Week 3 Problem/Solution

How Mass Layoffs Of Federal Employees Could Affect The Economy

Experts have identified some potential economic benefits and big risks from President Donald Trump's mass firing of federal workers.

In the first month of Donald Trump's presidency, he and his billionaire advisor Elon Musk have moved rapidly to reduce the size of the federal workforce. Trump has frozen hiring at all federal agencies and ordered "large-scale reductions in force" through buyout offers and layoffs.1

Out of the 2.4 million non-postal and non-military federal employees, 75,000 reportedly accepted buyout offers to leave their jobs.2

Last week, a slew of federal agencies fired thousands of employees with probationary employment status, mainly those in their first year on the job, a move potentially affecting hundreds of thousands of workers.3

On top of that, the administration has moved to dismantle at least two agencies, the Consumer Financial Protection Bureau and the U.S. Agency for International Development, and threatened to close the Department of Education. Unions representing federal workers have challenged the moves in court.4

How Layoffs Could Affect the Federal Budget

Some economists saw potential benefits in Trump's policies to the extent that they reduce federal spending.

The U.S. persistently runs a budget deficit, which adds to the national debt every year and potentially threatens the country's financial stability and the ability to respond to future crises. In 2024, the U.S. spent $1.8 trillion more than it took in, adding to the national debt.5 All else being equal, lower spending on federal workers could help improve that situation.

"While they might hurt growth in the short run, it's likely that higher taxes and lower spending will help growth in the long run by reducing the swollen federal budget deficit, which is putting upward pressure on interest rates and crowding out private investment." Robert Fry, an independent forecaster, said in a commentary.

However, mass firings of workers are likely to make only a small dent in the overall federal budget.

Assuming a 10% reduction in the federal workforce of 2.4 million people, the government would save $25 billion annually, economists at Deutsche Bank calculated. That would be less than 1% of federal spending, which amounted to $6.75 trillion last year.

The economists said a significant reduction in the federal deficit cannot happen without raising new taxes or making changes to the big entitlement programs. Social Security, Medicare, the military, and interest payments on the national debt take up most of the federal budget each year.

How Federal Layoffs Could Affect the Economy

Firing large numbers of federal workers also carries some risks to the economy.

Should the Trump administration achieve its goal of reducing the federal workforce by 75%, the unemployment rate would skyrocket in places where the federal government is a major employer. In Washington D.C., for example, the unemployment rate would spike to 9.6% from its current level of 2.8%, an analysis by think tank the Urban Institute found in January.6

Democrats, union representatives, and some economists warned that many of the employees dismissed by last week's order were doing important work.

The layoffs reportedly included personnel at the Federal Aviation Administration working on air travel safety; staff at the Food and Drug Administration who worked on baby formula safety; employees at the National Institutes of Health overseeing grants for outside research on cancer and other diseases; workers at Department of Agriculture labs who were working to control the ongoing bird flu epidemic that is ravaging poultry flocks across the country; and workers at the IRS who are in the midst of tax season.

Disruptions to government services could backfire on Trump's cost-saving efforts. For example, layoffs at the IRS could delay the processing of taxpayers' returns. They could also reduce federal revenue because fewer IRS workers would make tax cheats less likely to be caught, Elaine Kamarck, director of the Center for Effective Public Management at the Brookings Institution, wrote in a commentary.7

"The agencies and jobs that are disappearing play vital roles in protecting the public, supporting the safety net, and bolstering demand for U.S. products, among many other functions," Adam Kamins, and Justin Begley, economists at Moody's Analytics, wrote in a commentary. "This injects additional uncertainty into an environment that is already littered with risk." 8

DMU Timestamp: February 13, 2025 22:49

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