The latest jobs report contains good news on private sector job growth, yet some of our friends have managed to find a gray lining on the silver cloud: Paul Krugman and David Leonhardt of the New York Times, the bad cop and the good cop of liberal economic commentary as I sometimes think of them, are talking up the danger posed by government cutbacks.

The basic idea, and I do hope I’m characterizing it fairly, is that the recovery remains fragile, and that public sector layoffs will further weaken aggregate demand. In Krugman’s scenario, cutbacks will also devastate critical investments in human capital:

The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more. Quite aside from their negative long-run consequences, these cuts would lead, directly and indirectly, to the elimination of hundreds of thousands of jobs — and this could short-circuit the virtuous circle of rising incomes and improving finances.
Of course, Republicans believe, or at least pretend to believe, that the direct job-destroying effects of their proposals would be more than offset by a rise in business confidence. As I like to put it, they believe that the Confidence Fairy will make everything all right.

One has to believe a few things for this scenario to have teeth: existing social programs are deploying money so effectively in the domains of infant nutrition, disease control, clean water, and more that there is no room for finding economies, or for delivering even better results at lower cost by improving business practices. Whereas private firms are constantly engaged in a trial-and-error process to discover more cost-effective approaches to accomplishing core tasks, the public sector has achieved perfection. That’s a slightly polemical take, and there is something to the idea that the public sector is fundamentally different — burdened by rigid work rules and compensation schemes, it really is much harder for public bodies to change and improve how they do business, but of course that’s why some of us want to reform or rollback CBR, among other things.

As for the virtuous circle of rising incomes and improving finances, it’s worth thinking through what would happen if state governments across the country had to raise taxes and fees enough to pay for the existing workforce, regardless of its effectiveness. This is presumably why Krugman and others would advocate further fiscal stimulus — the money could be sent to prop up state governments. This, however, would exacerbate deficits at the federal level, which would translate into higher debt service payments. Given that debt is relatively inexpensive now, this could be a trivial problem. But it does seem to merit at least some attention, not least because it might limit our ability to respond to future crises.

David Leonhardt offered a more sober take late last month:

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. … Similarly, there is no evidence that the government is gobbling up too many workers and keeping them from the private sector.

It’s not clear to me that this is the only way to think about the issue. If public agencies are deploying talent less cost-effectively than private firms, something we have good reason to believe is true at the federal level, I’d say that we are misallocating resources. The “no evidence” statement is a bit of a red herring as the economy is a dynamic system. We do, however, have fairly solid evidence that there is a significant federal pay premium, per Biggs and Richwine, at least if we use the crude human capital metrics employed by EPI. Moreover, if cuts forestall steep tax increases, particularly increases in marginal tax rates (and implicit marginal tax rates), they might do a great deal of good.

The trick is finding the political will to end the stimulus when the time comes. That is not easy, especially for Democrats, given that stimulus programs tend to include policies they favor. But the wave of recently elected Republicans, in Congress and the states, will no doubt be happy to help summon that political will.

This paragraph strikes me as a little unmoored from historical reality. During flush periods, politicians are extremely reluctant to cut spending, for the obvious reason that disbursing revenue in the form of public jobs compensated at above-market levels is a good way to secure public approval. Suffice it to say, we’ll hear more politically appealing calls for “public investment.” “When the economy is growing, is it fair to expect teachers/social workers/subway conductors/doctors/nurses/etc. to suffer while the rich get richer?”

And there you have the permanent ratchet.

Thankfully, Economix also publishes Casey Mulligan’s posts, including this one.