No, DOGE Checks Wouldn’t Cause Inflation
Thinking through policy when all else isn't equal
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Unless you have been living under a rock, you have probably heard something about the Department of Government Efficiency (DOGE). This is the initiative that Elon Musk is running for the Trump administration in an attempt to cut wasteful spending and downsize the federal bureaucracy. People who have heard of this seem to have very strong feelings about it. Some are very enthusiastic. Some are extremely skeptical. This post isn’t about DOGE itself or whether you should be enthusiastic or skeptical, or skeptically enthusiastic, or enthusiastically skeptical. This post is only tangentially-related to DOGE.
What this post is about is an idea, floated by President Trump, that the U.S. government could take about 20% of the savings from DOGE and use that money to send checks to every taxpayer in the U.S. A DOGE dividend, you might say.
In response to this proposal, some have argued that this would just repeat the mistakes of pandemic-related policy. After all, the government sent people checks in the mail during — and arguably after — the pandemic. What followed was the most significant inflation that we have experienced in 40 years. Thus, wouldn’t these checks also just result in inflation? The likely answer is “no.”
Inflation: A Review
As I have written about before, the way that we should think about inflation is as a sustained decline in the purchasing power of money over time. This framing helps us to think about the fundamental causes of inflation. Fluctuations in the purchasing power of money are determined by the supply and demand for the medium of account (in the current world, this is the monetary base). A decline in the purchasing power of money is caused by an excess supply of the medium of account. Inflation is caused by a persistent excess supply of the medium of account.
With that as a backdrop, we can get a sense of why people might think that a DOGE dividend would be inflationary. For example, consider the typical environment in which the government gives out checks. Ordinarily this is done during recessions or in anticipation of a coming recession. In that environment, monetary policy tends to shift towards a more expansionary stance. The mechanics of sending out checks is as follows. The U.S. Treasury department issues bonds. The proceeds of those bonds are used to give out checks to the American taxpayer. The Federal Reserve, in its expansionary stance, is purchasing U.S. Treasury securities on the open market. As a result, what is effectively happening is that these checks are financed by an increase in base money.
Whether or not this affects the purchasing power of money depends on money demand. If the demand for money hasn’t changed, then this increase in base money leads to an excess supply of base money. The price level rises. On the other hand, if the U.S. economy is in a recession, this typically corresponds with an excess demand for base money, given its use as a flight to safety. In that instance, whether the price level rises or falls depends on whether the increase in the supply of base money is greater than, less than, or equal to the increase in demand for base money.
It is also important to note that if this is a one-time issuance, at most this would lead to an increase in the price level. This means that there would be a permanent increase in the price level (a permanent reduction in the purchasing power of a dollar), but a temporary increase in the inflation rate.
We can use this same logic to analyze DOGE and to think about whether a DOGE dividend would result in higher prices or higher inflation. Since this would conceivably be a one-time payment, our framework can rule out these checks as a source of persistent inflation. At most, we might think that such checks would lead to a permanently higher price level and a temporary increase in inflation. However, there are a lot of moving parts involved in the analysis of DOGE checks that we abstracted from in the organizing framework that I have just outlined. Let’s think about all of these moving parts.
All Else Isn’t Equal
In evaluating the proposed DOGE dividend, we need to think about a variety of factors that could determine the answer of whether sending Americans a check would raise prices. All else isn’t equal.
Let’s start by thinking about a central bank. Suppose the central bank is tasked with maintaining stable prices. From our framework, what this requires is that the central bank adjusts the money supply in conjunction with fluctuations in money demand. This sounds like a difficult task. Money demand is not directly observed. How can the central bank adjust the money supply in response to something unobservable?
The answer would be to use a proxy. An excess supply of money manifests in higher levels of nominal spending. An excess demand for money results in lower levels of nominal spending. Thus, the central bank can adjust the money supply to meet money demand by targeting a stable path for nominal spending. The central bank could have a target of constant nominal spending or it could have a target of constant growth in nominal spending. For example, during the period known as the Great Moderation, nominal spending growth was remarkably constant at around 5 percent per year.
This tells us something important about the conduct of monetary policy. First, given a target for nominal spending, increases in nominal spending above that target are indicative of an excess supply of money. Declines in nominal spending below that target are indicative of an excess demand for money. But if the central bank maintains nominal spending at its target, then the money supply is matching any change in money demand (for that target).
If we think of the effects of DOGE and the dividend checks in terms of spending, there are countervailing effects. All else equal, any cuts to government spending will tend to reduce nominal spending. All else equal, to the extent to which these DOGE dividends lead to an excess supply of money, they will result in higher nominal spending. These two effects are working in opposite directions. The net effect will depend on the magnitude of cuts, the size of the checks, and the extent to which these checks result in an excess supply of money.
However, if the central bank maintains its target for nominal spending, there will be no net effect on nominal spending of any of these changes and thus no change in the rate of inflation.
Thus, the answer to whether the DOGE dividend would be inflationary is no, but with one caveat. As long as the central bank conducts policy to keep nominal spending near its target, there will be no inflationary effect from a DOGE dividend. However, if the central bank fails to keep nominal spending on target, then this could result in higher inflation. But that is always true, independent of whether the government is sending people checks.
There is one additional point to note. Although I wouldn’t expect the DOGE dividends to be inflationary, there would likely be changes to relative prices. Just because nominal spending is constant doesn’t mean that nominal spending on particular goods and services would be constant. Spending on some goods might increase and spending on other goods might decrease. To the extent to which consumers spend the money they receive, they are likely to spend that money on different goods in comparison to how that money would have been spent by the various government agencies subject to cuts. As a result, the relative prices of certain consumer goods might rise and thus some consumers might see rising prices on average depending on their consumption pattern. Nonetheless, even this effect would tend to be small since the size of the proposed checks is only a fraction of the size of the spending cuts. Without more information about the magnitude of the DOGE cuts, the types of cuts, and the size of the checks, it is hard to predict the extent to which this would occur.
Does This Mean It’s a Good Idea?
Readers will notice that at no point did I say whether this would be a good or bad idea. As with anything in economics, the question about whether it is good or bad depends on the opportunity cost of distributing a DOGE dividend. If the government doesn’t remit this savings to the taxpayers, how would it spend the money otherwise?
The most obvious alternative use case would seem to be to pay down some of the federal government’s growing debt. This could be done by using the money to buy back Treasury bonds, and retire them from circulation. Or it could be done by taking the money that was saved and depositing it, say in the Treasury General Account, and then using that money to pay for some of next year’s spending, thereby reducing the amount of debt that needs to be issued next year.
Those who are skeptical of this initiative, however, often make the claim that most of this is just for show. The argument seems to be that DOGE is mostly just about grabbing headlines and that the total amount of money saved will be some small fraction of total government spending and wouldn’t really make a difference in the grand scheme of things. However, if this is true, that actually seems to make the case that the money should be returned to taxpayers through some type of DOGE dividend.
Of course, this also depends on whether you think DOGE is a good idea to begin with. The way that I framed the opportunity cost is conditional on DOGE being a thing. Another way to think about the opportunity cost of the checks would be to think of the alternative use of that money as having the government do whatever it was doing before DOGE. Clearly, if you liked that use of money, you would object to both the cuts and the checks.
Here at Economic Forces, the objective isn’t to tell you what to think, but rather provide you with a framework for how to think. Armed with this way of thinking, readers can make their own decisions about whether the DOGE dividend is a good idea. Regardless, it is unlikely to lead to higher inflation.