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.
