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, in which the private sector, or individuals, is unfettered in its economic behavior, actions, and decisions.​

​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 economic system has elements of both free markets and centrally planned economic controls by the government. There are several different ways market economies are changed in a mixed economy. Governments might place regulatory restrictions on voluntary transactions in the private market. Private establishments might require government-granted licenses to perform certain activities. Some activities might be banned altogether.

Governments might also own public property or provide public services and use tax policy or subsidies to change the price signals in the market. In a mixed economy, many private transactions are allowable but only under conditions subject to the government’s goals.​

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.1 Businesses can only advertise their goods and services if they comply with the Federal Trade Commission (FTC).2 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).3​

​The U.S. government keeps partial control over the economy with regulatory restrictions, such as licensing

or banning certain activities. ​

Financial Policies​

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).4​

​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.​

​The Bottom Line​

The list of laws, regulations, and other impediments to completely voluntary transactions in the economy

is cataloged in the Federal Register of the United States.5 The public sector has, in fact, had an enormous

impact on the American economy.​