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Economic Systems and the United States Economy
There are three different economic systems that exist in today’s world. A capitalist system is one in which individuals and corporations own the means of production and work to earn a profit for themselves. These business owners make important decisions on how the business will operate. A capitalist system is sometimes called a free enterprise system. This means that individuals are free to create and run their own businesses. In such a system, businesses must compete with one another in order to get customers and make money. Competition usually helps keeps prices from rising too high and gives consumers choices. Sometimes when one competing business does so well that it drives other competitors out of business, a monopoly is created. A monopoly is a business that sells a unique product or service that no one else sells, thus making it so there is no competition. This is dangerous to consumers because it can make prices too high.

Price is controlled by the laws of supply and demand. The supply of a good or service is how much is available for sale. The demand is the desire of potential buyers to purchase the good or service. If the supply is higher than the demand, then there are too many items that are not selling and the price will go down. If the demand is too high and there are not enough goods to go around, the price will rise.

A communist system is one in which the government, or the people collectively, owns the means of production and the profit made is divided amongst the people. Land is also collectively owned. Individuals do not have the right to owning private property. In theory, the ideas of communism were designed to benefit the workers and allow everyone to share equally the benefits of their labor. When put into practice, however, this did not work according to plan. Communist nations generally developed dictatorship forms of government, and the government took control of the wealth and divided a very small share amongst the people. Today, communist systems exist to some degree in Cuba, North Korea and China.

Socialism is a system similar to communism. In a socialist system, industry is nationalized. The government equally distributes necessities and services to the people. Taxes tend to be high in socialist countries because of the cost associated with providing these services. Critics of socialism believe the system is unfair because it does not allow for individuals to make decisions on how to use their income. Supporters of socialism believe it is a fair system, and that capitalism leads to inequality among citizens.

The American economic system is considered a capitalist system, although it is actually a mixed economy. A mixed economy is one in which individuals and corporations own the means of production, however the government is heavily involved through regulations, taxation, and other means. The American government places restrictions on businesses such as regulating minimum wage and maximum working hours, requiring businesses to pay taxes, and placing other restrictions on how businesses operate. The government also has laws and policies designed to protect consumers from monopolies.


Uriah Stephens – Early American labor leader
and co-founder of the Knights of Labor
Much of how the government regulates businesses has evolved over time throughout American history. Originally, there government did not get involved in business operations. During the late nineteenth century, workers began protesting their treatment by the employers. It was common for workers to work six days per week, 12-14 hours per day. Wages were generally low, and many working class families had both adults and even some of their children working full time jobs in order to survive. Organizations began to form to seek protections for workers.

The Knights of Labor was one such organization. They were a fraternal organization that worked to get laborers a five-day workweek and an eight-hour workday. This is currently the working situation for many laborers in the United States today. Although the group no longer exists, many of their accomplishments still affect American workers

Image of a Cement plant representative of manufacturing
With increased communication and modern technology, major industrial nations such as the United States are part of a global economy. The United States trades goods with many other nations. You’ve probably noticed that many goods you own are made in other nations. Many goods are manufactured in China, Taiwan, India and other Asian nations. Japan manufactures many electronics, technology related products, and automobiles. As time progresses, the American economy gets more and more goods from other nations and manufactures fewer goods domestically.

Foreign made goods are often cheaper to produce due to the lower labor costs in other nations, for example, and this is one reason that many American companies are seeking to outsource labor. Outsourcing is when companies have their products manufactured by other companies, often in other countries, instead of manufacturing them themselves. Many companies simply import goods instead of manufacturing them, and sell them to retailers who then sell them to consumers.

Two major economic problems that affect the nation and individual citizens are inflation and unemployment. The unemployment rate is calculated by the Bureau of Labor Statistics and is based on the percentage of people who do not have jobs but are actively seeking employment. If someone does not have a job, but is not seeking employment, they are not considered unemployed. Unemployment rates vary, but over the years of 1980-2005, it fluctuated between 4% and 10%. The lower the rate, the more people that are employed. Those with greater education levels and more job experience are less likely to be unemployed. Therefore, young workers and those without a college education are more likely to be unemployed. Members of racial minorities are also more likely to be unemployed.

