The United States is considered the world's premier free-market economy. Its economic output is greater than that of any other country that has a free market. The U.S. free market depends on capitalism to thrive. The law of supply and demand sets prices and distributes goods and services.
That fits right in with the overarching vision for American democracy. The Founding Fathers said in the Declaration of Independence that each American should have an equal opportunity to pursue their personal vision. That pursuit drives the entrepreneurial spirit that capitalism needs. The economy in America is more complex, involving a mixture of free-market capitalism and state intervention.
State Intervention in the Economy
The U.S. Constitution allows the government to use central planning in areas 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, the largest of which focus on seniors, children, and national defense.
The federal budget reflects these priorities. The nation's largest priority is health care. Medicare receives $753 billion and Medicaid gets $562 billion for FY 2022, and $847 billion and $536 billion for FY 2023, respectively. Second is Social Security benefits at $1.24 trillion for Fiscal Year 2022, and $1.3 trillion for FY 2023. The third-largest area is military spending, with $766 billion for FY 2022 and 2023. That's if you add Overseas Contingency Operations to the Defense Department base budget. Also included are defense support departments such as Homeland Security, the FBI, and the Veterans Administration.
As a result, many worry that America is becoming a socialist welfare state. Others warn that the country is a slave of the military-industrial complex. Still others want the government to increase interventions in some areas.
- The United States is a mixed economy, including both free market and command economies.
- America’s high debt-to-GDP ratio threatens its economic balance.
- Economists debate way that Congress can cut spending while still stimulating the free market.
America Is a Mixed Economy
The United States is a mixed economy, and many would say it is better for it. They would point out that it's difficult to coordinate a national defense plan in a truly free market. Likewise, a society without any government intervention may leave vulnerable members of society without a safety net. This would go against the constitutional mandate that everyone have the right to pursue happiness. Becuse of these tensions, America blends the free market with a command economy.
A mixed economy seeks to combine the best aspects of a free-market economy with those of a command economy.
In a command economy, the government uses a central plan to manage prices and distribution. Countries that follow communism use the command economy. So do some monarchies, fascists, and other totalitarian regimes.
When people think of a command economy, they call to mind Russia, China, Cuba, North Korea, or Iran, but even these countries have adopted many of the characteristics of a free market economy. They must compete against market pricing throughout the world. Engaging the free market gives them the flexibility to succeed in a globalized economy.
Threats to America's Free Market Status
Deficit spending threatens the U.S. status as a free-market country. Federal revenue doesn't cover spending. Each year the deficit adds to the debt. This happens when the debt-to-GDP ratio is more than 100% because the national debt is more than the country's annual economic output.
When the debt-to-GDP ratio extends beyond the World Bank's recommended max of 77%, investors often become reluctant to invest in the country by buying its debt. Yields rise, increasing interest rates. That can slow economic growth in the long run.
Economists debate the solution to the deficit problem, but one way to address it is through spending strategically to stimulate the economy, creating more jobs and increasing production while reducing overall expenses. For example, a 2011 report by the Political Economy Research Institute found that $1 billion in military spending added 11,200 jobs, while $1 billion in education spending created 26,700 jobs. More jobs mean more spending, so the argument goes, which raises production and decreases the debt-to-GDP ratio and stimulates the free market.
The Bottom Line
The dance between the free market and government intervention has always been a delicate one in the U.S. Economists and politicians will continue to debate the Founding Fathers' vision, and policies will change with different administrations. One thing is for sure though: America's system will continue to mix elements of free-market and command economies as long as there are any social programs in place to promote the general welfare.
Frequently Asked Questions (FAQs)
Is the stock market a free market?
Like the U.S. economy, the stock market employs many free-market values, but it isn't a perfectly free market. Authorities in the public and private sectors have designed regulations to enhance stability. For example, securities exchanges can halt trading when there's a significant news event or when there's a significant imbalance between buyers and sellers.
How are exchange rates determined in a free market?
Supply and demand determine currency exchange rates in a free market. Not all governments allow their currencies to float freely on the forex market, but many do, and the prices for those currencies fluctuate with market sentiment.