The United States economy has adapted to enormous economic challenges throughout its history. Gross domestic product, or GDP, measures the value of a nation’s products and services.
Americans believe that privately owned businesses have an important role to play in their country’s economy. This emphasis on private ownership reflects the foundation of American values about freedom and personal responsibility.
The Evolution of the American Economy
Whether you go to the grocery store for milk and bread or drive an electric car, you are participating in America’s economy. Your family, the people who work at your local supermarket and the products you buy are all part of an American economy that is the largest in the world.
Early American leaders rejected the idea of the federal government interfering in the economy except to regulate transportation and maintain law and order. But that attitude changed with the rapid growth of industry after the Civil War. New discoveries and inventions propelled America to economic preeminence.
Alexander Hamilton, one of the nation’s Founding Fathers, championed an economic development strategy in which the government nurtured infant industries by offering overt subsidies and imposing protective tariffs on imports. His ideas shaped trade policy until almost the middle of the 20th century. Government intervention in the economy increased in size and scope during this period. American corporations began to grow into huge diversified conglomerates such as General Electric and Sheraton Hotels. The United States also spearheaded the creation of international monetary and financial institutions to promote free trade around the globe.
The Postwar Expansion
After a decade of war, America emerged as the global economic leader. The massive programs of the New Deal – such as the Public Works Administration and the Rural Electrification Project – were continued as the interstate highway system and massive hydroelectric dams were constructed. As the economy grew, labor unions strengthened and middle-class incomes rose.
With pent-up consumer demand from years of rationing and restrictions, Americans began spending heavily. This fueled industrialization and increased consumption of automobiles, appliances and other products. It also facilitated suburbanization as workers moved out of city centers to live in housing developments on the periphery of their work areas.
As a result, direct government allocation of resources via rationing and price controls was ended; private resource allocation took over. Economists were pessimistic about this change, but the economy boomed as resources found their way to other uses.
The New Deal Era
Franklin D. Roosevelt launched an unprecedented program of economic relief, reform and public works. It addressed issues in industry, agriculture, finance, water power, labor and housing.
The programs enacted in 1933 to 1934 put the country on the road to recovery, stabilizing national output and household incomes. They stabilized banks and cleaned up the mess of the stock market crash, allowing credit to flow again. They raised agricultural prices and production through the Agricultural Adjustment Administration, and created public works programs to hire unemployed workers in construction projects, including post offices, schools and bridges. They promoted worker organization through the Wagner Act and established a minimum wage and maximum working hours.
New Deal programs also aided urban residents through libraries, settlement houses, parks facilities and English language instruction. Studies of the effect of New Deal policies have used a variety of instrumental variable techniques that narrow the analysis to aspects of the policy that are not correlated with the outcome variable of interest, but there remains some uncertainty about the identification of effects. In addition, some analyses have struggled with feedback effects from the economy to the policies.
The 1990s
The 1990s saw the economy become increasingly intertwined with the world economy. With the fall of communism in eastern Europe and the dissolution of the Soviet Union, new markets opened up for American exports. Innovations in telecommunications and computer hardware spawned vast new industries. The resulting economic prosperity boosted corporate profits. Stocks soared, and Americans enjoyed a period of low inflation and unemployment.
The American economy grew rapidly in the 1995-2000 period, with real GDP growth averaging 4.3% a year, while multi-factor productivity accelerated as well. This growth was a surprise to many economists, who were expecting much slower growth as a result of the decline in manufacturing output that had occurred since the 1970s.
The US economy’s success in the 1990s was largely due to crucial changes in IT production and investment, which resulted in growth and once-in-a-generation productivity gains. If the Administration thinks that these same kinds of productivity gains are on the horizon, it should carefully examine the sources of the economy’s strength during the 1990s in order to make the right tax policy choices.
The 21st Century
The United States is the largest economy in the world and accounts for a quarter of global GDP (at market exchange rates), one-fifth of global FDI, and more than a third of global stock market capitalisation. As a result, its growth prospects have important spillovers.
For example, an acceleration in US activity lifts growth in trading partners both directly via higher import demand and indirectly through stronger productivity spillovers embedded in trade. Similarly, the US financial markets are among the largest and most liquid in the world, and changes in monetary policy and investor sentiment have substantial global implications.
The strong economy fostered by the Biden-Harris Administration has helped reduce some long-standing inequities, including lowering the gap between the employment rate for white and black American workers to its lowest level on record. This, combined with historically low unemployment, is fuelling robust consumer spending and real wage growth. It has also made possible the historic public investments needed to foster future economic growth, resiliency, and security.
