1 Overview

The United States has the largest economy by country, second-largest by economic union (after the EU), and most technologically powerful economy in the world, with a per capita GDP of $39,689 (2nd Quarter 2004 annualized) . In this market-oriented economy, private individuals and business firms make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy considerably greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products. At the same time, they face higher barriers to entry in their rivals' home markets than the barriers to entry of foreign firms in US markets. US firms are at or near the forefront in technological advances, especially in computers and in medical, aerospace, and military equipment, although their advantage has narrowed since the end of World War II.

The onrush of technology largely explains the gradual development of a "two-tier labour market" in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits. Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an aging population, sizable trade deficits, and stagnation of family income in the lower economic groups.

2 Recent US economic history

In 1929, the US stock market crashed, and the US economy plunged into a depression. By 1932, the unemployment rate was 23.6%, and worker militancy was rising, including the Bonus march on Washington, DC, where the US army was called out to violently suppress a demonstration by World War I veterans for an earlier distribution of veteran benefits ("bonuses"). U.S. President Franklin Delano Roosevelt was elected later that year, as well as a slate of Democratic " New Dealers". By the early 1940s, after years of a combination of New Deal social-democratic policies, as well as federal money for armament for World War II, the US economy had managed to pull itself out of the depression. The US government involvement in social welfare and what Dwight Eisenhower called the " military-industrial complex" continues to this day.

The end of World War II to the late 1960s was a golden era of American capitalism. The middle class swelled, as did GDP and productivity. The US underwent a kind of golden age of economic growth for about two decades. This growth was distributed fairly evenly across the economic classes, which some attribute to the strength of labour unions in this period - labour union membership peaked historically in the US during the 1950s, in the midst of this massive economic growth. The US government financed much of private industry's research and development throughout these decades, and began specifically funding of R&D of what would become the Internet in the late 1960s.

In the late 1960s it was apparent to some that this juggernaut of economic growth was slowing down, and it began to become visibly apparent in the early 1970s. This was an era of stagflation, and the decade-long reign of the liberal economic ideas of Keynes and his worldwide Bretton Woods system came to an end. The conservative monetarist ideas of people like Milton Friedman came to the fore. The next few decades would see much slower GDP growth than had been seen from the 1940s to the 1960s. Economic inequality increased sharply in this time. Workers fared poorly - according to the US Bureau of Labour Statistics , the average inflation-adjusted hourly wage has decreased over the past 35 years. In other words, workers made more per hour, adjusted for inflation, in 1969, than they do in 2004. Disposable personal income, adjusted for inflation, has nonetheless more than doubled over the same period, as have personal consumption expenditures, according to the Bureau of Economic Analysis.

After several decades of US taxpayer financing of research and development of the Internet, the Internet project was opened up for commercial traffic on its backbone in 1994. The years 1994 - 2000 witnessed solid increases in real output, low inflation rates, and a drop in unemployment to below 5%. The year 2000 witnessed the end of the boom psychology and performance, with a growth rate of only 1.4% in the last three months. The situation worsened in 2001 with output increasing only 0.3% and unemployment and business failures rising substantially. The response to the terrorist attacks of September 11 showed the remarkable resilience of the economy. Since those attacks, the economy has continued to grow, albeit at an uneven pace.

3 Basic Ingredients of the U.S. Economy

The first ingredient of a nation's economic system is its natural resources. The United States is rich in mineral resources and fertile farm soil, and it is blessed with a moderate climate. It also has extensive coastlines on both the Atlantic and Pacific Oceans, as well as on the Gulf of Mexico. Rivers flow from far within the continent, and the Great Lakes -- five large, inland lakes along the U.S. border with Canada -- provide additional shipping access. These extensive waterways have helped shape the country's economic growth over the years and helped bind America's 50 individual states together in a single economic unit.

The second ingredient is labour, which converts natural resources into goods. The number of available workers and, more importantly, their productivity help determine the health of an economy. Throughout its history, the United States has experienced steady growth in the labour force, and that, in turn, has helped fuel almost constant economic expansion. Until shortly after World War I, most workers were immigrants from Europe, their immediate descendants, or African Americans whose ancestors were brought to the Americas as slaves. In the early years of the 20th century, large numbers of Asians immigrated to the United States, while many Latin American immigrants came in later years.

Although the United States has experienced some periods of high unemployment and other times when labour was in short supply, immigrants tended to come when jobs were plentiful. Often willing to work for somewhat lower wages than acculturated workers, they generally prospered, earning far more than they would have in their native lands. The nation prospered as well, so that the economy grew fast enough to absorb even more newcomers.

The quality of available labour -- how hard people are willing to work and how skilled they are -- is at least as important to a country's economic success as the number of workers. In the early days of the United States, frontier life required hard work, and what is known as the Protestant work ethic reinforced that trait. A strong emphasis on education, including technical and vocational training, also contributed to America's economic success, as did a willingness to experiment and to change.

