Unit 23 · Government and Economics

Picture a bill about school lunches. It is introduced in the House of Representatives, which has 435 voting members. Those 435 people cannot study every bill together, so the bill goes to a committee, a smaller group of members who specialize in one area, in this case the Committee on Agriculture. The committee holds hearings, calls witnesses, rewrites the bill line by line in a process called markup, and votes on whether to send it forward. Most bills never get that far. Thousands are introduced each two-year Congress, and only a few hundred become law.

The committee chair decides which bills get a hearing at all. Chairs belong to the majority party, the party with more than half the seats in that chamber, and they can simply let a bill sit until the Congress ends. That is why a bill’s fate often depends less on how many members like it than on whether one chair will schedule it. The other members of the minority party sit on the committee, ask questions and offer amendments, but they cannot force a vote.

Each chamber also has leaders. The Speaker of the House is elected by the whole House, and in practice by the majority party. The Speaker controls the floor schedule and sits second in line for the presidency, after the vice president. In the Senate, the vice president is the official presiding officer but almost never attends, so the majority leader runs the schedule. Both chambers have whips, whose job is counting votes and pressing members to stay with the party.

This structure explains a lot of what students find strange about Congress. A bill can be popular with most Americans and still die in committee. A single senator can hold up a nomination for months. A Speaker can lose the job when a few dozen members of the Speaker’s own party rebel, which happened in October 2023 for the first time in American history. Power in Congress is real, but it is spread thin and pooled in a few offices.

In August 1957 Senator Strom Thurmond of South Carolina stood up to speak against a civil rights bill and did not sit down for twenty-four hours and eighteen minutes. He read state election laws and the Declaration of Independence aloud. That is a filibuster in its classic form: using the Senate’s tradition of unlimited debate to delay or block a vote. The House has no such tradition. Its rules set strict time limits, so a House majority can pass almost anything.

The Senate can cut off debate, but only by a vote called cloture. Since 1975 cloture on most matters has required sixty of the one hundred senators. That single rule reshapes American politics. A party with fifty-two seats has a majority but cannot pass most major bills alone, because the other party can filibuster. Today a senator rarely has to talk for hours. Simply signaling that a filibuster will happen is usually enough to force the sixty-vote test, and many bills are never brought up because leaders know they would fall short.

There are exceptions, and they matter. In 2013 the Senate majority changed the rules so that most presidential nominations, such as judges and cabinet officers, need only a simple majority to end debate. In 2017 the other party extended that change to Supreme Court nominations. A special budget process called reconciliation also lets certain tax and spending bills pass with fifty-one votes, which is how several of the largest laws of recent decades were passed.

Supporters say the filibuster forces compromise and protects the minority from being steamrolled. Critics say it lets a minority block what most voters chose and that it was used for decades to stall civil rights laws. Both sides have switched positions depending on which party held the majority. That pattern is a good reminder that arguments about rules are often arguments about outcomes.

The Constitution says no money may be drawn from the Treasury except by law. That sentence gives Congress the power of the purse. In practice the process runs like this. Early in the year the president sends Congress a budget request. It is a proposal, not a law. Then twelve appropriations bills, each covering a slice of government such as defense or transportation, move through the House and Senate committees. If all twelve are signed by October 1, the new fiscal year starts smoothly.

That rarely happens. More often Congress passes a continuing resolution, a short-term bill that keeps spending at last year’s levels while the fighting continues. When even that fails, the shutdown described at the start of this chapter begins. A 2019 law now guarantees back pay to federal workers after a shutdown ends, but contractors, and people waiting for services, get nothing back.

Here is the part that surprises most students. The twelve appropriations bills cover only discretionary spending, roughly a quarter to a third of the total. The rest is mandatory spending: Social Security, Medicare, Medicaid and interest on the national debt. Those programs are written into permanent law and pay out automatically to anyone who qualifies. Congress can change them, but it does not have to vote on them each year, and changing them is politically hard. That is why budget fights rage over the small slice and rarely touch the large one.

The numbers are large. In the 2024 fiscal year the federal government spent roughly six and a half trillion dollars and took in roughly five trillion, so it borrowed the difference. The total national debt passed thirty-six trillion dollars by early 2025. Whether that is dangerous, and what to do about it, is one of the most contested questions in American politics, and the next chapter takes it up as a problem in economics.

Read Article II of the Constitution and the list is short. The president is commander in chief of the armed forces. The president makes treaties, but only if two thirds of the Senate agrees. The president appoints judges, ambassadors and top officials, but only with the Senate’s consent. The president can veto bills, and Congress can override a veto with two thirds of both houses. The president grants pardons, receives ambassadors, and must take care that the laws are faithfully executed. That is nearly all of it.

Each of those powers has real teeth. A veto is rarely overridden, so a threat to veto shapes what Congress even tries. Since the 1790s presidents have vetoed well over two thousand bills, and Congress has overridden only about one in twenty. A pardon can wipe out a federal conviction with no appeal, a power that has been used for mercy, for healing after wars, and sometimes for friends and allies. Appointments last: a federal judge serves for life, so a president’s choices sit on the bench for decades after the president leaves.

