The Good News Behind Today's Labor Report

by: Ira Stoll

If you're in the camp that wants the government to shrink while the private sector grows, today's employment report from the federal Bureau of Labor Statistics, at least the establishment survey section of it, is good news: In June the economy added 57,000 private-sector jobs and shed 39,000 government jobs. If you take the last three months together — April, May, and June — the economy added 371,000 private-sector jobs and shed 111,000 government jobs.

There's a view — call it the Keynesian or neo-Keynesian view — that this is how it is supposed to work. The government picks up some of the slack during a downturn by using its borrowing (and specifically, in the case of the federal government, deficit spending) powers to hire some people. Then, once growth resumes, things return to a more normal state, government shrinks back, and the private sector takes the lead.

There are also challenges to this view. One challenge says that if government hadn't stepped in with all that hiring earlier on in the crisis, the private sector turnaround would have started stronger and more vigorously, as some of those people who took government or government-contractor jobs would have instead started businesses or found the private sector jobs that they are now seeking. Another, related challenge is that the government hiring just creates problems a few years down the road (the "stimulus trap") as the government's deficit spending and borrowing power has limits, forcing the government into a spot in which it has to either raise taxes or lay off a lot of workers just as the recovery is getting under way, thus jeopardizing the recovery or creating the risk of a double-dip recession.

In the meantime, while Warren Buffett comes in for a lot of criticism on this site, I liked a point he made in a Bloomberg interview this morning: "I would say by far the biggest factor in corrections of the business cycle over time is what I would call the natural regenerative powers of capitalism. Capitalism works."