Labour mobility has likewise been important to the capacity of the American economy to adapt to changing conditions. When immigrants flooded labour markets on the East Coast, many workers moved inland, often to farmland waiting to be tilled. Similarly, economic opportunities in industrial, northern cities attracted black Americans from southern farms in the first half of the 20th century.

Labour-force quality continues to be an important issue. Today, Americans consider "human capital" a key to success in numerous modern, high-technology industries. As a result, government leaders and business officials increasingly stress the importance of education and training to develop workers with the kind of nimble minds and adaptable skills needed in new industries such as computers and telecommunications.

But natural resources and labour account for only part of an economic system. These resources must be organized and directed as efficiently as possible. In the American economy, managers, responding to signals from markets, perform this function. The traditional managerial structure in America is based on a top-down chain of command; authority flows from the chief executive in the boardroom, who makes sure that the entire business runs smoothly and efficiently, through various lower levels of management responsible for coordinating different parts of the enterprise, down to the foreman on the shop floor. Numerous tasks are divided among different divisions and workers. In early 20th-century America, this specialization, or division of labour, was said to reflect "scientific management" based on systematic analysis.

Many enterprises continue to operate with this traditional structure, but others have taken changing views on management. Facing heightened global competition, American businesses are seeking more flexible organization structures, especially in high-technology industries that employ skilled workers and must develop, modify, and even customize products rapidly. Excessive hierarchy and division of labour increasingly are thought to inhibit creativity. As a result, many companies have "flattened" their organizational structures, reduced the number of managers, and delegated more authority to interdisciplinary teams of workers.

Before managers or teams of workers can produce anything, of course, they must be organized into business ventures. In the United States, the corporation has proved to be an effective device for accumulating the funds needed to launch a new business or to expand an existing one. The corporation is a voluntary association of owners, known as stockholders, who form a business enterprise governed by a complex set of rules and customs.

Corporations must have financial resources to acquire the resources they need to produce goods or services. They raise the necessary capital largely by selling stocks (ownership shares in their assets) or bonds (long-term loans of money) to insurance companies, banks, pension funds, individuals, and other investors. Some institutions, especially banks, also lend money directly to corporations or other business enterprises. Federal and state governments have developed detailed rules and regulations to ensure the safety and soundness of this financial system and to foster the free flow of information so investors can make well-informed decisions.

The gross domestic product measures the total output of goods and services in a given year. In the United States it has been growing steadily, rising from more than $3.4 trillion (3.4 T$) in 1983 to around 8.5 T$ by 1998. But while these figures help measure the economy's health, they do not gauge every aspect of national well-being. GDP shows the market value of the goods and services an economy produces, but it does not weigh a nation's quality of life. And some important variables -- personal happiness and security, for instance, or a clean environment and good health -- are entirely beyond its scope.

4 A Mixed Economy: The Role of the Market

The United States is said to have a mixed economy because privately owned businesses and government both play important roles. Indeed, some of the most enduring debates of American economic history focus on the relative roles of the public and private sectors.

The American free enterprise system emphasizes private ownership. Private businesses produce most goods and services, and almost two-thirds of the nation's total economic output goes to individuals for personal use (the remaining one-third is bought by government and business). The consumer role is so great, in fact, that the nation is sometimes characterized as having a "consumer economy."

However, like in all modern economies, there are limits to free enterprise and private ownership. Americans generally agree that some services are better performed by public rather than private enterprise. For instance, in the United States, government is primarily responsible for the administration of justice, education (although there are many private schools and training centers), the road system, social statistical reporting, and national defence. In addition, government often is asked to intervene in the economy to correct situations in which the price system does not work. It regulates " natural monopolies," for example, and it uses antitrust laws to control or break up other business combinations that become so powerful that they can surmount market forces.

Government also addresses issues beyond the reach of market forces. It provides welfare and unemployment benefits to people who cannot or will not support themselves, either because they encounter problems in their personal lives or lose their jobs as a result of economic upheaval; it pays much of the cost of medical care for the aged and those who live in poverty; it regulates private industry to limit air and water pollution; it provides low-cost loans to people who suffer losses as a result of natural disasters; and it has played the leading role in the exploration of space, which is too expensive for any private enterprise to handle. All of this is paid for by a system of progressive taxation.

In this mixed economy, individuals can help guide the economy not only through the choices they make as consumers but through the votes they cast for officials who shape economic policy. In recent years, consumers have voiced concerns about product safety, environmental threats posed by certain industrial practices, and potential health risks citizens may face; government has responded by creating agencies which aim to protect consumer interests and promote the general public welfare.