The larger source of power is informal. The president is the only official elected by the whole country and commands attention no member of Congress can match. Presidents use that platform to set the agenda, pressure legislators, and speak directly to voters. Presidents also sit atop an executive branch of about two million civilian employees and a military of more than a million. Deciding how those people enforce the law, which cases to prosecute, and which rules to write is power the Constitution never spelled out but every president uses.

The limits are real, too. A president cannot pass a law, raise a tax, or spend money Congress has not appropriated. A president can be impeached by the House and removed by two thirds of the Senate, though no president has been removed. Three have been impeached and acquitted: Andrew Johnson in 1868, Bill Clinton in 1998, and Donald Trump in 2019 and again in 2021. Richard Nixon resigned in 1974 before the House could vote.

An executive order is a written instruction from the president to the executive branch about how to carry out the law. It is not a law. It cannot create a crime or spend unappropriated money, and the next president can cancel it with a signature. Within those limits, orders have changed the country. Franklin Roosevelt’s Executive Order 9066 in 1942 sent Japanese Americans to internment camps. Harry Truman’s Order 9981 in 1948 ordered the armed forces desegregated. Recent presidents have used orders on immigration, the environment and the federal workforce, and each new administration reverses many of the last one’s.

Courts do check orders. In 1952, during the Korean War, Truman ordered the government to seize the nation’s steel mills to stop a strike. The Supreme Court ruled against him in Youngstown Sheet and Tube v. Sawyer. Justice Robert Jackson’s opinion in that case set the test judges still use: a president is strongest acting with Congress’s approval, weaker acting where Congress is silent, and weakest acting against Congress’s clear wishes. When an order is challenged, that is the first question a court asks.

War is the sharpest version of the problem. The Constitution gives Congress the power to declare war and gives the president command of the forces. Congress has formally declared war only eleven times, the last in 1942. Yet American troops fought in Korea, Vietnam, the Persian Gulf, Afghanistan and Iraq, and in dozens of smaller actions, without a declaration. Presidents argue that the commander in chief power lets them respond to threats; Congress has often funded the fighting while complaining that it was not asked.

In 1973, over President Nixon’s veto, Congress passed the War Powers Resolution. It requires the president to notify Congress within forty-eight hours of sending troops into hostilities and to withdraw them within sixty days unless Congress authorizes the action. Every president since has called it unconstitutional, and none has fully tested it in court. After the attacks of September 11, 2001, Congress passed an authorization for the use of military force that presidents of both parties have relied on for more than twenty years, in countries the original vote never named.

When Congress passes a law saying that the air must be safe to breathe, it does not say how many parts per million of a chemical count as safe. That is left to an agency, in this case the Environmental Protection Agency. The bureaucracy is the name for the whole system of departments and agencies that carry out laws: fifteen cabinet departments such as Defense and Education, plus dozens of independent agencies such as NASA, the Federal Reserve and the Social Security Administration. It employs about two million civilians, most of them far from Washington, from meat inspectors in Illinois to air traffic controllers at O’Hare.

Agencies make regulations, detailed rules that have the force of law. A 1946 law sets the process. The agency publishes a proposed rule in the Federal Register, takes public comments for weeks or months, answers them, and issues a final rule. Anyone, including a student, can file a comment. Rules can then be challenged in court, and judges ask whether the agency stayed within the law Congress wrote. In 2024 the Supreme Court ended a forty-year practice under which judges deferred to an agency’s reading of an unclear law, a decision that shifts power from agencies toward courts.

Who works in the bureaucracy matters as much as what it does. In 1881 President James Garfield was shot by a man angry that he had not been given a government job. Two years later Congress passed the Pendleton Act, which began hiring civil servants by exam and merit instead of party loyalty. Today the great majority of federal jobs are protected civil service positions, while a few thousand top posts are political appointments that change with each president.

The debates are old and live. Critics say agencies write too many rules, that unelected experts should not have so much power, and that presidents should be able to fire more officials. Defenders say modern problems, from drug safety to bank failures, need expertise that Congress does not have and that a professional workforce protects the public from being run by whoever won the last election. How much of the executive branch a president should personally control is one of the sharpest arguments in government today.

The Constitution never says that courts may strike down laws. That power was claimed by the Supreme Court itself in 1803. In the last days of his presidency, John Adams appointed dozens of judges. Some of the signed commissions were never delivered. When Thomas Jefferson took office, his secretary of state, James Madison, refused to deliver them. William Marbury sued, asking the Supreme Court to order Madison to hand his over.

Chief Justice John Marshall faced a trap. If he ordered Madison to act, Jefferson would ignore him and the Court would look powerless. If he did nothing, the Court would look powerless anyway. Marshall found a third way. He ruled that Marbury deserved the commission, but that the law giving the Court power to order it was itself unconstitutional, so the Court could not help him. Jefferson won the case and lost the principle. The Court had just declared that it decides what the Constitution means. That power is called judicial review.

Judicial review runs in both directions. The Court has used it to strike down segregation laws, campaign finance limits, gun regulations, state abortion laws and federal abortion protections, parts of the Voting Rights Act, and presidential actions from Truman’s steel seizure to a 2020 attempt to end a program for young immigrants. Every one of those decisions was celebrated by some Americans and condemned by others. The Court’s power does not depend on being popular; it depends on the other branches choosing to obey.