Map of the United States illustrating the unemployment distribution in 2004
Inflation is the term for the rise in prices of general consumer goods. This figure is based on a calculation called the Consumer Price Index (CPI). The CPI is calculated by taking the prices of a specific group of items at various points in time and comparing them to the prices of the same objects at different times to see how prices change. Inflation is inevitable, and prices will go up over time, but a healthy economy is one in which the inflation rate is not too high. Over the past decade, inflation rates have been generally low, around 2% in 2003, but peaked close to 14% in the late 1970s. Economists generally like to see low unemployment and low inflation as an indicator of a healthy economy.


The red line indicates American Inflation Rates 1913– 2006

Photogrpah of the Federal Reserve
Monetary policy is a term that deals with how the supply of money is manipulated by the government to control the economy. In 1913, Congress created the Federal Reserve System, known as the Fed, to control monetary policy in America. The Fed controls how much money is actually produced and they control interest rates on loans and bank accounts. The Fed buys and sells government bonds, and they determine how much money banks can lend through loans. The Fed direction and indirectly affects economic issues such as inflation, unemployment and interest rates, therefore having a large impact on the overall economy. The Fed’s decisions to alter interest rates are of interest to economists and also have an effect on the stock market.


Question Number 1	Points: 5.00/5.00
Question Text
An economic system wherein individuals and corporations own the means of production and work to earn a profit for themselves is called
Your Answer
B. a capitalist system.
Question Number 2	Points: 5.00/5.00
Question Text
A system where individuals are free to create and run their own businesses is sometimes referred to as
Your Answer
B. a free enterprise system.
Question Number 3	Points: 5.00/5.00
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The term for a rise in prices of general consumer goods is
Your Answer
C. inflation.
Question Number 4	Points: 5.00/5.00
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Which of the following describes a monopoly?
Your Answer
D. a business that sells a product or service unavailable anywhere else.
Question Number 5	Points: 5.00/5.00
Question Text
In a capitalist system, prices are controlled by
Your Answer
A. the law of supply and demand.
Question Number 6	Points: 5.00/5.00
Question Text
Collective ownership" of the means of production. with profits divided among the people is a somewhat theoretical description of which economic system?
Your Answer
D. a communist system.
Question Number 7	Points: 5.00/5.00
Question Text
A major reason for the practice of outsourcing is
Your Answer
B. lower labor costs.
Question Number 8	Points: 5.00/5.00
Question Text
Which of the following is true of a mixed economy?
Your Answer
D. All of the above
Question Number 9	Points: 5.00/5.00
Question Text
An economic system wherein industry is nationalized and the government distributes necessities and services to its people is know as
Your Answer
C. a socialist system.
Question Number 10	Points: 5.00/5.00
Question Text
The comparison of the prices of a specific group of items over a period of time is known as
Your Answer
C. the Consumer Price Index.


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Revenue and Expenditures
In order to fund its programs, the government must bring in money. Revenue is another word for income. The government needs to have money in order to spend money. The biggest sources of revenue for the government are taxes and borrowing. An expenditure is another word for an expense. To determine how money should be spent, the government creates an annual budget and considers expected revenue and expenditures for the year.

Symbol of the Internal Revenue Service
Income Tax
Income tax is one of the main sources of government revenue. An income tax is a portion of individual earnings paid to the government. The federal income tax was created in 1913 by the passage of the Sixteenth Amendment. Since 1950, the individual income tax has been the single largest source of federal income. The Internal Revenue Service (IRS) is the government agency that collects taxes. Congress makes tax laws, but it is the IRS that collects taxes. In 2010, the IRS collected 2.3 trillion dollars in income taxes.

Over time, the IRS developed a reputation for aggressively enforcing tax laws. This was unpopular with taxpayers. To address this problem, Congress passed the IRS Restructuring and Reform Act of 1998. This act reformed questionable IRS practices and improved the relationship between taxpayers and the IRS. Another significant reform involved the creation of an independent oversight board to monitor IRS practices. A new taxpayer advocate position was also established within the IRS. It enabled the agency to allow taxpayers more flexibility in repaying their debts and placed new conditions on audits.

