass an audit for the past few years, and can’t account for their $800B+ budget. He’s also taken aim at hundreds of billions of dollars in improper federal payments as well as pandemic relief funds abuse. While there could be explanations for this, it’s possible when Elon and Vivek take a closer look, they might be able to eliminate tens to hundreds of billions in wasteful spending that won’t be noticed by anybody outside the bureaucracy.

If that’s the low hanging fruit, would they be able to reduce the number of government departments like Millei? They can only do so much with executive orders, they would need to get many of these measures approved by the congress or senate. Many of the items they would look to cut would impact Republican districts as much as Democrats. How likely are they to go through with reductions that hurt their own constituents? It’s not unheard of. Governments have managed to engage in deficit reductions before, it happened in the late 90’s under President Clinton and a Republican controlled Senate. The difference, is that the deficit is much larger than it was then, the US is running the largest deficit since WWII.

In any case, the reflex of DOGE is the right one, given the large deficit and growing debt levels. Can Elon & Vivek achieve a balanced budget in the 18 months they have given themselves? Almost certainly not. Could they enact some deregulation that could help unlock industry, similar to what Millei did in Argentina? Possibly yes. Although, I doubt higher tax revenue from increased economic activity would be able to increase enough to fill the gap. This is before we factor in the tax cuts Trump wants. My expectation is that any spending reductions will be offset by tax cuts. The only way the deficit will meaningfully come down, is if they can prove that getting government out of the way, will help unlock more growth in the private sector. Even if they manage to prove this, I doubt their changes will be noticeable within the first 18 months, possibly even before the end of President Trump’s term.

What they are doing is not really Austrian economics. They are unlikely to eliminate the Federal Reserve and as much as they cut, the government will remain very involved in the economy, even if not to the extent that Marxists or MMTers would like. This is because Austrian economics like all the other economic theories mentioned, work better as a principal/philosophy than an actual economic prescription. If an economy gets into a slowdown, the government will naturally step in. Virtually all countries have some form of unemployment insurance or welfare, so this would be automatic. The notion of waiting for the market to work itself in to find the long term equilibrium is not practical because as Keynes famously said “In the long-term, we are all dead!”. What we can hope for, especially if Millei and the DOGE team are successful, is that book stores might begin stocking books on Austrian economics³.

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1. This was of course before my money ran out and I was stuck eating lentils until the end of the term.

2. Some will point out that one of Millei’s predecessors, President Macri was also able to make a positive impression on global markets early in his term which proved to be short lived.

3. I’m aware that Austerity and Austrian economics are not the same thing. My team thought Austerity made for a better title. If you disagree please send your thoughts to noreply@AOL.com