That obedience is a habit, not a guarantee. President Andrew Jackson is said to have shrugged off a ruling protecting the Cherokee in 1832. Southern states resisted school desegregation for years after 1954, and it took federal troops in Little Rock in 1957 to enforce it. Congress can also respond by passing a new law or, rarely, by amending the Constitution, as it did to overturn a 1857 ruling that Black Americans could not be citizens. The system holds because, most of the time, losing sides accept the loss and fight again through elections.

Suppose a student in Chicago is suspended for a T-shirt and believes her free speech rights were violated. Her case does not start at the Supreme Court. It starts in a trial court, either an Illinois circuit court or, for a federal claim, the United States District Court for the Northern District of Illinois, which sits in a tall building on Dearborn Street. There, a judge or jury hears witnesses and decides the facts. The loser can appeal to the Court of Appeals for the Seventh Circuit, also in Chicago, which covers Illinois, Indiana and Wisconsin. Three judges review whether the law was applied correctly. They do not rehear witnesses.

Only after that can the loser ask the Supreme Court to take the case by filing a petition for certiorari, a Latin word for an order to send up the record. The Court receives roughly seven thousand petitions a year and agrees to hear only about sixty. Under the rule of four, it takes four of the nine justices to grant a petition. The justices look for cases where lower courts disagree, where a federal law’s meaning is unsettled, or where a major constitutional question is squarely presented. Being wrongly decided below is not, by itself, enough.

When a case is heard, each side files a written brief and gets about thirty minutes of oral argument. Outside groups file friend-of-the-court briefs. The justices meet privately, vote, and one justice in the majority writes the opinion explaining the ruling. Justices who disagree write dissents, which have no legal force but sometimes become the law decades later when the Court changes its mind. Decisions come out by the end of June, and a majority opinion binds every court in the country.

The structure has a purpose. Trial courts find facts; appeals courts fix legal errors; the Supreme Court settles questions that need one national answer. The nine justices, serving for life, decide a tiny fraction of American law. The federal courts of appeals decide tens of thousands of cases each year, and for almost all of them the Seventh Circuit, or its counterpart elsewhere, is the last word.

The Eighth Amendment bans cruel and unusual punishments. Cruel by whose standard, and when? In 1791 public whipping was common. Does the amendment ban whipping today because people now find it cruel, or allow it because the founders did? That single question shows the great divide in how judges interpret the Constitution. Every justice claims to follow the text; they disagree about what the text means.

One camp is called originalism. Its judges ask what the words meant to the public at the time they were adopted, and they try to hold to that meaning until the people change it by amendment. Their argument is about democracy: unelected judges should not update the Constitution themselves, because that is the job of the voters and Congress. A close cousin, textualism, applies the same idea to ordinary laws: read the words as written, not what the legislators might have wished.

The other camp is often called living constitutionalism. Its judges say the framers deliberately wrote in broad terms, such as liberty and equal protection, so that each generation could apply them to conditions the founders could not imagine, from wiretaps to the internet. Their argument is also about democracy: a document frozen in 1787 or 1868 would have excluded most Americans, and amendments are so hard to pass that the Constitution would fail if it could not grow. Each side accuses the other of reading its own politics into the text.

Neither method is pure. Originalist judges have struck down long-standing laws, and living-constitution judges have honored old precedents. What students should notice is that interpretation is an argument with rules, made in public, in writing, with reasons that can be answered. Reading a majority opinion next to its dissent is one of the best ways to see two serious people reasoning from the same words to opposite conclusions.

The state government in Springfield mirrors the federal one. The General Assembly has a House of 118 members and a Senate of 59. The governor signs or vetoes bills and can also use an amendatory veto, sending a bill back with suggested changes, which the federal president cannot do. Illinois voters elect six statewide officers: governor, lieutenant governor, attorney general, secretary of state, comptroller and treasurer. The Illinois Supreme Court has seven justices elected by district for ten-year terms, another difference from the life-tenured federal bench.

The state’s current constitution was adopted in 1970, replacing one from 1870. It created home rule, which lets larger cities and counties pass their own ordinances and taxes without waiting for the legislature’s permission. Chicago is a home rule city. Its City Council has fifty members, one from each ward, who pass the city budget and zoning changes, and a mayor who runs city departments. Cook County, the state’s largest, has its own board, sheriff, and court system, the biggest unified court system in the country.

Illinois has more units of local government than any other state, nearly seven thousand: counties, townships, cities and villages, school districts, park districts, library districts, mosquito abatement districts and more. Each can levy taxes. That is why an Illinois property tax bill lists a dozen lines. School districts take the largest share, which is also why school funding varies so much between a wealthy suburb and a poor one, a problem the state has tried to soften with a 2017 funding formula that sends more state money to districts with less local wealth.

For a student, local government is the government that matters most. The school board sets the calendar and the code of conduct. The city decides whether a street gets a bike lane. The county runs the jail and the election. These bodies meet in public, post their agendas, and take comments from anyone who signs up. A teenager who cannot yet vote can still speak at a school board meeting, and boards do change their minds when people show up.

