America Is Not Really a Free Market Economy

American flag in front of the One World World trade Center in New York city

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The United States is the world's premier free market economy. Its gross domestic product is greater than any other country that has a free market. China has the world's largest economy, but it relies on a command economy.

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, which states that each person has the right to pursue their own idea of happiness. That pursuit drives the entrepreneurial spirit that capitalism needs. The Founding Fathers said each American should have an 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 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 definition of general welfare. It included unemployment compensation, retirement income, and aid for mothers with dependent children. It was part of FDR's 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 most significant budget item is Social Security benefits, at $967 billion. The second largest is defense ($773.5 billion in FY 2017). Healthcare comes next. Medicare costs $598 billion, and Medicaid costs $386 billion. 

As a result, many worry that America is 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. The Founding Fathers included that assurance to protect a child's 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 regimes. 

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

The United States is losing its free market status because Congress is spending above its means. Federal revenue doesn't cover spending. Each year the deficit adds to the debt. 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. Congress' spending to promote the general welfare is overwhelming the free market economy. 

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 more effectively create jobs. Defense spending only creates 8,555 jobs for every $1 billion spent. It's not a good unemployment solution since so much is spent on technology instead. Half of those funds could go toward public works construction, which creates 19,795 jobs for every $1 billion. 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.