Why the Trump-Musk buyout offer risks dumbing government down

On Jan. 28, the Trump administration announced that it was offering a buyout to some 2 million federal workers. Those who accept this offer will receive full pay and benefits for 8 months. The expectation is that 5 to 10 percent of federal workers will accept this offer resulting in savings estimated at $100 billion annually. 

This approach is appealing, at least on the surface. The federal government workforce is bloated. The Department of Government Efficiency or DOGE, led by Elon Musk, clearly sees an opportunity to substitute capital for labor. Artificial intelligence will increasingly be able to perform many of the tasks that are now performed by federal workers.

The potential savings are alluring, but perhaps also illusory.  

Corporate downsizing was all the rage among Fortune 500 corporations in the 1990s. Grand promises were made to shareowners that significant efficiencies could be achieved with a smaller workforce. The efficiencies to be realized in downsizing a workforce are appealing in theory but can and often do prove elusive in practice.

If you are the CEO of a Fortune 500 corporation (or the president of the U.S.) and you think logically about how to conduct downsizing, you would naturally start by making buyout offers to the least-productive workers.

The problem with this approach is that it can quickly run into a legal quagmire, particularly if your least-productive workers are disproportionately non-white. Employment discrimination lawsuits are time-consuming and notoriously costly to litigate. 

The fact that across-the-board downsizing became common practice in corporate America suggests that management did the math and determined that the benefits employers expected from the selective downsizing of low-productivity workers outweighed the expected litigation costs. This explains why employers seeking to downsize frequently resort to across-the-board buy-out offers.

The problem with across-the-board offers, however, is that they are likely to be accepted by the highest-productivity workers because these workers will have the most lucrative outside opportunities. In the case of the federal government, these workers can accept the offer of eight months' pay and benefits and never miss a day of work. 

In contrast, the lowest-productivity workers are likely to have few, if any, outside opportunities, and so their best strategy may be to turn down the government’s offer. This would tend to leave behind a greater share of low-performers in government — less-skilled or less diligent workers clinging to jobs they can't afford to lose.

The telecommunications industry in the late 20th century was confronted with a scenario not unlike what the federal government is experiencing today. Faced with the prospect of rapid technological change due to the advent of microchip technology, the industry found itself with an inflated workforce.

The common practice was to offer across-the-board buyout offers to facilitate the downsizing required to achieve an efficient capital-labor input mix. Productivity growth for these companies was unremarkable or worse in the years immediately following these downsizing initiatives. One plausible explanation for this development is that the workers who accepted the offers were disproportionately high-productivity workers.

This example illustrates the inherent problem with across-the-board buyouts to facilitate downsizing. It gives rise to a problem of adverse selection in that post-downsizing, the employer is left with a greater share of the “wrong” type of worker. A similar problem presents itself in health insurance markets. The most sickly people are also the most likely to sign up for health insurance.

Employers are thus faced with something of a “Hobson’s Choice” — the prospect of prohibitively costly litigation with selective downsizing or a dumbed-down workforce with across-the-board downsizing.

Is there a better path forward? To counter the “brain-drain problem” associated with across-the-board downsizing, the employer may wish to consider retention bonuses for high-productivity workers. These can take a number of different forms, but one model is to offer high-productivity workers an additional year of compensation for every four years they remain employed with the organization. With this approach, the employer increases the likelihood of retaining high-productivity workers.

The Trump administration’s DOGE is a laudable initiative led by one of the preeminent industrialists of our time. It offers some hope that it is more than just window-dressing. Nonetheless, trapdoors abound in the course of downsizing a workforce.

History teaches that running the government is different from running a business and that a downsized workforce is not synonymous with a more efficient workforce. These are just a few of the daunting challenges confronting Musk and his compatriots.  

Dennis L. Weisman, Ph.D. is a professor emeritus of Economics at Kansas State University.