Campaigns cost money, and the rules on money have swung back and forth. In 1976 the Supreme Court ruled in Buckley v. Valeo that Congress may limit how much a person gives to a candidate, because large gifts risk corruption, but may not limit how much a candidate or group spends, because spending is a form of speech. In 2010, in Citizens United v. FEC, the Court held that corporations and unions may spend unlimited sums on their own political ads. Groups called super PACs now raise unlimited money as long as they do not coordinate with a candidate. An individual may give a candidate only a few thousand dollars per election, but can give a super PAC millions.

District lines are the second rule. Every ten years, after the census, states redraw the maps for the U.S. House and their own legislatures. In most states, including Illinois, the legislature draws them, and the party in power draws lines that help it win. This is gerrymandering, named for Governor Elbridge Gerry of Massachusetts, whose 1812 map included a district shaped like a salamander. The tools are packing, cramming the other party’s voters into a few districts, and cracking, splitting them thinly across many. In 2019 the Supreme Court ruled that federal courts may not police partisan gerrymanders, leaving the question to states. Illinois’s 2021 map was drawn by Democrats and criticized as one of the most lopsided in the country; maps drawn by Republicans in other states drew the same charge.

The third rule chooses the president. Voters do not elect the president directly. Each state has as many electors as it has members of Congress, and the District of Columbia has three, for a total of 538. A candidate needs 270. Illinois has nineteen electors, and, like all but two states, gives all of them to whoever wins the state’s popular vote. Because of that winner-take-all rule, a candidate can win the presidency while losing the national popular vote, which happened in 2000 and 2016. Campaigns focus on a handful of closely divided states and mostly skip the rest, including Illinois.

Defenders of the Electoral College say it forces candidates to build support across regions and protects smaller states. Critics say it makes most voters’ ballots irrelevant to the outcome and can override the majority. Changing it takes a constitutional amendment, which has been proposed hundreds of times and never passed. Some states have instead joined a compact promising their electors to the national popular vote winner, which would take effect only if states with 270 electors sign on. Illinois joined in 2008.

A video appears on your phone: a politician says a new law will cost every Illinois family two thousand dollars a year. It has a million views. Before you share it, treat it the way a historian treats a source. Ask who made it, when, and why. A campaign, a news outlet, a think tank funded by one industry and a random account are four very different sources, and the first job is to find out which one you are looking at. Do not spend long studying the page itself. Open new tabs and read laterally, checking what other reliable sources say about the source and the claim.

Then examine the evidence. Where does the two-thousand-dollar figure come from? Is it an average, and if so, of whom? Does it cover one year or ten? A single scary number without a source is a red flag. So is a chart with no labels, a quote with no date, or a statistic that cannot be found anywhere but in the video. Watch for cherry-picking, choosing the one study or the one year that supports a point while leaving out the rest, and for confusing correlation with cause: two things rising together does not mean one caused the other.

Now hold the claim up against the strongest version of the other side, not the weakest. If you believe the law is bad, ask what its best defender would say and whether you can answer it. This habit, sometimes called steelmanning, is the opposite of what most online argument rewards, and it is the core of civil discourse: disagreeing about ideas while treating the person as someone who might be partly right. Legislators who never do this write worse laws. Citizens who never do this get fooled by their own side as often as by the other.

None of this means every claim is equally uncertain. Some things are established, some are contested, and some are false. The point of checking is to sort them. A student who can say where a number came from, who paid for the study, what the other side argues, and what is still unknown has done more than most adults do before voting. That is not cynicism. It is the work of self-government, done one claim at a time.

A high school junior in Aurora, Illinois, has one Saturday. She can take an eight-hour shift at a grocery store, study for Monday’s chemistry test, or spend the day with friends. Illinois raised its minimum wage to fifteen dollars an hour in 2025, so the shift is worth about one hundred twenty dollars before taxes. She cannot do all three. She has twenty-four hours, like everyone, and more wants than hours. That gap between what people want and what exists to satisfy those wants is scarcity, and it is the starting point of economics, the study of how people choose under scarcity.

Every choice has a cost, and economists measure it in a particular way. The opportunity cost of a choice is the value of the next-best option you gave up, not everything you gave up. If the student works the shift, her opportunity cost is not the study time and the friends together. It is whichever of the two she would have chosen instead. If the chemistry grade matters more to her, the cost of working is a lower test score. The money is real, but so is the cost, and a good decision compares the two honestly.

Nations face the same arithmetic on a larger scale. Illinois spends its state budget on schools, roads, prisons, universities, health care and pensions for retired teachers and state workers. Every dollar that goes to one cannot go to another. When lawmakers in Springfield argue about the budget, they are arguing about opportunity cost, whether they use the phrase or not. A country that builds more warships builds fewer hospitals. A city that adds police officers with a fixed budget has fewer dollars for street repair. This is a trade-off, giving up some of one thing to get more of another.

Thinking in opportunity cost changes decisions. A free concert is not free if it costs you an evening you would have spent earning money. A college degree costs tuition, but it also costs four years of full-time wages you did not earn, and that second cost is often larger. Sunk costs, money already spent that cannot be recovered, should not count at all, though people find that hard to accept. Someone who paid for a bad movie ticket often stays to the end to get their money’s worth, when the ticket is gone either way and the only real choice is whether to spend the next hour in the theater.

