436 CHAPTER 14|ECONOMIC AND SOCIAL POLICY
PROMOTING THE FREE MARKET AND GROWTH
The American economy is a capitalist system, which means that most economic
decisions are voluntarily made between individuals and fi rms for their mutual
benefi t. The government generally stays out of most economic activity, except to
regulate the market when it produces too much of something that is not in the
public’s interest, such as pollution or unsafe products. Economists tout the advan-
tage of the free market as promoting the most effi cient use of resources. Economic
growth is also a central goal, for a growing economy provides a better standard of
living for each generation.
The government does not get directly involved in most economic transac-
tions, but it can provide the foundation for a strong free market and economic
growth. The government protects property rights so that businesses that invest
in the growth of their company know that another fi rm or the government can-
not take away their property. The foundation for the free market is also provided
by secure and transparent capital markets through the oversight of the Securi-
ties and Exchange Commission, and through a secure banking system as ensured
by the Federal Deposit Insurance Corporation and the Federal Reserve System.
Moreover, the government supports the economic infrastructure by subsidiz-
ing the transportation system and regulating the telecommunication system. It
accomplishes this through public works such as building the interstate highway
system in the 1950s and 1960s, and by promoting economic growth with support
of research in the sciences and medicine through agencies such as the National
Science Foundation and the National Institutes of Health.
As we will see later in the chapter, the economic meltdown of 2008–09 raised
basic questions about the effi ciency of economic markets and the need for more
regulation of the fi nancial sector.BALANCED BUDGETS
Maintaining a balanced budget has been a central economic goal since the 1980s,
when budget defi cits skyrocketed (see Figure 14.3A and Nuts and Bolts 14.1).
Large defi cits are a concern for several reasons. First, they take a big bite out of
current spending. About $258 billion, or 7.3 percent, of the 2012 fi scal year budget
went to fi nancing the federal debt. These dollars went to people who own federal
bonds and securities; the monies did not buy a single uniform for a soldier, highway
exit ramp, or student loan. Second, the total federal debt is a burden on future gen-
erations. Each man, woman, and child in the United States in eff ect carries more
than $51,386 of federal debt. (Total debt has grown steadily; see Figure 14.3B.)TRADE-OFFS AMONG ECONOMIC POLICY GOALS
One challenge facing economic policy makers is that it is diffi cult to “have it all.”
The period of economic growth, low unemployment, and low infl ation with falling
budget defi cits that the United States enjoyed through much of the 1990s was rela-
tively unusual. Typically, at least part of the economy is not performing well and
some goals are not being met, so policy makers must tread carefully when address-
ing economic problems to ensure that they do not ma ke some other problem worse.ONE IMPORTANT WAY THAT THE
government supports the free
market and economic growth is
by promoting the stability of the
banking system. The Federal
Deposit Insurance Corporation
(FDIC) bolsters confi dence in
banks by insuring each account
holder’s deposits in its member
banks up to $250,000.
balanced budget A spending plan
in which the government’s expendi-
tures are equal to its revenue.
budget defi cits The amount by
which a government’s spending
in a given fi scal year exceeds its
revenue.