The U.S. economy has changed in other ways as well. The population and the labour force have shifted dramatically away from farms to cities, from fields to factories, and, above all, to service industries. In today's economy, the providers of personal and public services far outnumber producers of agricultural and manufactured goods. As the economy has grown more complex, statistics also reveal over the last century a sharp long-term trend away from self-employment toward working for others.

5 Government's Role in the Economy

While consumers and producers make most decisions that mold the economy, government activities have a powerful effect on the U.S. economy in at least four areas. Strong government regulation in the U.S. economy started in the early 1900s; before that date, it was a nearly pure free market economy.

5.1 Stabilization and Growth

Perhaps most importantly, the federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By adjusting spending and tax rates ( fiscal policy) or managing the money supply and controlling the use of credit ( monetary policy), it can slow down or speed up the economy's rate of growth -- in the process, affecting the level of prices and employment.

For many years following the Great Depression of the 1930s, recessions -- periods of slow economic growth and high unemployment -- were viewed as the greatest of economic threats. When the danger of recession appeared most serious, government sought to strengthen the economy by spending heavily itself or cutting taxes so that consumers would spend more, and by fostering rapid growth in the money supply, which also encouraged more spending. In the 1970s, major price increases, particularly for energy, created a strong fear of inflation -- increases in the overall level of prices. As a result, government leaders came to concentrate more on controlling inflation than on combating recession by limiting spending, resisting tax cuts, and reining in growth in the money supply.

Ideas about the best tools for stabilizing the economy changed substantially between the 1960s and the 1990s. In the 1960s, government had great faith in fiscal policy -- manipulation of government revenues to influence the economy. Since spending and taxes are controlled by the president and the Congress, these elected officials played a leading role in directing the economy. A period of high inflation, high unemployment, and huge government deficits weakened confidence in fiscal policy as a tool for regulating the overall pace of economic activity. Instead, monetary policy -- controlling the nation's money supply through such devices as interest rates -- assumed growing prominence. Monetary policy is directed by the nation's central bank, known as the Federal Reserve Board, with considerable independence from the president and the Congress..

5.2 Regulation and Control

The U.S. federal government regulates private enterprise in numerous ways. Regulation falls into two general categories. Economic regulation seeks, either directly or indirectly, to control prices. Traditionally, the government has sought to prevent monopolies such as electric utilities from raising prices beyond the level that would ensure them reasonable profits. At times, the government has extended economic control to other kinds of industries as well. In the years following the Great Depression, it devised a complex system to stabilize prices for agricultural goods, which tend to fluctuate wildly in response to rapidly changing supply and demand. A number of other industries -- trucking and, later, airlines -- successfully sought regulation themselves to limit what they considered harmful price-cutting.

Another form of economic regulation, antitrust law, seeks to strengthen market forces so that direct regulation is unnecessary. The government -- and, sometimes, private parties -- have used antitrust law to prohibit practices or mergers that would unduly limit competition.

Government also exercises control over private companies to achieve social goals, such as protecting the public's health and safety or maintaining a clean and healthy environment. The U.S. Food and Drug Administration bans harmful drugs, for example; the Occupational Safety and Health Administration protects workers from hazards they may encounter in their jobs; and the Environmental Protection Agency seeks to control water and air pollution.

American attitudes about regulation changed substantially during the final three decades of the 20th century. Beginning in the 1970s, policy-makers grew increasingly concerned that economic regulation protected inefficient companies at the expense of consumers in industries such as airlines and trucking. At the same time, technological changes spawned new competitors in some industries, such as telecommunications, that once were considered natural monopolies. Both developments led to a succession of laws easing regulation.

While leaders of both political parties generally favoured economic deregulation during the 1970s, 1980s, and 1990s, there was less agreement concerning regulations designed to achieve social goals. Social regulation had assumed growing importance in the years following the Depression and World War II, and again in the 1960s and 1970s. But during the presidency of Ronald Reagan in the 1980s, the government relaxed rules to protect workers, consumers, and the environment, arguing that regulation interfered with free enterprise, increased the costs of doing business, and thus contributed to inflation. Still, many Americans continued to voice concerns about specific events or trends, prompting the government to issue new regulations in some areas, including environmental protection.

Some citizens, meanwhile, have turned to the courts when they feel their elected officials are not addressing certain issues quickly or strongly enough. For instance, in the 1990s, individuals, and eventually government itself, sued tobacco companies over the health risks of cigarette smoking. A large financial settlement provided states with long-term payments to cover medical costs to treat smoking-related illnesses.

5.3 Direct Services

Each level of government provides many direct services. The federal government, for example, is responsible for national defence, backs research that often leads to the development of new products, conducts space exploration, and runs numerous programs designed to help workers develop workplace skills and find jobs. Government spending has a significant effect on local and regional economies -- and even on the overall pace of economic activity.

