Profit Shares Hit New Highs, Washington Focuses on Disability

04/02/2013 04:40 am ET | Updated Jun 01, 2013

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.

The difference between the after-tax profit share in 2012 and the average share in the Reagan years is 4.7 percentage points of the income generated in the corporate sector or roughly $330 billion last year. If we applied this to a 10-year budget window, as is the fashion in Washington, this growth in the profit share would be equivalent to a $5 trillion tax on the nation's workers.

By comparison, the whole disability program cost $142 billion last year. If we pull out the recession-related portion the cost would have been just over $105 billion. If we assume that 20 percent of the remaining cost was due to people gaming the system (surely a high estimate since more than half of all applications are turned down), then we are looking at $21 billion a year in wrongful claims, less than one-fifteenth of the redistribution from wages to profits. And this is what has the VSP in Washington very excited.

The VSP may argue that we can do something to crack down on abuses in disability, but there is not much we can do about corporate profits. Certainly we can have stricter eligibility rules, which will prevent some of the undeserving types from getting their $1,100 monthly checks. The cost of this greater scrutiny will be denying benefits to more genuinely disabled people or delaying checks further, possibly until after the applicant dies from their disability, as is already often the case.

Of course it's not true that we can't do anything about the surge in corporate profits. For example, we could break up the too-big-to-fail banks ending a government subsidy that Bloomberg estimated at $83 billion a year, four times the cost of workers freeloading on disability. We could drastically cut back or eliminate patent monopolies for prescription drugs, eating into the $250 billion in patent rents that the drug companies collect each year from patients and taxpayers.

We could also take steps to increase workers' bargaining power by moving the economy closer to full employment. Another big dose of stimulus devoted to education, infrastructure and retrofitting buildings to reduce energy use would go a long way. So would a sharp drop in the value of the dollar, which would bring the trade deficit closer to balance. The rise in net exports would employ millions of additional workers in manufacturing increasing the bargaining power of large segments of the workforce.

We could also follow Germany's route of aggressively pushing work-sharing arrangements. As a result of Germany's reduction in work hours, its unemployment rate has fallen 2.5 percentage points since the downturn to 5.4 percent even though its GDP growth has been no better than U.S. growth.

We could be talking about these or other measures to bring corporate profits back down to more normal levels. But the VSP don't want the public discussing such issues. They want us to be arguing about how to keep sick, injured, and unemployed workers from collecting $1,100 a month in disability insurance. You can count on seeing many more pieces on disability insurance in the news in coming months.