America Is Not Really a Free Market Economy

BY
KIMBERLY AMADEO
https://www.thebalance.com/america-is-not-really-a-free-market-economy-3980689
Updated March 19, 2020

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. 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
their own idea of happiness. That pursuit drives the entrepreneurial spirit that capitalism
needs. The Founding Fathers said in the Declaration of Independence that each American
should have an equal opportunity to pursue their personal vision.1 They based the
Constitution, the highest law in the land, to protect that right.2

The Constitution also instructs the federal government to "promote the general welfare."

That 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 the general welfare. 3 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 $1.1 trillion. 4 The second largest is military spending. It's $934
billion in Fiscal Year 2021.5 That's if you add Overseas Contingency Operations to the
Defense Department base budget. Also included is defense support departments such as
Homeland Security and Veterans Administration. The nation's third-largest priority is health
care. Medicare costs $679 billion and Medicaid costs $418 billion.

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.

Key Takeaways

 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.
 Congress can cut spending without lowering growth by prioritizing job creation.

America Is a Mixed Economy

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 each 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 call to mind Russia, China, Cuba, North
Korea, or Iran. But even these countries have adopted the 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.
Threats to America's Free Market Status

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%. That's beyond the World Bank's tipping point of 77%. 6

How to Restore America's Free Market Status

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 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.7 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. At the same time, spending should be capped at current levels. Over
time, that will restore the debt-to-GDP ratio to a sustainable level.