America Is Not Really a Free Market Economy

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The United States is considered the world's premier free market economy. That's because the U.S. Constitution guarantees the three critical elements that create a free market. They are ownership of private property, a competitive market, and unregulated prices. The U.S. free market depends on capitalism to thrive.  That means the law of demand and supply sets prices and distributes goods and services.


That fits right in with the American Dream. It states that each person has the right to pursue his or her own idea of happiness. That pursuit drives the entrepreneurial spirit that capitalism needs. The Founding Fathers said each American should have ans equal opportunity to pursue their personal vision. They wrote the Constitution to protect that right.

The Constitution also instructs the federal government to "promote the general welfare." That allows the federal government to use central planning in areas that of vital importance to the nation's growth. That includes defense, telecommunications, and transportation. 

In 1935, the Social Security Act extended the general welfare to include unemployment compensation, retirement income, and aid for mothers with dependent children. It was part of the New Deal to get America out of the Great Depression

Since then, Congress has extended the general welfare clause to many other areas.

But the priorities remain defense and the well-being of seniors, women, and children.

If you look at the federal budget, it reflects these priorities. The largest budget item is Social Security benefits, at $967 billion. The second largest is defense ($773.5 billion in FY 2017). Health care comes next.

Medicare costs $598 billion and Medicaid costs $386 billion.  

As a result, many worry that America is either becoming a socialist welfare state. Others warn the country is a slave of the military-industrial complex.

But the United States is a mixed economy, and is better for it. A free market economy can't coordinate a national defense plan. It also leaves vulnerable members of society without a safety net. That safety net protects a child's right to have the opportunity to pursue happiness. 

A mixed economy combines the best aspects of a free market economy with those of a command economy. That's where the government uses a central plan to manage prices and distribution. Countries that follow communism use the command economy. So do monarchies, fascists, and other totalitarian governments. 

When people think of a command or centrally planned economy, they usually call to mind Russia, China, Cuba, North Korea, or Iran. But even these command economies are adopting characteristics of a free market economy. They must compete against free market pricing throughout the world. Only a free market economy gives them the flexibility to succeed in a globalized economy. They are becoming mixed economies, as well.

The problem is that Congress is spending above its means. Another large budget item is the interest payment on the debt ($303 billion). That's because federal revenue doesn't cover spending. Each year the deficit adds to the debt. As a result, Congress' spending to promote the general welfare is overwhelming the free market economy. The national debt is more than each the country's annual economic output. The debt-to-GDP ratio is more than 100 percent. That's beyond the World Bank's tipping point of 77 percent. As the world recovers from the financial crisis, investors will leave the safe haven of U.S. Treasuries. At that point, interest rates will rise. That will slow economic growth and worsen the debt-to-GDP ratio.

Therefore, the concern is not "Is America no longer a free market economy?" It is that Congress continues to spend beyond its means on everything.

It is letting its responsibility for the general welfare of the country outweigh its duty to protect how capitalism works. It must find a way to restore the balance envisioned by our Founding Fathers.

One way to do that is to shift spending priorities to put the millions of unemployed back to work. Defense spending only creates 8,555 jobs for every $1 billion spent. It's not very effective at creating jobs, since so much is spent on technology instead.  Half of those funds ($300,000 billion) could go toward public works construction instead, which creates 19,795 jobs/billion.  That would use the benefits of a command economy by mobilizing quickly to solve the nation's #1 problem. Putting people back to work will create the demand needed to let free market grow faster. Keeping spending the same will restore the debt-to-GDP ratio to a sustainable level.