This is a good read on the effect of Public and Private sector proportion and growth.
Full article here:
The Impact of Government Spending on Economic Growth
March 15, 2005
The Impact of Government Spending on Economic Growth
by Daniel J. Mitchell, Ph.D.
Backgrounder #1831
For more information, see the supplemental appendix to this paper.
Policymakers are divided as to whether government expansion helps or hinders economic growth. Advo*cates of bigger government argue that government programs provide valuable “public goods” such as education and infrastructure. They also claim that increases in government spending can bolster eco*nomic growth by putting money into people’s pockets.
Proponents of smaller government have the oppo*site view. They explain that government is too big and that higher spending undermines economic growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently. They also warn that an expanding public sector complicates efforts to implement pro-growth policies—such as fundamen*tal tax reform and personal retirement accounts— because critics can use the existence of budget defi*cits as a reason to oppose policies that would strengthen the economy.
Which side is right?
This paper evaluates the impact of government spending on economic performance. It discusses the theoretical arguments, reviews the international evidence, highlights the latest academic research, cites examples of countries that have significantly reduced government spending as a share of national economic output, and analyzes the economic con*sequences of those reforms.1 The online supple*ment to this paper contains a comprehensive list of research and key findings.
This paper concludes that a large and growing government is not con*ducive to better economic perfor*mance. Indeed, reducing the size of government would lead to higher incomes and improve America’s com*petitiveness. There are also philosoph*ical reasons to support smaller government, but this paper does not address that aspect of the debate. Instead, it reports on—and relies upon—economic theory and empiri*cal