How the Government Spends Your Money

"Cut the deficit, not my benefits!" quipped Motley Fool advisor Robert Brokamp in a blog post last week, showing how most of us are generally clueless when it comes to the federal budget. It's a great point that deserves more attention.

Most of us have a near-religious opinion of the federal budget. Knowledge of basic budgetary facts seems less common. Important things, like where the money is spent, are often lost in rhetoric. Robert's blog quotes one economist as saying, "most people tend to think that balancing the budget is a relatively easy task just requiring political will, something that would not affect them personally." The truth, though, is quite different.

Less screaming, more numbers
To address where exactly the government spends your money, I pulled numbers from the Office of Management and Budget showing total federal spending over the past two fiscal years. Have a look:

Total Federal Spending (in Billions)

Source: OMB.
*Unemployment benefits, food stamps, child tax credits, etc.
**One-year swing attributable to 2009 stimulus.

Focus on what matters
The main cause of current deficits is a catastrophic decline in revenue. But let's just look at the expenditure side of the equation here.

Government spending is obnoxiously huge. Given. But this point can't be repeated enough: High spending has little to do with earmarks, foreign aid, or bridges to nowhere. Social Security, Medicare, Medicaid, defense spending, income security, and interest make up more than 80% of federal spending. Every other individual segment is virtually irrelevant to the big picture. Entitlements and defense spending alone consume almost 60% of the bill. Unless you're willing to take a chainsaw to these two programs, it's a bit rich to protest the profligacy.

But very few are willing. Especially those who count -- politicians. Cutting defense spending seems off limits because it rattles the lobbying arms of Raytheon (NYSE:RTN), Lockheed Martin (NYSE:LMT), et al. and brings charges that you're a terrorism softy. Slashing entitlement spending is a PR no-no because no politician (from either party) dares to run on the "I'll force Grandma to live on cat food" platform. Cut income security? Good luck getting the "let the hungry kids starve" campaign buttons to fly.

These programs need reform. Oh man, do they ever. But that won't happen without cuts affecting those who qualify for entitlements, which is to say all of us. You. Me. Everyone. Even the most fanatical spending hawks, though, squirm when you start cutting their benefits. Spending cuts always seem vital so long as they don't hit you ... or your constituents.

That's what makes the government spending issue such a swamp. So many want spending slashed, but what needs to be cut in order to make a dent is realistically off limits. Areas where we are willing to make sacrifices -- say, NASA's budget -- make rounding-error differences at best.

What to do now?
The mind-bending difficulty of these choices makes long-term budget deficits nearly a surefire bet. It's unlikely that any of these issues will be sufficiently tackled this year, next year, or even over the next decade.

That doesn't bode well for the strength of the U.S. dollar, and makes companies with outsized foreign revenue, like Coca-Cola (NYSE:KO), Philip Morris International (NYSE:PM), and ExxonMobil (NYSE:XOM), start to look real good for long-term investors. On the domestic front, companies that can provide healthy returns in a slow-growth economy, like Verizon (NYSE:VZ) and Southern Co. (NYSE:SO) begin to look seriously attractive as well. These spending problems aren't insurmountable, but aren't going away anytime soon. Invest accordingly.

Got your own take? Let loose in the comments section below.