As Profit Shares Hit New Highs, Washington Focuses on Abuse of Disability System


Disability Icons(Image: Disability icons via Shutterstock)

The Commerce Department released data on corporate profits last week that showed the before-tax profit share in 2012 reaching its highest level since 1951. The after-tax profit share edged down by one-tenth of a percentage point from its 2011 level, but was still higher than every other year since 1930. Naturally this new information led the Very Serious People (VSP) in Washington to focus on the problems of abuses of the Social Security disability system.

If soaring profits and rising disability rates seem unrelated, then you better look closer. The most obvious reason that profit shares are soaring is that high unemployment takes away workers’ bargaining power. As a result of the collapse of the housing bubble, the economy is still down almost 9 million jobs from its trend growth path.

With the supply of labor continuing along its trend path and the demand for labor having fallen sharply, wages will be pushed downward. That is exactly what we have seen over the last five years as real wages have been flat or declining since 2007. This means that the gains from productivity growth over this period have gone overwhelmingly to corporate profits.

The downturn has also been the main factor behind a surge in disability rates. Prior to the downturn, disability rates were actually somewhat below the projections from the mid 90s. This changed radically when the economy collapsed in 2008. Workers who may have been able to hold jobs despite disabilities in the years before the downturn suddenly found themselves unemployed.

When there are three or four unemployed workers for every person looking for a job, anyone with a serious disability would be at a major disadvantage. As a result, the cost of the disability program increased by more than 30 percent relative to the size of taxable payroll over the years 2007 to 2012.

In short, the downturn caused by the collapse of the housing bubble was the key factor behind both soaring profits and rising disability rates. In terms of their relative importance to the economy, soaring profits swamp rising disability payments…



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