Both individuals and corporations must pay income taxes. However, the tax rates vary. The federal income tax is a progressive tax. It requires wealthier individuals to pay a higher percentage of income tax. People who earn less money pay fewer taxes. According to the nonpartisan Congressional Budget Office, the top 20% of the wealthiest taxpayers owned 85% of the nation’s total wealth in 2007. This group paid 68.9% of all tax dollars collected by the government that year. The remaining 80% of U. S. taxpayers owned 15% of the nation’s total assets in 2007. They paid 31.1% of the total tax dollars collected. These seemingly paradoxical statistics pose difficult questions for policymakers. Are the rich over taxed? If so, why do they control such a large percentage of the nation’s total wealth? Can the nation maintain financial and social stability when the majority of US citizens own such a small share of its wealth? Does this inequality suggest that the wealthiest are under taxed? These issues are the subject of heated debate both within the government and among the public.


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Revenue and Expenditures
Social Security
The government also collects social insurance taxes. Federal Income Contribution Act (FICA) taxes support Social Security and Medicare programs. They make up a large percentage of government revenue. Like income taxes, these payroll taxes are deducted directly from employees’ paychecks and deposited into special government trust funds.

The Social Security Trust Fund pays benefits to the elderly, disabled, widowed, and the unemployed. However, this fund is not receiving enough deposits. As the number of retirees increases, and the number of workers stays the same or decreases, more people are collecting money from the fund than are paying into it. Many approaches to ensuring the solvency of Social Security have been proposed in recent years. Some policymakers suggest that the retirement age should be raised. They also suggest that taxpayers should pay more withholding tax. Another proposal is to limit those who claim Social Security based on need. Some even advocate privatizing Social Security. This approach would allow people to invest their money for themselves instead of allowing the government to manage it. They argue that this type of change might allow people to generate more wealth than they could through the Social Security system. However, critics of this approach worry that it would make retirement savings more vulnerable to the volatility of the stock market. They claim that the combination of private investment and Social Security offers more security than either system can promise on its own. Congress has yet to make any concrete decisions concerning the future of Social Security.

Federal Debt
Borrowing is another way that the government gets money. Citizens and financial institutions purchase treasury bonds, and in return, the government promises to pay them interest. Most government borrowing pays for daily operating expenses. The federal debt has been increasing over time because annual budgets reflect higher expenditures than revenues. As of July 1, 2012, the federal debt (money the government owes) was nearly 16 trillion dollars.

Expenditures
Federal government expenditures are manifold. They include things such as national defense, salaries for federal employees, the cost of government operations, entitlement programs, and interest on the national debt. Entitlements are benefits that the federal government promises to those who meet eligibility requirements. These services include Social Security, Medicare, food stamps, and unemployment compensation. Many government expenditures are discretionary, but some are uncontrollable. For example, the government is required to pay entitlements and interest on the debt regardless of revenue. If it failed to do so, the consequences would be devastating. People who depend on entitlements would be unable to survive, and government creditors would suffer enormous losses. A federal default would undermine confidence in the stability of the dollar. It could also do serious damage to the global economy, and perhaps trigger a worldwide recession.


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Revenue and Expenditures
Practice Activity

Use the Internet and research the following questions about US federal budgets and budgets from your own state:

What are the largest categories of expenditures for both the federal government and the state government?
How much of the federal budget is flexible? What part of your state government uses a flexible spending pattern?
How much of the federal budget is devoted to entitlements? Does your state government devote money to entitlement programs?
Based on your research, how does your state’s level of public debt compare to the federal debt?
In your opinion, how well are the debts and obligations being handled by the federal and state governments?
The Minnesota State Budget

The State of Minnesota has a biennial operating budget. The state budget includes spending on education, roads and bridges, healthcare, technology, public safety, and health care. Agriculture, housing, natural resources, higher education, and economic development, and local governments are also included in the operating budget.

Where does the state of Minnesota get its money? According to the Minnesota House of Representatives, the state collected $22.4 Billion in taxes in 2006. Ninety-seven percent of this revenue came from five sources:

Individual income taxes: 30.51%
Sales tax, including motor vehicle sales: 24.76%
Property taxes: 23.75%
Excise taxes: 13.04%
Corporate income taxes: 4.77%
In 2006, Minnesota ranked eighth for highest individual income tax burden among states. The average citizen paid $1,332 in state and local income taxes compared to $899 nationwide. However, Minnesotans pay fewer property taxes and sales taxes than people in other states.


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Budget-Making Process
The federal budget is the plan for how money will be handled during the course of a given year. The annual budget includes plans for revenue that is expected to come in and spending plans for what expenditures will be given how much money. The process of making the federal budget has many steps and involves many parties. It is very complicated, and begins over a year before the new budget will go into effect. The budget impacts the nation greatly by impacting what programs get how much money, and this trickles down to impact the people directly.

