Economic Growth and the Public

Economic Growth and the Public Sector The idea that the economy grows faster when the public sector dominates other sectors is one of the most basic principles of Keynesian Economics. This school of economic thought is based in the notion that private sector economics is relatively inefficient, and the distribution and regulation of money and wealth by the government, or by a centralized banking institution like the Federal Reserve, is best for the overall economy.

The private sector, which often encourages operation outside of regulatory boundaries and transparency, can be effectively manipulated to help generate economic growth only through proper government action. Private sector decisions can often be inefficient for the economy as a whole, since these decisions do not take into account the overall health of the economy and the possible benefits or detriments to other parts of the economy.

When the Federal Reserve regulates the flow of money, it can more easily influence the rate of private sector growth through the manipulation of interest rates and money supply. When the Fed increases the money supply, it often leads to an inflationary period. A deflationary period often occurs when the money supply is restricted.

These regulations in turn help to regulate the flow of money and the private sector's access to money as well as the rates at which said money is available from the banks and ultimately the Federal Reserve. The period following World War Two was a period of unprecedented economic growth and wealth creation in the United States. This period was also dominated by Keynesian economics, and ending in the 1970's, it created much of the expansion and wealth that we now see today.

Following the global economic recession in 2007 and 2008, a resurgence of Keynesian policy has found its way into public monetary policy. This means that the Federal Reserve has stimulated the economy through low interest rates coupled with government stimulus and bailouts. These monies have been inserted into the public sector to help grow jobs from the ground up. That is to say, when the stimulus bill was put into practice, much of the funding from the bill was put to work through local government projects and public sector activity.

The private sector, dominated by the idea that economies and markets should be self-regulated, was devastated by the recent global economic recession. Many economists blame the private sector's lack of regulation and transparency for the fallout of the economic meltdown. Governments are now eager to regulate and make private sector activities much more transparent to the investor and to regulators, giving both groups a better idea of how their money is being used and to what ends their investments are being handled.

The private sector tends to be against public sector funding, since it represents a basic redistribution of wealth from the ground up. Private sector economics has always held that the trickle-down economic models work best, where businesses and the very rich are given tax cuts and stimulus that is supposed to trickle down to the workers and the economy through renewed monetary business incentives.

However, this form of economics, popularly labeled "Reaganomics" since President Reagan was one of its biggest advocates, has failed utterly and has led to one of the largest global economic collapses in modern times. The growth of the economy can often be linked to the growth of the money supply, or what economists commonly refer to as M2. When M2 shrinks, the economy tends to follow, since there is less money available for investment and reinvestment in the public sector.

Accordingly, when M2 grows, the economy tends to grow with it, signaling higher inflation but lower interest rates. The availability of money, or indirectly, M2, can be a bell-weather of economic condition from the Keynesian standpoint. As more, cheaper money is pumped into the economy, more people tend to spend and consume with this cheaper money, creating economic activity and generating wealth not only in the short and medium terms, but also in the long-term.

The Keynesian economic model has led to some of the highest growth rates during the 20th century, immediately.