Governments should permit religious decorations in public locations only if we intend to destroy the American concept of freedom of religion, and here's why. Let's start with the assumption that the "governments" referred to in the title are all local, state and federal here in the U.S. Next, we need to ask some questions:
Who decides which decorations will be used?
Who pays for the decorations?
Who pays for the government's time and resources to defend against any Constitutional challenge to one religion's decorations over another?
For example: According to a survey done by the Pew Forum on Religion and Public Life (http://religions.pewforum.org/affiliations) Evangelical Protestants and traditional Catholics make up the two largest blocks of the 14 major religions in the U.S. Let's say you're an Evangelical Protestant who recently transferred to Utah for a more secure job. Although nation-wide you're in the majority, 58% of Utah's residents are Mormon. Are you expecting the decorations to be consistent with your traditions?
If you're comfortable having decorations that don't exactly reflect the traditions you've practiced and believed in, are you willing to have your tax dollars pay for them anyway?
If a group of people unaffiliated with any formal religious organization (who represent about 16% of this country's population) challenged having or paying for the decorations, and that lawsuit cost the taxpayers millions of dollars over several years to defend, do you mind sharing that cost as well?
And if the U.S. Supreme court found in favor of protecting the rights of the minority (based on the U.S. Declaration of Independence and Constitution holding certain theories of "inalienable rights" and a "bill of rights" specifically to protect minority rights against "the tyranny of the majority") would you consider the lawsuit unjustified or the decision unfair?
Let's take these suppositions a step further. Last September Islamic law (via sharia courts) was officially adopted in Britain. Although Muslims had sharia courts prior to that time, adherence to their decisions regarding issues ranging from divorce to disputes with neighbors was voluntary. Now the full force of the British government stands behind these "arbitration tribunals." Is it possible the same could happen in the U.S.? Michigan's southwestern region has the single largest Muslim population outside of the middle east. If you were living there, would you be willing to support your local government's permit of public decorations if they were Islamic? Would you consider your support benign or the first step to broader power for one religion over another?
Finally, for those who would argue our founding fathers were all Christian I would ask them to review their history. Thomas Jefferson as well as others negate that supposition. In the Declaration of Independence Jefferson's appeal was to the God of the Deist, "Nature's God," not specifically to the God of Christianity (in his letter dated Sept. 14, 1813, to Jefferson from John Adams equating "Nature's God" with "the revelation from nature".) One can interpret from these and other exchanges that there was no intention of applying freedom of religion exclusively within the Christian community.
By now perhaps you've reached the same conclusion I have. Freedom of religion means exactly what it says. If you don't want anyone imposing on yours, then you must be willing to fore-go opposing yours on anyone else. As President Andrew Shephard acknowledged in the movie The American President:
"America isn't easy. America is advanced citizenship. You gotta want it bad, 'cause it's gonna put up a fight. It's gonna say "You want free speech? Let's see you acknowledge a man whose words make your blood boil, who's standing center stage and advocating at the top of his lungs that which you would spend a lifetime opposing at the top of yours".