The American economy is “simply” the total of all the buying, selling and producing that happens in the country every day. From a farmer selling corn to a tech engineer designing software and you buying your morning coffee, these millions of transactions make up the American economy. It's a complex system, a mixed economy that's mostly based on capitalism but with significant government involvement to regulate and guide the market. The economy is primarily driven by decisions made by private individuals and businesses, with the government playing a crucial and often significant role.

How We Gauge the Economy's Health

Because the economy is so vast, we use a few key metrics to understand its health. You've likely heard these terms on the news:

Gross Domestic Product (GDP): This is the total dollar value of all final goods and services produced within the country in a specific time period. When GDP is growing, it generally means the economy is expanding, businesses are thriving, and more jobs are being created. "Real GDP" is a more accurate measure because it's adjusted for inflation.

Unemployment Rate: This measures the percentage of the workforce that's actively looking for a job but can't find one. A low unemployment rate usually signals a healthy, growing economy where employers are hiring.

Inflation: This is the rate at which prices for goods and services are rising, which means the purchasing power of your money is falling. A small amount of inflation is considered normal for a growing economy. However, too much inflation erodes savings and makes it harder for people to afford daily necessities. The Consumer Price Index (CPI) is a common way to measure inflation by tracking the prices of a "basket" of common consumer items over time.

Who Influences the American Economy?

No single person or group "controls" the American economy. Instead, it's a dynamic system influenced by a combination of key players and market forces.

The Federal Reserve: Known as "the Fed," is the nation's central bank. It's intentionally independent of political pressure, which is a core part of its design. The Fed's main job is to set monetary policy, primarily by adjusting some interest rates a and hoping other rates will follow. For example, to cool down an "overheating" economy and curb inflation, the Fed can raise interest rates, making it more expensive for businesses and consumers to borrow money. To stimulate a slow economy, they can lower rates.

The President and Congress: These elected officials are in charge of fiscal policy, influencing the economy through government spending and taxation. Ideally, the President proposes a budget and Congress debates and passes it. To stimulate the economy, for instance, they might approve new infrastructure projects that create jobs or cut taxes to give people more spending money. However, executive action at least temporarily preempts Congress.

Consumers and Businesses: This is arguably the most powerful group. The American economy is built on consumer spending, which accounts for about two-thirds of all economic activity. Your decisions on what to buy, where to save, and what to invest in have a massive collective impact. Similarly, businesses decide whether to hire new workers or expand their operations. The confidence of consumers and businesses—their optimism about the future—is a huge driver of economic momentum.

The Economy’s Impact on American Democracy

The structure of the American economy and how it's managed has a direct and significant impact on our democracy. Understanding how allows you to make more informed decisions at the ballot box.

Empowering Your Vote: When you understand economic indicators like GDP, inflation and unemployment, you can better evaluate the performance of elected officials and their promises and vote accordingly. Are the policies of a particular president or party leading to job growth or rising prices? How important is that to you as a voter?

Fiscal vs. Monetary Policy: The split between the elected officials like the Congress and President (fiscal policy) and the politically independent Federal Reserve (monetary policy) is a key feature of our democratic system. Voters hold elected officials accountable for fiscal policy decisions—how their tax money is spent. However, the Fed's independence is meant to keep short-term political goals from destabilizing the economy with irresponsible monetary policy. This dual system is designed to provide both democratic accountability and economic stability.

Personal Economic Stakes: The health of the economy directly affects your daily life. Inflation can shrink your savings and make groceries more expensive. A high unemployment rate could make it harder to find a job. When you understand the roles of the Fed, Congress, and the President in influencing these factors, you can vote for candidates whose economic platforms align with your personal financial well-being.

Informed Citizenship: An understanding of the economy fosters a more engaged and informed citizenry. It empowers you to understand and influence tax policy, government spending and the role of the central bank. It moves conversations beyond political bombast and biased news and toward substantive discussions about what's best for the country's economic future. Ultimately, a well-informed voter base is the cornerstone of a strong and healthy democracy.