Friday, January 4, 2019

The Partial Government Shutdown of 2018-2019 Gets Real Next Week

No furloughed fed has missed a paycheck yet. That will start to happen on January eleventh, the first payday of 2019 (see this handy federal payroll calendar). Until then, all the huffing and puffing between Trump and the House leadership is just so much stage-setting for the deal they will eventually make.

Yet, people are worried. While browsing an article with advice for furloughed federal employees I came across a terrific 2015 study from the National Bureau of Economic Research about how furloughed employees coped with a loss of cash income during the last government shutdown, the one in 2013. Some of the figures on liquidity of the average employee astonished me.

From the paper's abstract:
Using comprehensive account records, this paper examines how individuals respond to a temporary drop in income following the 2013 U.S. Federal Government shutdown. Affected employees saw their income decline by 40% on average, which was recovered within two weeks. Despite having no effect on lifetime earnings, spending dropped sharply, implying a naïve estimate of the marginal propensity to spend of 0.57. This estimate overstates how consumption responded. To smooth consumption, individuals adjusted by delaying recurring payments such as mortgages and credit card balances. Those with the least liquidity struggled most to smooth spending and were left holding more debt months after the shutdown.

Here are the figures I found astonishing:
Prior to the shutdown, the median worker in the data held an average liquid assets balance sufficient to cover just eight days of average spending.

Moreover, liquid assets exhibit systematic changes over the pay-cycle. Just before payday, the median level of liquid assets is only five days of average spending. Indeed, a substantial fraction of this population barely lives paycheck-to-paycheck. On the day before their paycheck arrives, the bottom third of the liquid assets distribution has, on average, a combined checking and savings account balance of zero.

Think of that, the median worker in the data held an average liquid assets balance sufficient to cover just eight days of average spending. Do that many federal employees live paycheck to paycheck?

And the bottom line best advice for feds critically short of income:
This paper provides direct evidence on the importance of deferring debt payments, especially mortgages, as an instrument for consumption smoothing. Mortgages function for many as a primary line of credit. By deferring a mortgage payment, they can continue to consume housing, while waiting for an income loss to be recovered. For changing the timing of mortgage payments within the month due, there is no cost. As discussed above, that is the pattern for the bulk of deferred mortgage payments. Moreover, the cost of paying one month late can also be low. Many mortgages allow a grace period after the official due date, in which not even late charges are incurred, or charge a fee that is 4-6 percent of the late payment. Being late by a month adds only modestly to the total mortgage when interest rates are low, and mortgage service companies cannot report a late payment to credit agencies until it is at least 30 days overdue. Even if there are penalties or costs, late payment of a mortgage is a source of credit that is available without the burden of applying for credit.

The shutdown might be resolved before it comes to the point of deferring mortgage payments. Should the House agree to pass the El Chapo Act, for instance, that might let both sides call it a win. Or Trump might even bypass Congress and sell bonds, which is a current practice of the federal government to raise money for other purposes, or tax the billions of dollars in cash transfers to Mexico and Central America, something that could be done using regulatory authority.

So it might not come to that. But if it does, the home you own is your best store of value.


Anonymous said...

Real good post TSB: Those facts are amazing! Same thing going on in my sleepy little town. Nice young working couples with 2 kids spending every penny that comes in and then some. But watch out for Ocasio-Cortez. Out of 200 who voted for Nancy Pelosi as Speaker, she was the only one booed by Republicans. She tweeted: "Don't hate me cause you ain't me." and proposed a 70% tax bracket for millionaires. lol gwb (The Young Turks who promoted her before anyone else.)

TSB said...

Oh, AOC is certainly the new thing in Congress, at least for now. She might not wear all that well over time, but her Trump-like shamelessness about the nonsense she says will make her impervious to criticism.

TSB said...

I'm not being particularly harsh to AOC. As a legislator now, she can just bloviate away and never have to actually deliver any goods. An executive branch politician has to perform on some tangible matter, from waging wars to fixing potholes, whereas a member of Congress doesn't have to deliver anything but hot air.

Anonymous said...

TSB: As an AOC lover I think it's time to look toward the National Conventions. She's too young to run for President but the tv cameras can't take their eyes off her. I say she's the front runner for keynote speaker with her ability to mobilize millennials, kick Scalice's Cane, and get in the face of the fading Neo-liberals. If that works out well it could AOC for President in 2024!! Bring on the music! gwb

TSB said...

Between Alexandria Occasional-Cortex and Tulsi Gabbard, the 2020 election season is off to a fantastic start. And I didn't think anything could be better than Trump in 2016.

Anonymous said...

Lol..I had forgotten how unusual her background is. Went to a private Catholic school, then home-schooled by her Hindu mom, then 2 tours in the Iraq war as an Army Reserve logistics specialist...prodding all the globalists to do something to help Vets. (Wounded Vets Fly Free). First Hindu
Congresswoman. Dad was Mayor of Honolulu...was made Assistant Chairman of Democratic National Committee until she found out she would not be allowed to criticize any Democrats.. so resigned. Now working as the only X-Gen Progressive Leader with the new Millenial Progressive Leaders and Bernie, the only Ancient Progressive Leader left. Also aligned with Eleanor Holmes Norton (also ancient). gwb