In August 2017 Cook County began charging a tax of one cent per ounce on sweetened drinks. A two-liter bottle of soda cost about sixty-eight cents more. County officials said the tax would raise money and cut sugar. Within weeks shoppers in the south suburbs were driving across the line into Will County and Indiana to buy groceries, and stores near the county border reported sales falling. By December the county board had repealed the tax. The lesson was not that the goal was foolish. It was that people respond to an incentive, any reward or penalty that changes the payoff of a choice, and they respond faster than planners expect.

The Scottish economist Adam Smith described this in 1776 in The Wealth of Nations. The butcher, the brewer and the baker do not feed you out of kindness, he wrote, but out of self-interest, attention to their own gain. That sounds cold, but Smith’s point was hopeful. In a market, the way to serve yourself is to make something other people want at a price they will pay. Self-interest, channeled through prices, gets bread onto shelves in a city of millions without anyone being ordered to bake. A rising price is a signal and an incentive at once. When egg prices tripled in 2023, farmers who had spare barns raced to add hens, because each hen was suddenly worth more.

Incentives do not have to be money. Grades, praise, jail time, a reserved parking space and a teacher’s disappointed look all change behavior. Governments use incentives on purpose: a tax on cigarettes to discourage smoking, a tax credit to encourage buying an electric car, a fine for littering. Businesses do too. A store’s loyalty card is an incentive to come back. A restaurant’s happy hour is an incentive to show up at four o’clock instead of seven, when the tables would be full anyway.

The hard part is the unintended consequence, a result the rule-maker did not plan for. The soda tax was meant to cut sugar, and instead it cut shopping in Cook County. A bonus paid to call-center workers for handling more calls can push them to hang up on customers faster. A rule that requires expensive safety gear on small fishing boats can push owners to keep older, less safe boats longer. Before judging a new policy, an economist asks a simple question: who gains, who pays, and what will each of them do about it? The answers are often not what the policy’s authors hoped.

Think of a price as a meeting point. Demand describes how much of something buyers want at each possible price. As a rule, the higher the price, the less people buy. At two dollars a dozen, a family buys eggs for breakfast and baking. At six dollars, they skip the cake. Supply describes how much sellers offer at each price. As a rule, the higher the price, the more sellers offer, because a high price makes it worth adding hens, hiring workers or shipping from farther away. Somewhere the two meet: a price at which the amount buyers want equals the amount sellers bring. Economists call it equilibrium, the balance point.

The egg story shows what happens when the balance breaks. Bird flu destroyed tens of millions of hens in 2022, so at the old price of about a dollar and a half, farms could not supply what buyers wanted. That is a shortage: more wanted than offered. Stores raised prices, some limited how many cartons a customer could buy, and shelves emptied anyway. The rising price did two jobs at once. It pushed some buyers to give up eggs for a while, and it told every farmer in the country that more hens would pay. By late 2023 supply had recovered and the price fell back toward two dollars. Nobody ordered it. The price did the work.

Demand can shift too. When a study, a diet trend or a holiday makes people want more of something, the demand curve moves and the price rises even though nothing happened to supply. When a substitute becomes cheap, demand for the original falls. When incomes rise, demand for restaurant meals and cars rises. Supply shifts when costs change: a drought in Illinois cuts the corn crop, a new machine makes solar panels cheaper, a tariff raises the price of imported steel. Watching which curve moved tells you why the price moved, and that is most of what a price analyst does.

Sometimes governments set prices directly. A price ceiling holds a price below equilibrium, as rent control does in some cities. Renters who have apartments pay less, but landlords build fewer and repair less, and people looking for apartments face a shortage. A price floor holds a price above equilibrium, as a minimum wage does for labor. Workers who keep their jobs earn more, and employers may hire fewer or cut hours. How large those effects are is one of the most argued questions in economics, and the honest answer depends on how far the floor sits above the market wage. Both policies trade one group’s gain for another’s loss, and both work against the pull of the meeting point.

An Illinois corn farmer cannot set the price of corn. There are hundreds of thousands of corn farmers in the country, and a bushel from Champaign County is the same as a bushel from Iowa. The price is set every day in trading tied to the Chicago Board of Trade, a market founded on LaSalle Street in 1848, and the farmer takes it or leaves it. Economists call this end of the range competition in its purest form: many sellers, an identical product, and no single seller large enough to move the price. The farmer’s only levers are cost and yield.

At the other end is a monopoly, a market with one seller. The electric utility that serves most of northern Illinois is close to it. Running two sets of power lines down every street would be wasteful, so the state lets one company do it and then regulates what it can charge. Without regulation, a monopoly raises price above the competitive level and sells less, because customers have nowhere else to go. Between the two ends sit most real markets. An oligopoly is a market with a few large sellers, such as the three national wireless carriers or the handful of big airlines. Each watches the others, and prices can drift up without any secret agreement.

The most common structure is many sellers with products that differ slightly: restaurants, hair salons, clothing brands, phone apps. Each has a small amount of pricing power because its product is a little different, but a big price increase sends customers to the shop next door. Economists call this monopolistic competition, which sounds contradictory until you see a block of Chicago taquerias each charging slightly different prices for a slightly different taco. Market structure, the number of sellers and how alike their products are, predicts a lot about price and quality.

