The United States has a mixed economy. It works according to an economic system that features characteristics of both capitalism and socialism. A mixed economic system protects some private property and allows a level of economic freedom in the use of capital, but also allows for governments to intervene in economic activities in order to achieve social aims and for the public good.
- The U.S. has a mixed economy, exhibiting characteristics of both capitalism and socialism.
- Such a mixed economy embraces the free market when it comes to capital use, but it also allows for government intervention for the public good.
- The U.S. government controls part of the economy with restrictions and licensing requirements, in areas like education, roads, hospital care, and postal delivery.
- The federal government provides a limited welfare state to reduce the effects of extreme poverty.
- The government also intervenes through the financial reserve, by adjusting the costs for businesses to borrow money.
How the U.S. Government Impacts the Economy
The U.S. government has always played a role in the economic affairs of the nation. Over the course of its history, many services began to come under the influence or direct control of the public sector. During some periods in U.S. history, however, it was closer to a true free-market economy, where the private sector was largely unrestricted in its economic activity.
A "true" or "absolute" free market economy requires that all property be owned by private individuals and all goods and services be privately provided. Prices are allowed to fluctuate based on supply and demand, and all transactions are voluntary, not compelled, or restricted by the government. This system is also referred to as "pure capitalism" or "laissez-faire capitalism."
Conversely, a mixed economy has elements of both free markets and economic intervention by the government. There are several different ways market economies are changed in a mixed economy. Governments might place restrictions on voluntary transactions, such as licensing or regulatory requirements.
Governments might also own public property or provide public services and use tax policies or subsidies to change the price signals in the market. In a mixed economy, many private transactions are allowed but only under conditions subject to the government's goals.
The number of civilian employees of the federal government, as of June 2022.
Elements of a Mixed Economy
The U.S. government controls or partially controls many goods or services, such as education, courts, roads, hospital care, and postal delivery. It also provides subsidies to agricultural producers, oil companies, financial companies, and utility firms. For example, private individuals cannot legally provide or purchase certain types of goods, such as cocaine, haggis, raw milk (in some states), and most types of flavored cigarettes. Other products face heavy taxation to discourage their use.
In the U.S., private businesses need to register with government agencies, and many types of professionals can only operate with government-approved licenses, including funeral attendants, auctioneers, private investigators, makeup artists, hairstylists, real estate agents, and financial advisers.
Nearly every type of business and every form of economic exchange is affected by government policy in the U.S. The Food and Drug Administration (FDA) must approve consumable foods and medicines before they can be sold and requires producers to provide very specific disclaimers. Businesses can only advertise their goods and services if they comply with the Federal Trade Commission (FTC). The hiring, compensating, and firing of employees must comply with the Fair Labor Standards Act (FLSA), the Employee Retirement Income Security Act (ERISA), and many other regulations from agencies such as the Department of Labor (DOL).
The U.S. government keeps partial control over the economy with regulatory restrictions, such as licensing or banning certain activities.
The U.S. government also plays a role in the economy via financial policies that can influence inflation and business production. The Federal Reserve is charged with controlling monetary policy (which has to do with the quantity, velocity, and availability of the circulating money supply), and Congress and the executive branch handle fiscal policy (which focuses on government revenue and spending).
Expansionary monetary policy aims to inject liquidity, stimulate lending and spending, and discourage savings. Contractionary policy is supposed to reduce aggregate demand, encourage savings, slow down the rate of inflation, or burst asset bubbles. If an expansionary policy is analogous to pushing on the gas pedal, then the contractionary policy is stepping on the brakes.
Other Types of Economic Systems
An economy encompasses all of the activities related to the production, consumption, and trade of goods and services in an entity. Economic systems can be categorized into four main types: traditional economies, command economies, market economies, and mixed economies.
- Traditional: A traditional economy is based on goods, services, and work, all of which rely on customs, history, and time-honored beliefs. Tradition guides economic decisions such as production and distribution. Societies with traditional economies depend on agriculture, fishing, hunting, gathering, or some combination of them, and there is very little division of labor or specialization. The traditional economy is very basic and the most ancient of the four types.
- Command: In a command economy, a central governmental authority controls the economic structure and dictates the levels of production and the prices that may be charged for goods and services. It's also known as a planned system and is common in communist societies.
- Market: A market economy is based on the concept of free markets. There is very little government interference and control over resources. Any economic decision and the pricing of goods and services are guided by the interactions of a country's individual citizens and businesses as well as the relationship between supply and demand.
How Does the Federal Government Control the Economy?
In the United States, the federal reserve intervenes in economic activity by buying and selling debt. This affects the cost of lending money, thereby encouraging or discouraging more economic activity by businesses.
Does the U.S. Have a Welfare State?
The United States has a limited welfare state that is intended to reduce the effects of extreme poverty. Examples of these policies include the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps, or Medicaid, which provides health care assistance to those with limited incomes.
Government subsidies, that is, financial contributions granted to private companies to help them keep the price of a commodity or service low, have also a role as a means to increase welfare. As of Q2 2022, the federal government spent over $157 billion in subsidies.
Does the U.S. Have State-Owned Enterprises?
The federal government has several government-sponsored enterprises that generate revenue for the federal government, although this is not their primary purpose. Freddie Mac and Fannie Mae lend money for residential mortgages, thereby facilitating homeownership among people who might not otherwise qualify for a loan. The United States Postal Service also generates revenue from its business activities, although this is typically less than its expenses.
The Bottom Line
While U.S. politicians tend to be highly committed to free market values, the government also intervenes regularly in economic affairs. In fact, the public sector has an enormous impact on the American economy. By providing public goods and services like education, military protection, federal highways, and national parks, the U.S. government impacts the U.S. economy. These goods and services are paid for with tax revenue, which highlights another role of government: redistribution of income. Public sector employment is also a way of reducing unemployment in the short term, and it can create demand in other sectors of the economy.