Truth and rhetoric in job creation

By Felix Salmon
August 19, 2010

The most important and most difficult task facing the Obama administration is making a dent in the unemployment situation. There aren’t many things that the government can do to try to boost the number of jobs in the U.S., but at the top of the list has to be attempts to boost lending to small and medium-sized businesses. These companies are a huge driver of employment growth — they account for two of every three jobs created in the past decade — but they never find it easy to get loans even in good times: all too often they have to resort to borrowing on credit cards, which can be lethally expensive.

This morning, a Treasury announcement showed one way that this can and should be done. Treasury’s CDFI Fund has awarded just over $100 million to 180 local financial institutions, including $750,000 to my own credit union. That kind of money, leveraged and lent out to small businesses, can do more for creating jobs than just about any other government program.

The CDFI initiative is small beer, however, compared to the Small Business Jobs and Credit Act, which would create a $30 billion fund to be used to encourage small banks to lend to small businesses. Combined with standard bank leverage, that could mean $300 billion in new, job-creating loans.

Where does the $30 billion come from? A significant chunk of it would come from five big oil companies:

[The Democrats' plan] would repeal Section 199 of the tax code, which currently allows these corporations to deduct six percent of their income from oil and gas production from their tax liability, effective December 31, 2010. This repeal would only apply to the five largest corporations with more than $1 billion of before-tax income.

The five major integrated oil companies, which include BP, had a combined profit of $25 billion in the first quarter of 2010. And, in the five years since enactment of the Section 199 deduction, these major integrated oil companies have posted $521 billion in profits. The profitability of these companies has been so robust that in the first quarter of 2009, when the U.S. GDP shrank by 6.4 percent and corporate profits decreased by 5.25 percent, these companies still earned more than $13 billion in profits. Furthermore, it is not clear the goal of this deduction, which is to improve America’s energy security by promoting domestic production, has been reached. When the Section 199 deduction took effect in 2005, domestic oil production averaged about 5.5 million barrels per day. Now, five years after the deduction took effect, domestic oil production has actually fallen slightly, to 5.48 million barrels per day.

Section 199 was always a barely-defensible boondoggle, designed to get around a World Trade Organization ruling saying that the U.S. couldn’t subsidize its domestic oil industry through something called the “extraterritorial income exclusion”. Its effect is to allow Big Oil to pay less in corporate taxes than most other companies: 31.85% rather than 35%. Does Big Oil really need this tax break? Of course not.

Repealing Section 199 would make sense on a purely fiscal level, even if it wasn’t linked to the Small Business Jobs and Credit Act. Repealing Section 199 in order to create new jobs just makes it more of a no-brainer.

Big Oil, of course, isn’t happy about this. And so one of its hired representatives sent me some talking points saying that repealing Section 199 would actually cost jobs. And a lot of them:

The White House’s proposed 2011 budget and measures under consideration in both the Senate and House aim to repeal this job-creating policy only for oil and gas companies. Such a move would levy an incredible burden on American businesses, workers, and households.

A 2008 study found such a repeal would trigger nationwide job loss of 637,000 workers and decrease total economic output by $185.9 billion over 10 years.

This was a study I had to see. It can be found here, or in slightly more detailed PDF form here. It’s 28 pages long, which is more than enough space, one would think, to explain exactly how the 637,000 number was derived. But instead it just teases. “Overall, the proposed changes are estimated to reduce U.S. employment by approximately 637,000 jobs over 10 years,” it says. But how was that number derived? Look at the relevant table, and it just says “author’s calculations”.

But the paper does give a broad indication of where the number came from. It starts with this:

In a 2006 working paper from the Congressional Budget Office, William C. Randolph estimated, based on an open-economy model with reasonable parameters for the U.S. economy, that roughly 70 percent of the U.S. corporate tax burden is borne by domestic workers…

Following the results from Randolph (2006), we allocate 70 percent of the burden of corporate tax changes to domestic workers in the form of lower earnings.

In other words, the paper simply assumes that for every extra dollar that a company pays in taxes, its workers will lose 70 cents in earnings. It would then follow that if the bill raises $13.57 billion over 10 years, workers would lose $9.5 billion in earnings. Which seems extremely dubious to me. But the paper doesn’t stop there. It then takes that $9.5 billion and magnifies it using something called “input-output multipliers” to come to the conclusion that total reduced household earnings, across all industries (rather than just in the oil industry directly) would be not $9.5 billion but rather $35 billion.

Finally, the report’s intrepid author, Andrew Chamberlain, decides that for every $54,881 in reduced household earnings, a job magically disappears. It’s not remotely clear where that number comes from, but using it, Chamberlain manages to conclude that the $35 billion in reduced earnings means that total employment would shrink by 637,195 jobs.

All of this is profoundly silly. The report doesn’t even make an attempt to work through the effects of higher corporate taxes on oil-industry employment: instead, it basically assumes its conclusion, by starting from the assumption that there’s a simple and direct correlation between any kind of oil-industry tax hike, on the one hand, and job losses, on the other. Is there any particular reason to believe that repealing Section 199 “would trigger nationwide job loss of 637,000 workers”? Of course not. There is good reason to believe, however, that passing the Small Business Jobs and Credit Act would help create millions of jobs.

So let’s not let Big Oil, or anybody else, try to get away with saying that passing this act would cost jobs rather than save them. It’s a ridiculous argument, which deserves to go nowhere.

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