Competition matters because it is the discipline that makes Adam Smith’s self-interest serve buyers. A grocery on a block with three others has to keep prices low and shelves stocked or lose customers. A grocery that is the only one for twenty miles does not. That is why economists worry when large firms merge. A merger can lower costs and prices, or it can reduce the number of competitors until the survivors gain the power to raise them. Deciding which is happening is the work of antitrust law, the subject of a later lesson, and the answer is rarely obvious in advance.

In the 1800s Chicago’s slaughterhouses and factories dumped waste into the Chicago River, which carried it into Lake Michigan, the source of the city’s drinking water. Cholera and typhoid followed. No stockyard owner paid a cent for the sickness downstream, so none had a reason to stop. In 1900 the city finished a canal that reversed the river’s flow, sending the waste toward the Mississippi instead, and the lake began to recover. The river is the classic case of an externality, a cost or benefit that lands on someone outside the transaction. The meatpacker and the customer both gained; the family drinking lake water paid.

An externality means the price is wrong. Pollution makes a product cheaper than its true cost, so buyers get too much of it. The same logic runs the other way. A homeowner who plants trees cools the whole block, and a person who gets a flu shot protects the people around them, but neither is paid for the benefit to others, so people do less of both than a neighborhood would want. Economists say a market with externalities has a market failure: it reaches an equilibrium, but not the one that reflects the real costs and benefits to everyone.

A second failure involves goods no one can be excluded from using. A lighthouse guides every ship that passes, whether or not the captain paid. National defense protects a person who never paid a dollar of tax. Economists call these public goods: once they exist, everyone gets them, and one person’s use does not use them up. Since everyone can wait for someone else to pay, a person who enjoys the good without paying is a free rider, and the good tends not to get built by private sellers. That is why lighthouses, armies, flood levees and basic research are mostly paid for by taxes.

A third failure is uneven information. The seller of a used car knows whether it was in a flood; the buyer usually does not. A patient cannot judge a surgeon’s skill in advance. A worker cannot see inside a factory’s ventilation before taking the job. When one side knows much more than the other, the side with less information either overpays, walks away, or demands protection. Laws that require vehicle histories, medical licenses and ingredient labels exist because the market alone does not fix the gap. Together, externalities, public goods, information gaps and monopoly power are the four standard reasons economists give for letting government into a market at all.

In 1906 a novel about Chicago’s meatpacking plants, The Jungle by Upton Sinclair, described rotten meat, rats and workers losing fingers in the machines. Public outrage that year pushed Congress to pass the first federal meat inspection law and the Pure Food and Drug Act. Those laws are regulation: rules set by government that limit what businesses may do. They answered an information failure. A shopper could not see inside a packing plant, so the government sent inspectors to look instead. Inspectors, labels and licenses are the common tools for a market where buyers cannot judge what they are buying.

A different tool targets market power. The Sherman Antitrust Act of 1890 made it illegal to restrain trade or to monopolize a market. Under it, the Supreme Court broke up Standard Oil in 1911 and the government split the telephone company AT&T into pieces in 1984. Antitrust law does not punish a company for being big or successful. It punishes agreements among competitors to fix prices, and mergers or tactics that leave customers with no real choice. Today’s antitrust fights over technology companies turn on the same question the Court faced in 1911: does this firm win by being better, or by blocking rivals?

Every rule has a cost, and honest policy weighs it. A safety rule for cars saves lives and raises the price of cars. A rule requiring a license to braid hair protects customers from harm, or it protects existing salons from competition, and Illinois has argued about exactly that. Cost-benefit analysis is the attempt to add up a rule’s gains and losses in dollars before adopting it, and federal agencies are required to do it for major rules. The numbers are contested, since no one agrees on the dollar value of a life or a clean river, but the exercise forces both sides to show their evidence.

The deepest danger is regulatory capture, when the regulated industry comes to control the agency that regulates it. Regulators need expertise, and the experts often come from the industry and return to it. Industries hire lobbyists who write draft rules and fund the campaigns of the lawmakers who oversee the agency. The result can be rules that keep newcomers out while looking like consumer protection. None of this means rules are bad. It means a rule should be judged by what it does, not what it is named, and that judgment needs data: prices before and after, injuries before and after, and who ended up paying.

In April 2020, as the pandemic closed restaurants, factories and stores, the U.S. unemployment rate jumped to about fifteen percent, the highest since the Great Depression. That single figure told the whole country how bad the shock was. The rate counts people who do not have a job, are able to work and have looked for one in the past four weeks, as a share of everyone working or looking. A student who is not looking is not counted. Neither is a parent who chooses to stay home. The rate is measured by a monthly survey of about sixty thousand households, and it moved the stock market, Congress and the Federal Reserve within days.

The broadest measure of an economy is GDP, gross domestic product: the total value of all final goods and services produced inside a country in a year. In 2024 U.S. GDP was roughly twenty-nine trillion dollars, about eighty-five thousand dollars per person. GDP counts the cars, the haircuts, the software and the surgeries. It does not count work done at home without pay, and it does not subtract pollution or crime. A country with high GDP per person is usually healthier and longer-lived than one with low GDP per person, but GDP is a measure of output, not of happiness, fairness or the future.

