Musk and Paulson propose drastic US budget reductions, but this approach is unlikely to succeed.

"Shock therapy," which involves drastically reducing government spending in heavily indebted countries, was once supported by many economists and global policymakers as a way to revive struggling economies.

Surprisingly, these so-called austerity programs have had just the opposite effect.

The economic downturn has resulted in significant recessions and social unrest.

If former President Donald Trump is re-elected and Elon Musk and hedge fund manager John Paulson join his cabinet, they are advocating for reductions in the U.S. budget.

Trump announced that Musk would lead a government efficiency commission, while Paulson is a potential candidate for Treasury Secretary in a possible second Trump administration.

This week, both Musk and the government have endorsed slashing budgets, with Musk calling for a $2 trillion reduction.

In 2023, the federal government spent a total of $3.8 trillion, with more than half of that going toward Social Security and Medicare, and a significant portion of the remaining funds going toward defense in a world facing ongoing conflicts.

What is the impact of sharp budget cuts on the U.S. economy?

Attempts to implement strict measures in struggling economies, such as those seen in ex-Soviet states or developing countries, have typically resulted in recessions and shortages of essential goods.

The long-term benefits will require Americans to endure temporary hardship, as Musk has proposed for the economy.

If only it were that easy.

The ill effects of austerity measures

Some countries that underwent shock therapy in recent economic history have struggled for years. They experienced stagnating growth and frequent fluctuations between inflation and deflation, leading to unrest and the departure of leaders.

In the early 1990s, Russia experienced hyperinflation, empty store shelves, and Boris Yeltsin's victory over a coup, which he achieved by standing atop a tank.

Entire societies were upended by rapid and radical measures amid political and economic turmoil, not just once.

The privatization of state-owned enterprises in Russia resulted in the emergence of a new oligarchy.

Swift significant alterations that have a substantial impact on the daily existence of a country's people will not occur effortlessly.

The U.S. must tackle its annual budget deficits and $35 trillion debt, by identifying and reducing waste, fraud, and abuse, and addressing unfunded liabilities.

Other ways to curb government spending and lessen the burden on future generations exist.

A thoughtful plan to rein in budgets

The Simpson-Bowles Committee, also known as the National Commission on Fiscal Responsibility and Reform, presented a comprehensive plan for reducing budget deficits, revising the tax system, and addressing the Social Security and Medicare unfunded liabilities.

Although this blueprint was carefully crafted and should have been implemented, it was released in 2010 during the Great Financial Crisis, a time when deficit reduction was not a pressing concern. It would have been imprudent to implement the plan at a time when the economy was still recovering.

I recommend Musk and Paulson read the plan.

The Simpson-Bowles plan proposes a measured approach to addressing the massive increases in deficits, debt, and spending by right-sizing the U.S. budget and formalizing audits of federal spending. Additionally, it presents long-term solutions to the burdens of funding entitlement programs that all Americans pay into.

Everyone should read it.

While there are no easy solutions to the U.S.'s debt problem, there are more careful and deliberate steps that can be taken to prevent a crisis from happening.

John Paulson and Elon Musk should follow the lead of Alan Simpson and Erskine Bowles.

Ron Insana, a CNBC contributor, is the CEO of iFi.AI, an AI-driven fintech company.