Estimating job losses due to the deepwater drilling moratorium – was the good news simply assumed?

Michael Giberson

Last week I pointed out that, “Temporary policies have temporary effects – and sometimes that is good news,” pointing to an Obama administration report that found job losses due to the temporary ban on deepwater drilling were smaller than expected.

But possibly the government reached their happy results more or less by assumption rather than by analysis.  In particular, on p. 17 of the report it discusses adjustments made to the “standard multiplier analysis” that was employed to translate reductions in spending into job losses.  The state that “We start with a multiplier that is based on empirical evidence of how changes in spending affect the entire economy,” but then make two changes to the standard analysis, one because the policy was temporary in nature and the other to account for some offsetting policy changes.

An important reason why a temporary moratorium will have a smaller effect is that firms are likely to be reluctant to lay off workers when they know the suspension is temporary. For instance, as described in the previous section, nearly all of the rig operators and contractors we spoke with stated that they have retained most of their workforce during the moratorium. One might expect that supplier firms may engage in similar behavior. Large firms that have ample access to financial capital will be better able to pay their employees during the moratorium than more financially constrained firms. Large companies with multiple clients will also be more likely to switch workers into temporary work of another sort while waiting for drilling operations to start again. At the same time, small firms with less financial capital will likely experience relatively larger employment losses. (p. 17)

Clearly, then, the administration believes the more general point made in the earlier post and by the group of economists writing in the Wall Street Journal: temporary policies have smaller effects than long lasting policies (did they included this adjustment in the administration’s analyses of “cash for clunkers”?).

We do not know with precision exactly how much smaller the economic effect might be, relative to the standard multiplier. Because of this, we use a range of multipliers, producing a range of possible job impacts. Specifically, we assume that the appropriate multiplier with which to analyze the impact of the deepwater drilling moratorium will be between 40 and 60 percent of the effect estimated by a full multiplier. (p. 18)

And so their estimate of only 8,000 to 12,000 jobs lost rather than their unadjusted estimate of near 20,000. In July the Department of Interior had estimated that 23,000 jobs would be lost due to the moratorium.  So, in effect, the difference between the Inter-Agency Task Force estimate released last week and the Department of Interior estimate put forward in July – the “good news” – is achieved primarily by assumption.

For a detailed examination of the methods used in the Inter-Agency Task Force report see the analysis of LSU professor Joseph Mason, “Critique of the Inter-Agency Economic Report….”