The process is done with the join effort of the Executive Branch and Congress. The budget process goes through the following steps:

Each federal agency drafts detailed estimates for how much money they feel their agency will need during the budget period.
These estimates are submitted to the Office of Management and Budget (OMB), the executive branch agency that assists the president in his work on the budget.
The OMB reviews the budget proposals. Agencies representatives are often called into hearings to justify their monetary requests.
The OMB revises the spending plans for the agencies after concluding its research. It then drafts the president’s version of the budget which, following the president’s approval, is sent to Congress.
The Congressional Budget Office (CBO) works with budget committees in both houses of Congress to study the president’s budget.
The House and Senate’s Appropriations Committees also analyze the president’s budget proposal. These committees do research and present their findings and suggestions to the floor of each house of Congress.
The budget committees in both the House and Senate work together to create a final version of the budget.
Many different groups have an impact on the budgetary process.

Interest groups lobby government agencies in an attempt to influence their budgetary requests.
Government agencies generally request more money than they really need because they know that cuts will be made to the final budget
The OMB represents the president in the budget-making process because there is simply too much involved in the process for the president to do everything himself.
The president must approve the version of the budget put together by the OMB before it goes to Congress. The president unveils the proposed budget to Congress and works to try to convince Congress to pass a version of the budget as close to his version as possible.
The Senate Finance Committee and the House Ways and Means Committee make decisions relating to tax codes, which affects the amount of money that the government brings in from taxes.
The CBO is equivalent to the executive branch’s OMB. It controls the budgetary process in the legislative branch.
Other Congressional committees work to get money for their pet projects by publicizing positive things that have been done with the funds from the previous years.
The House and Senate Appropriations Committees decide who gets what by holding hearings relating to individual budget requests from agencies.
Congress, as a whole, makes the final decisions on taxes and appropriations.
The Government Accounting Agency (GAO) is responsible for monitoring and evaluating what the agencies are doing with the money, and auditing agencies if necessary.
Balancing the budget has been a concern in recent years, and it is very difficult to achieve. Recent years’ budgets have been running in a deficit. A deficit is a budget that plans to bring in less money than it spends and increases the debt. Having a budget deficit year after year increases the national debt. During the term of President Bill Clinton, the budget deficit was shrinking and it appeared that a balanced budget was on the horizon. More recently, however, the deficit has been growing again. In order to balance the budget, one of two things must happen – revenue must increase, or expenditures must decrease. To increase revenue, the government must increase taxes. This, of course, is not a popular idea with voters and citizens in general. To decrease expenditures, cuts must be made. Whatever cuts are made, some programs must be cut and someone suffers as a result. These are all very difficult decisions and cannot be made hastily.



Question Number 1	Points: 5.00/5.00
Question Text
Many of the expenditures of the government are considered uncontrollable expenditures. Which of the following would not be an uncontrollable expenditure?
Your Answer
D. salaries for federal officials.
Question Number 2	Points: 5.00/5.00
Question Text
The agency that assists the president in developing the budget is known as
Your Answer
C. the Office of Management and Budget.
Question Number 3	Points: 5.00/5.00
Question Text
The government agency that collects taxes is the
Your Answer
C. Internal Revenue Service.
Question Number 4	Points: 5.00/5.00
Question Text
Which of the following is true of the federal budget?
Your Answer
A. It is a joint process of the executive branch and Congress.
Question Number 5	Points: 5.00/5.00
Question Text
The government's annual plan for revenue and expenditures is know as the
Your Answer
B. federal budget.
Question Number 6	Points: 5.00/5.00
Question Text
A government expenditure is
Your Answer
C. money spent on programs, services, needs.
Question Number 7	Points: 5.00/5.00
Question Text
The biggest sources of revenue for the government are
Your Answer
B. taxes and borrowing.
Question Number 8	Points: 5.00/5.00
Question Text
Money that the government owes is called
Your Answer
D. the Federal Debt.
Question Number 9	Points: 5.00/5.00
Question Text
Which of the following is true of a deficit?
Your Answer
D. All of the above.
Question Number 10	Points: 5.00/5.00
Question Text
Congress impacts the federal budget through the
Your Answer
D. All of the above.