Disinflationary DOGE Dividends
President Donald Trump is considering returning 20 percent of the savings identified by the Department of Government Efficiency (DOGE) directly to taxpayers while using another 20 percent to pay down government debt.
“There’s even a — under consideration, a new concept where we give 20 percent of the DOGE savings to American citizens and 20 percent goes to paying down debt,” Trump said earlier this week.
Some analysts argue that these “DOGE Dividends” could contribute to inflation. However, the economic impact of this policy differs significantly from the Biden-era stimulus measures that drove inflation to four decade highs.
The Biden administration’s stimulus checks fueled inflation because they were financed through deficit spending and an expansion of the money supply. The government borrowed trillions to send out checks, while the Federal Reserve increased its balance sheet by purchasing Treasury bonds and slashed interest rates. Essentially, the Fed monetized the cost of the Biden stimulus.
In contrast, the DOGE refunds are funded by cuts to excessive and inefficient government spending. Instead of injecting new money into the economy, this policy reallocates existing funds that were previously spent on government programs.
Steve Chiavarone of Federated Hermes underscored this on Bloomberg TV Friday, explaining why DOGE dividends won’t be inflationary.
“They can’t be inflationary in the short-run because I’ve already pre-cut that money. I’m just shifting it from one part of the economy to the other,” Chiavarone said.
Cutting the number of government employees and private sector employees receiving government funding is also disinflationary. Government employees, particularly those in stable bureaucratic positions with generous pensions, generally have a high propensity to spend. If some of these salaries are redirected into one-time payments to taxpayers, a greater share of funds will be saved rather than spent, which would further dampen inflationary pressures.
Another factor is the plan’s allocation of 20 percent of the savings toward reducing the national debt. Paying down government debt reduces the need for new borrowing. Lower debt issuance can lead to reduced longer-term interest rates, making capital more accessible for private sector investment. A lower debt burden also reduces the risk of inflationary pressures associated with excessive government spending.
The economic environment today is also different from the conditions during the early years of the Biden administration. At that time, pandemic-related supply-chain disruptions and labor shortages constrained production. The Biden administration’s war on fossil fuels hindered energy production, and its massive increase in regulations retarded investment. So, when stimulus checks increased household demand, this imbalance contributed to higher prices.
The current economy, however, does not face the same supply constraints. Factories are operational, supply chains have stabilized, and the labor force has recovered. Trump is taking measures to free the economy from the shackles of Bidenomics: pushing for more energy production, making tax cuts permanent, and rolling back regulation. As a result, DOGE refunds will not have the same inflationary impact as past stimulus payments.
Consumer behavior also plays a role in determining inflationary effects. COVID-era stimulus checks were designed to boost consumer spending, particularly among lower-income households and workers who had been displaced by the pandemic. The DOGE refunds, by contrast, would arrive at a time of historically low unemployment, making concentrated demand surges less likely. Additionally, one-time payments are less likely to be spent immediately compared to continuous income, meaning a portion may be saved or used to pay down personal debt, reducing the inflationary impact.
Another consideration is the broader impact of reducing inefficient government spending. Inefficiency in government expenditures often leads to higher costs as excessive spending competes for limited resources. Cutting wasteful programs can reduce excess demand in certain sectors, easing inflationary pressures rather than exacerbating them. And as Chiavarone said on Bloomberg, the private sector is likely to use the money in a much more productive way than the government.
Finally, sending out the DOGE dividends or efficiency refunds could bolster public support for budget cuts, allowing the Trump administration to make even deeper cuts. That reduced spending would also tend to reduce inflationary pressures.
Far from fueling inflation, Trump’s plan reins in wasteful spending, reduces debt, and returns money to taxpayers without expanding the deficit. That’s a win for fiscal sanity and the taxpayer.