State governments, meanwhile, are responsible for the construction and maintenance of most highways. State, county, or city governments play the leading role in financing and operating public schools. Local governments are primarily responsible for police and fire protection. Government spending in each of these areas can also affect local and regional economies, although federal decisions generally have the greatest economic impact.

Overall, federal, state, and local spending accounted for almost 18 percent of gross domestic product in 1997.

5.4 Direct Assistance

Government also provides many kinds of help to businesses and individuals. It offers low-interest loans and technical assistance to small businesses, and it provides loans to help students attend college. Government-sponsored enterprises buy home mortgages from lenders and turn them into securities that can be bought and sold by investors, thereby encouraging home lending. Government also actively promotes exports and seeks to prevent foreign countries from maintaining trade barriers that restrict imports.

Government supports individuals who cannot adequately care for themselves. Social Security, which is financed by a tax on employers and employees, accounts for the largest portion of Americans' retirement income. The Medicare program pays for many of the medical costs of the elderly. The Medicaid program finances medical care for low-income families. In many states, government maintains institutions for the mentally ill or people with severe disabilities. The federal government provides food stamps to help poor families obtain food, and the federal and state governments jointly provide welfare grants to support low-income parents with children.

Many of these programs, including Social Security, trace their roots to the "New Deal" programs of Franklin D. Roosevelt, who served as the U.S. president from 1933 to 1945. Key to Roosevelt's reforms was a belief that poverty usually resulted from social and economic causes rather than from failed personal morals. This view repudiated a common notion whose roots lay in New England Puritanism that success was a sign of God's favour and failure a sign of God's displeasure. This was an important transformation in American social and economic thought. Even today, however, echoes of the older notions are still heard in debates around certain issues, especially welfare.

Many other assistance programs for individuals and families, including Medicare and Medicaid, were begun in the 1960s during President Lyndon Johnson's (1963-1969) "War on Poverty." Although some of these programs encountered financial difficulties in the 1990s and various reforms were proposed, they continued to have strong support from both of the United States' major political parties. Critics argued, however, that providing welfare to unemployed but healthy individuals actually created dependency rather than solving problems. Welfare reform legislation enacted in 1996 under President Bill Clinton (1993-2001) requires people to work as a condition of receiving benefits and imposes limits on how long individuals may receive payments.

6 Other Statistics

Industrial production growth rate: -4%

Electricity - production: 3,799,944 GWh (2000)

Electricity - production by source: (2000)

• fossil fuel: 71.4%
• hydro: 5,6%
• nuclear: 20.7%
• other: 2.3%

Electricity - consumption: 3,602,000 GWh (2001)

Electricity - exports: 18,170 GWh (2001)

Electricity - imports: 38,480 GWh (2001)

Agriculture - products: wheat, other grains, corn, fruits, vegetables, cotton; beef, pork, poultry, dairy products; forest products; fish

Exports - commodities: capital goods, automobiles, industrial supplies and raw materials, consumer goods, agricultural products

Imports - commodities: crude oil and refined petroleum products, machinery, automobiles, consumer goods, industrial raw materials, food and beverages

Historic Exchange rates: British pounds per US dollar - 0.6981 (January 2002), 0.6944 (2001), 0.6596 (2000), 0.6180 (1999), 0.6037 (1998), 0.6106 (1997); Canadian dollars per US dollar - 1.6003 (January 2002), 1.5488 (2001), 1.4851 (2000), 1.4857 (1999), 1.4835 (1998), 1.3846 (1997); French francs per US dollar - 5.65 (January 1999), 5.8995 (1998), 5.8367 (1997); Italian lire per US dollar - 1,668.7 (January 1999), 1,763.2 (1998), 1,703.1 (1997); Japanese yen per US dollar - 132.66 (January 2002), 121.53 (2001), 107.77 (2000), 113.91 (1999), 130.91 (1998), 120.99 (1997); German deutsche marks per US dollar - 1.69 (January 1999), 1.9692 (1998), 1.7341 (1997); euros per US dollar - 1.1324 (January 2002), 1.1175 (2001), 1.08540 (2000), 0.93863 (1999)
note: financial institutions in France, Italy, and Germany and eight other European countries started using the euro on 1 January 1999 with the euro replacing the local currency in consenting countries for all transactions in 2002

7 Related topics

• Balance of payments
• Poverty in the United States
• Economy of Puerto Rico
• Jobs created during U.S. presidential terms

8 External links

• CIA - The World Factbook - United States
• Outline of the U.S. Economy
• U.S. Census Bureau
• U.S. Dept of Labor - Bureau of Labor Statistics
• U.S. Dept of Commerce - Bureau of Economic Analysis
• Statistical Resources of the U.S.

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