There are two types of Federal or Government Spending:

Mandatory and Discretionary.

For example, about 55% of federal government spending in fiscal 2010 was mandatory, covering all expenditures that are controlled by laws other than appropriations acts.

Almost all such spending is for entitlements, expenditures for which depend on individual eligibility and participation, and which are funded at whatever level is needed to cover the resulting costs. Just under 40% of spending in fiscal 2010 was discretionary, covering activities that Congress must reauthorize each year. The remainder went to pay interest on the national debt.

Mandatory spending has claimed a much larger share of the federal budget over the past four decades, more than doubling from about one-fourth of federal spending in 1962 to just over half today.

In contrast, the share of the budget going for discretionary spending has fallen from two-thirds in 1962 to about two-fifths now. Interest on the national debt has fluctuated over the period: it climbed from 6 percent in 1962 to more than 15 percent in the mid-1990s, fell to about 7 percent in the early 2000s, and has fluctuated more recently as interest rates have fallen to historically low levels. Debt service accounted for just 5 percent of federal spending in 2010, the lowest level in nearly 50 years.

The federal government's budget contains both mandatory and discretionary elements. Consider, for example, Social Security, which accounts for more than 20 percent of total federal expenditures. (Social Security is a program that taxes people when they are working, and then provides them with income when they retire; it also provides income for workers who become disabled and for the dependents of workers who die.) By law, the government has to pay Social Security benefits to anyone who qualifies for them.

Other examples of mandatory spending are Medicare, Medicaid, benefits to retired civil servants, and interest on the debt that the government has accumulated over the years. (Medicare is a program that pays for health care for the elderly and certain disabled persons, while Medicaid is a joint federal-state program that provides medical assistance to low-income persons.)

In contrast, spending on items such as national defense, space exploration, and the FBI is discretionary; the government can do more or less of it, as it decides.

Cutting Government Spending to reduce the Deficit

The uS citizens are able to borrow at extraordinarily low rates of interest. And US government spending, though considerably higher than US government tax revenue (thus the budget deficit), is still relatively low as a percent of GDP when compared to that of other developed countries.

Some people argue that would help the deficit:

U.S. government spending is critical to our economic recovery and that cutting spending now to reduce the deficit would be a disastrous mistake.By reducing government spending, country's reduce employment and GDP. And by reducing employment and GDP, they also reduce tax revenue, which increases the deficit. So they have to cut more spending. And so on.

Example: Nobel Prize-winning economist Paul Krugman

Other view:

hose who blame the depression on fiscal irresponsibility and runaway government spending. The way to fix the economy, those folks argue, is to immediately slash government spending, reduce the deficit, and restore "confidence" among the country's business leaders.

Importantly, Paul Krugman does not think we can ignore our budget deficit forever.

By printing money, the Fed will create runaway inflation

The Federal Reserve's announcement on Nov. 3 that it will buy $600 billion worth of Treasury bonds to help boost the struggling U.S. economy reverberated around the world this past week, with condemnation from critics as varied as Sarah Palin and the president-elect of Brazil.

The Fed's current policy of "quantitative easing" essentially means it is printing money ($600 billion) to buy assets such as government bonds. The Fed isn't literally printing the $20 bills that end up in your wallet - it's doing the electronic equivalent.

When it buys a $100 bond from a bank, it deposits $100 into the bank's account at the Fed. This electronic money is called reserves, and the Fed conjures it up out of thin air.

Risky Business

However, this money can lead to inflation only if banks lend it and consumers and businesses spend it. Banks lend when they have strong balance sheets and when credit-worthy customers demand loans. People and businesses spend when their incomes are growing and they're confident about the future. None of this has been true lately.

-Will the borrower pay back the loan with interest?
-What if the borrower doesn’t repay the loan?
-What happens to the banking system and the economy if a large number of borrowers can’t or won’t repay their loans?
-And what happens if, in the pursuit of profit, banks do not maintain levels of reserves and capital consistent with their own stability?

The Fed Buys Bonds

The Fed is trying to stimulate spending, but not by showering people with newly minted dollars. Rather, when the Fed buys bonds, it pushes their prices up and their yields down. Lower long-term interest rates will tempt some people to borrow.

They will also make stocks more attractive. Higher stock prices will make consumers feel wealthier and spend more. If that spending outstrips the economy's productive capacity, inflation could result.

But that's years away: The economy today is awash in idle factories and unemployed workers.