Inflation is a general rise in prices, which means a fall in what a dollar buys. The government measures it with the Consumer Price Index, which tracks the cost of a fixed basket of what typical households buy: rent, food, gasoline, clothing, medical care and much else. In June 2022 the index was about nine percent higher than a year earlier, the fastest rise since 1981. A worker whose pay rose four percent that year took a real pay cut. Retirees on fixed incomes and people holding cash lost buying power. Borrowers gained, because they repaid loans in cheaper dollars. Inflation is not just a number; it quietly moves money between groups.

These three numbers pull against one another, which is why steering an economy is hard. Push output and hiring hard enough and prices tend to rise. Squeeze inflation out by slowing spending and unemployment tends to rise. Chicago has its own version of each: the city’s job numbers, the local price index that the government publishes for the metro area, and the boarded storefronts that appear when both go wrong. Learning to read the three together, and to ask what each leaves out, is the first job of anyone who wants to argue about economic policy.

No economy grows in a straight line. It rises for years, peaks, falls for months or longer, hits bottom and rises again. This pattern is the business cycle. The falling part is a recession, usually defined as a serious decline in output and employment across the whole economy lasting more than a few months. The housing crash of 2008 produced a long, deep one; the pandemic of 2020 produced the sharpest and shortest on record. In a recession, spending falls, so businesses cut workers, so spending falls further. The cycle feeds itself, which is why governments try to break it.

Congress has two levers: what it spends and what it taxes. Using them to steer the economy is fiscal policy. In a recession, government can spend more or cut taxes to put money in people’s hands and replace the spending that vanished. In March 2020 Congress passed a relief law of roughly two trillion dollars that sent checks to most households, expanded unemployment benefits and lent money to businesses to keep workers on payroll. Some of that spending stays automatic: unemployment insurance and food assistance rise on their own when people lose jobs, which is why economists call them automatic stabilizers.

The lever has a cost. When the government spends more than it collects in taxes in a year, the gap is the deficit, and it borrows the difference by selling Treasury bonds. Every year’s deficit adds to the national debt, the total the government owes. By 2025 the debt had passed thirty-six trillion dollars, roughly equal to a full year of the country’s GDP, a level last seen just after the Second World War. Interest payments alone took about one dollar in eight of federal spending, more than the country spent on its military. Those dollars buy nothing new; they pay for the past.

Whether that is a crisis is argued honestly on both sides. One side notes that the United States borrows in its own currency, that investors still line up to lend to it at reasonable rates, and that cutting spending in a recession has often made recessions worse. The other side notes that interest now crowds out everything else in the budget, that an aging population will push spending on Social Security and health programs higher, and that a country’s credit is not unlimited. The evidence supports one clear point: the two things Congress has to do to shrink the debt, raise taxes or cut spending that people count on, are both unpopular, which is why the debt keeps growing under both parties.

In 1907 a panic swept through New York banks. Depositors lined up to pull out their money, healthy banks failed because they could not get cash fast enough, and a single private banker, J. P. Morgan, gathered rich men in his library to organize a rescue. Congress decided the country should not depend on one man again. In 1913 it created the Federal Reserve, the nation’s central bank, with a board in Washington and twelve regional banks, one of them on LaSalle Street in Chicago. Its first job was to be a lender of last resort: a bank that lends to banks when everyone else is afraid to.

Today the Fed’s main tool is the interest rate, the price of borrowing money. A committee of Fed officials meets about eight times a year and sets a target for the rate banks charge each other overnight. Every other rate follows it: mortgages, car loans, credit cards, business loans. Raising the rate makes borrowing dearer, so households and firms spend less, which cools prices. Cutting it does the opposite. This is monetary policy. In 2020 the Fed cut its rate to nearly zero to keep the pandemic economy alive. Between March 2022 and July 2023 it raised the rate from near zero to over five percent, the fastest climb in forty years, to fight the inflation that followed.

Congress gave the Fed two goals, often called the dual mandate: maximum employment and stable prices. The two conflict at the worst moments. Raising rates to cut inflation also slows hiring; in 1982 the Fed’s war on inflation pushed unemployment above ten percent. Cutting rates to create jobs risks inflation. Fed officials describe their work as trying to slow a car on ice, since a rate change takes a year or more to show its full effect and they cannot see the road ahead. The 2022 to 2023 case turned out better than most feared: inflation fell sharply and unemployment stayed near four percent, though economists still argue how much credit the Fed deserves.

The Fed is deliberately insulated from politics. Its governors serve fourteen-year terms, its chair is appointed by the president and confirmed by the Senate for four years, and it funds itself rather than depending on Congress for a budget. Supporters say this is essential, because a president facing an election will always want lower rates now and inflation later. Critics from both parties say an unelected body with that much power over jobs and mortgages should answer more directly to voters. Presidents have complained about the Fed publicly and privately for a century. The design, so far, has held.

Illinois is one of the two largest soybean-growing states in the country, and for years its biggest customer was China. A farmer near Decatur sells beans that ride a barge down the Illinois River to the Gulf and cross the Pacific in a bulk ship. In return, the container ships that dock on the West Coast carry phones, clothes and machine parts to Chicago’s rail yards. An export is something sold to another country; an import is something bought from one. The United States imports more than it exports, and the gap is the trade deficit.

Why trade at all? Because a country, like a person, gains by doing what it does relatively best and buying the rest. Illinois soil and machinery grow soybeans cheaper than almost anywhere. Factories in Vietnam sew shirts cheaper than any American factory could. When each side specializes and trades, both end up with more beans and more shirts than if each tried to make everything. Economists call this comparative advantage, and it is one of the few ideas nearly all of them accept. The catch is that gains are spread thin across millions of shoppers while the losses land hard on particular towns.

