So yesterday Obama gave a one-on-one talk on CBS news about his economic plan.

And here is the core of it: payroll savings will be reduced 2% and since there are 100 million in the workforce, this will allow a 2% increase in hiring, immediately, and will put 2 million people to work. (His economic advisors, in order to make it seem like they had made separate calculations and had come to almost the same conclusion, guess 1.9 million.)

So…. here is how it is supposed to work. A firm reduces its payroll taxes payment by 2%. Then, the hiring starts…

But lets look at the math. If a small firm has a 941 liability (which is what the business side of payroll taxes looks like: income tax withholdings paid by the employee, FICA withholdings from the employee (4.2% total wages now) which is overmatched by the employer (6.2%), as well as medicaid (1.45%) and the medicaid matching payment by the employer (1.45%) of $20000 for a year (about equal to an owner- operator and four part-time, minimum wage employees), the firm will see a $400 reduction in payroll taxes over the course of the year (somewhat less than $30 a month).

Go forth and hire
But let’s look at it from the other end. One fulltime, minimum wage employee (at $9 and hour) will cost (2080 hours x 9) $18720, assuming employee benefits like health insurance cost zero (that means they don’t get them). (BTW, all these hiring assumptions are based on the idea that there are zero costs to a business to add an employee. Hiring skilled worked to use some complex machine might require hundreds of thousands of capital spending to sustain that job. So what we are talking about here are zero-capital-cost jobs, like having employees sit in the dirt by the side of the road for 8 hours a day.)

So, to create one $18720 a year job would require a 941 liability that is 50 times that big (remember, it is just a 2% cut), or $936,000. Now such an immense 941 liability suggests a payroll of $4.68-9.36 million (depending on wether the business is capital- intensive or not), and (if the payroll equals 33% of the firm’s costs) firm revenue of $14.04-28.02 million.

To get enough money to create one fulltime minimum wage job requires a “small business” (and “small business” has been defined by SBA as a firm with $100 million in annual revenue), with revenues of $14-28 million.

Thinking about the typical new high-tech cutting-edge kind of small business that is flourishing these days, a Starbucks or a convenience store owned and operated by a Pakistani immigrant, such small post-industrial business units typically generate only about revenue of about $250,000 each per year. (They make their money in volume. Like the bank that just makes change. Volume is everything.)

So, to get that one incremental job from Obama’s 941 liability reduction, an employer has to operate a business with 56-96 employees: say 10 Starbucks. To create one fulltime minimum wage job.

The conclusion is obvious: The payroll tax reduction of 2% will create no jobs at all.

Obama and the boys didn’t fool me. But how could they have been so foolish as to fool themselves.

James “Do the Math” Sanchez

NOTE from Granny:

JOBS (Just Obama’s Bull-Shit)