Private Hiring and Government Layoffs: [G]overnment employment and private sector employment have both fallen during the last two years. Over just the last year, private employment has risen — though more slowly than the population has been growing — while government employment has continued falling. These numbers make clear that a surge of government hiring can’t be the economy’s problem right now — because there has been no surge.... It’s hard to look at these numbers and believe that the laying off of more government workers will somehow cure the economy’s troubles.
Germany’s Cuts vs. America’s Stimulus: Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked.... Well, it turns out the German boom didn’t last long... he United States — where the stimulus program has been bigger and longer lasting — has recovered.... Yet many members of Congress continue to insist that budget cuts are the path to prosperity. The only question in Washington seems to be how deeply to cut federal spending this year.
If the economy were at a different point in the cycle — not emerging from a financial crisis — the coming fight over spending could actually be quite productive.... The immediate problem, however, is the fragility of the economy.... A big round of federal cuts will only make things worse. So if the opponents of deep federal cuts, starting with President Obama, are trying to decide how hard to fight, they may want to err on the side of toughness. Both logic and history make this case.
Let’s start with the logic. The austerity crowd argues that government cuts will lead to more activity by the private sector. How could that be? The main way would be if the government were using so many resources that it was driving up their price and making it harder for companies to use them. In the early 1990s, for instance, government borrowing was pushing up interest rates. When the deficit began to fall, interest rates did too. Projects that had not previously been profitable for companies suddenly began to make sense. The resulting economic boom brought in more tax revenue and further reduced the deficit. But this virtuous cycle can’t happen today. Interest rates are already very low. They’re low because the financial crisis and recession caused a huge drop in the private sector’s demand for loans. Even with all the government spending to fight the recession, overall demand for loans has remained historically low, the data shows.
Similarly, there is no evidence that the government is gobbling up too many workers and keeping them from the private sector. When John Boehner, the speaker of the House, said last week that federal payrolls had grown by 200,000 people since Mr. Obama took office, he was simply wrong.... Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape. Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.
That’s the historical lesson of postcrisis austerity movements. The history is a rich one, too, because people understandably react to a bubble’s excesses by calling for the reverse. When Franklin Roosevelt was running for president in 1932, he repeatedly called for a balanced budget. But no matter how morally satisfying austerity may be, it’s the wrong answer....
“It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively,” says Ian Shepherdson, a Britain-based economist for the research firm High Frequency Economics, “and relative to Germany, which is tightening more modestly.” Mr. Shepherdson adds that he generally opposes stimulus programs for a normal recession but that they are crucial after a crisis....
By all means, though, don’t follow the path of the Germans and the British just because it feels morally satisfying.