Those losses are real. When cheaper imports arrived, steel mills in Gary and Granite City, auto-parts plants in Rockford and furniture makers across the Midwest shed jobs, and many of the workers never found pay as good again. A tariff is a tax on imports, and its purpose is to raise the price of the foreign product so the domestic one can compete. In 2018 the federal government put a twenty-five percent tariff on imported steel, and a mill in Granite City, Illinois, restarted furnaces it had shut down. Steelworkers there saw the tariff as rescue.

Then China answered with tariffs of its own on American soybeans. Illinois farmers lost their best market almost overnight, and the federal government paid farmers tens of billions of dollars to cover the losses. Meanwhile every American factory that uses steel, from carmakers to can makers, paid more for it. That is the standard pattern: a tariff helps the protected industry, hurts the industries that buy its product, invites retaliation against exporters, and raises prices for shoppers. Whether it is worth it depends on how much you value a steel town’s jobs against everyone else’s costs. That is a political judgment, and economics can only tell you the size of each side.

A first paycheck is an economics lesson in miniature. A student working twenty hours a week at fifteen dollars an hour in Illinois earns about three hundred dollars, and after taxes are withheld the deposit is smaller. Then the wants line up: a phone bill, gas, food with friends, a pair of shoes, a savings goal. A budget is a written plan for where the money goes before it goes there. One common rule divides take-home pay into roughly half for needs, thirty percent for wants and twenty percent for saving and paying down debt. The exact numbers matter less than the act of deciding in advance, because money that is not assigned tends to leave.

Saving works because of interest, the price of using money over time. When you save, a bank pays you interest; when you borrow, you pay it. The power comes from compounding. Compound interest means each year’s interest is added to the balance, so the next year’s interest is figured on a larger amount. One thousand dollars growing at seven percent a year becomes about two thousand in ten years, four thousand in twenty, and nearly fifteen thousand in forty. The early years look slow and the late years look like magic, which is why the most valuable thing a young saver has is time.

Compounding runs the other way on debt. A credit card charges interest by the year, stated as the APR, the annual percentage rate, and card rates often run above twenty percent. A one-thousand-dollar balance paid down only by the minimum each month can take years to clear and cost hundreds in interest, while the same thousand dollars saved would have been earning for you. A card is a tool: paid in full every month, it costs nothing and builds a record. Carried, it is one of the most expensive loans an ordinary person can take. The difference is entirely in the habit.

That record becomes a credit score, a number, usually between three hundred and eight hundred fifty, that lenders use to predict whether you will repay. It rises when you pay on time and keep balances low relative to your limits, and it falls when you miss payments or max out cards. The score follows you to the landlord, the car dealer, sometimes the employer, and it sets the interest rate you will pay for a car or a house. Two people buying the same car can pay thousands of dollars apart over the loan because of it. Illinois requires every high school student to take a consumer education course for exactly this reason: the rules are simple, the cost of not knowing them is not.

Saving keeps money safe; investing puts it to work. A stock is a share of ownership in a company, and a bond is a loan to a company or government that pays interest. Stocks have grown faster over any long stretch of American history, but they swing: the market fell by about half in 2008 and 2009 before recovering. Bonds pay less and swing less. The core rule is diversification: spreading money across many investments so that no single failure ruins you. An index fund does this automatically by holding small pieces of hundreds of companies at very low cost, and for most people it beats trying to pick winners. A retirement account such as a 401(k) at work or an IRA adds tax advantages, and an employer match is free money.

Insurance solves a different problem. A car crash, a house fire or a serious illness could cost more than most families could ever save. Insurance pools that risk. Thousands of people each pay a premium, a regular payment, into a pool, and the pool pays the few who suffer a loss. The deductible is the amount you pay yourself before the insurance pays. A higher deductible means a lower premium, a sensible trade for someone with savings and a bad one for someone with none. Illinois requires drivers to carry liability insurance, and a hospital bill without health insurance is the most common way an American family falls into debt it cannot repay.

College is where all of these ideas meet. It is an investment: workers with a bachelor’s degree earn, on average, well over half again as much as workers with only a high school diploma, and are far less likely to be unemployed. It also has a price. In 2024 a year of tuition and fees at a public four-year university averaged about eleven thousand dollars for in-state students and a private one about forty-three thousand, before housing and food. The sticker price is not what most students pay. The net price, what a family actually pays after grants and scholarships, is often far lower, and the only way to learn it is to apply.

The application that unlocks aid is the FAFSA, the free federal form every college uses to award grants, work-study and federal loans. The Pell Grant, which does not have to be repaid, pays lower-income students up to about seven thousand four hundred dollars a year. Illinois adds its own grant for state residents. The typical borrower who finishes a bachelor’s degree owes roughly thirty thousand dollars, a burden that is manageable for a nurse or engineer and heavy for someone who left without a degree. That is the real risk: debt without the diploma. Two years at an Illinois community college and a transfer, a degree with a clear path to work, and a budget that starts before the first tuition bill are the diversification, insurance and compounding of this chapter, applied to your own life.