📬 Governments are people, my friend

Hey hey, happy Monday Tuesday.

Today, a 5-minute read with few thoughts on a shock to the system that Wall Street is just beginning to wrap its head around – massive job cuts in the federal government.

To number-obsessed wonks, these newly unemployed workers were line items. Bloat in a budget. But in reality, they’re the backbone of our daily lives, our economy, and potentially, our stock market.

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We’re just now starting to understand just how much damage has been done to the federal government.

Last week, the White House reported that 75,000 workers accepted a buyout offer, which would presumably allow them to leave their jobs this month and continue receiving pay through September.

A few days later, the administration laid off thousands of federal workers across a range of agencies. While we don’t have an exact number of layoffs yet, reports suggest that most—if not all—of the federal government’s 200,000 ‘probationary’ workers have been terminated.

Add those together and you easily have the largest job cuts in American history.

It’s not just layoffs and buyouts, either. Lately, spending freezes and chaotic developments have hounded federal agencies, and it’s not a stretch to think that hiring has plateaued and voluntary resignations have picked up.

No matter where you sit on the political spectrum, your brain’s little alarm bells should be going off at all of these headlines.

Too often, we think of the federal government as this abstract concept of paper-pushing middle men ripe for budget cuts and Office Space memes.

But governments are people, my friend.

And we may soon find out the hard way that people drive the U.S. economy.

When I first read about the government layoffs, my mind instantly rewound a decade and a half back to that notorious quote from then-presidential candidate and now-retired politician Mitt Romney.

In 2011, Romney famously said that “corporations are people, my friend” after hecklers at the Iowa State Fair demanded he raise taxes on wealthy Americans and businesses to fund social programs like Medicare and Medicaid. Romney’s argument against the idea was that corporations are ultimately made up of people – and shareholders – who benefit from profits these companies bring in.

In other words, Raise taxes on companies, and you’ll hurt the people.

I think the argument is more nuanced than a catchphrase, as most political debates usually are. But I want to tell you why my mind keeps coming back to Romney’s words as I try to quantify the impact of these politically charged government job cuts on the economy and the stock market.

First, Romney had a point. In a way, employers —. both public and private — drive this raging capitalism machine. 81% of working-age Americans are gainfully employed, and 94% of those gainfully employed Americans work for somebody else (not themselves).

When you’re making money, you’re more likely to spend that money. And in America, we’re world class at blowing money — so much so that our spending accounts for about 70% of the economy.

The economy is indisputably made up of people and their wallets. Disrupt our spending and growth will sputter, no matter how worthy you think the cause of the disruption is.

The stock market may too if you consider the worst selloffs have happened around periods of mass unemployment.

Now, consider the largest job cut in American history (by a mile) at the largest employer in the nation. If all probationary workers were laid off, we may have to digest a total reduction of 275,000 workers. Even if only 25,000 – or an eighth – of probationary employees were laid off, the total job loss would still be in six-figure territory.

For context, U.S. based employers cut an average of 1.7 million jobs per month last year. This round of federal buyouts and layoffs alone could account for about a fifth of that number, much higher than the 0.4% (or 6,000 layoffs) the federal government contributed in 2024.

Government layoffs are the green in this chart, and you’d have to squint to see them:

That’s a lot of lost income and productivity.

Even the sheer optics of this move could hurt. We’ll likely see these cuts show up in regular economic releases, even if not all at once. Hiring freezes and voluntary resignations could show up in monthly payrolls as soon as February, while layoffs will likely be counted in March and buyouts will show up later this year. Claims for unemployment benefits could trickle in over the following weeks, and these layoffs will undoubtedly move the unemployment rate higher (absent a big hiring spree elsewhere).

But the danger isn’t just in the number of jobs lost. It’s the fact that we’re coming for the government, the backbone of our daily lives.

This is where Romney’s argument fell flat, at least in voters’ eyes. Corporations are not people, in so much that employees don’t always benefit from higher profits. Sometimes they do, but it’s far from a fair split. Shareholders, of course, are a different story (and that’s why you need to invest in the stock market!).

When we hear about layoffs, we imagine a company cutting staff to fatten up the bottom line or make ends meet. People carrying boxes full of pens, mouse pads, books and desk trinkets, walking single file out of the local headquarters.

These government layoffs aren’t that. The federal government is a workforce of 3 million people – postal workers, park rangers, doctors, psychologists, scientists, prosecutors, social workers – that exists to serve 330 million Americans. Not to generate profits, appease shareholders or optimize the bottom line.

This distinction matters – in your portfolio and in your life. One thing you’ll notice in hiring trends is that the government is less likely to cut jobs in an economic crisis for this exact reason.

You need society to keep humming along, even when stock prices are in freefall and corporate America is slashing payrolls. You can’t say that about the local bakery or that tech company focused on the metaverse. 

Public jobs have served as a cushion to the workforce – a cushion we’re relying on more than most realize these days. Hack that cushion away with a blunt saw instead of a scalpel and you can run into problems. Over the past two years, government jobs have increased every month but one, countering an unusual decline in payrolls among business services and information-focused jobs. We may be testing this support soon.

A lot of big companies depend on the US government, too. By my count, 12 of 20 biggest companies in the S&P 500 – an index of the largest publicly traded companies in America – have contracts with the federal government. 

Most importantly, the government – or your safety, security and well-being – isn’t designed to be run like a business. Without federal workers, your mail doesn’t get delivered. Your highways aren’t maintained. You lose the guardrail of safety in what you eat, where you go, and how you get there. The societal function that we take for granted disappears, and that can have disastrous consequences if we don’t handle it with care.

My colleague Barry Ritholtz also raised an important point here. America benefits from the rule of law premium – or the value investors place on a nation that prioritizes the sanctity of contracts, respect for private property, and (as a structure) a government of laws, not men. Stability is a huge advantage,

I get the griping. The federal government – like any crowd of two million people – probably isn’t operating as efficiently as possible. I could’ve told you as much after visiting the social security office last year.

We are all allowed to complain, but we need to understand what we’re cheering for when we praise broad-based cuts in the name of efficiency.

At the very least, annoyances like delayed mail and tax returns, plus some hard-to-swallow economic data.

Or worse, a huge shock to the job market that rattles the economy — and the stock market. Inflation hand-wringing may be popular these days, but this degree of job loss and a thick fog of policy-related uncertainty makes me think we’re collectively underestimating the potential weaknesses ahead.

Thanks for reading!

Callie

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