JPM’s Mike Feroli is one of the best economists on Wall Street. In a new Economic Research Note he finds the number of Americans claiming disability is rising rapidly:
As of January over 8.5 million individuals were receiving federal disability payments (an additional 2 million spouses and children of disabled workers also received disability payments). Since the onset of the recession and the subsequent slow recovery, this figure has accelerated and grown faster than the overall size of the potential labor force—currently 5.3% of the population aged 25-64 is on federal disability, up from 4.5% when the recession began. The cost to the federal budget of these programs has escalated along with the number of claimants, and now runs around $200 billion per year—more than the budgets of the Departments of Commerce, Energy, Homeland Security, Interior, Justice, and State combined.
This spike in people claiming disability is keeping the unemployment rate artificially low (while I cheered the recent unemployment data, Feroli’s note bolsters Jimmy P’s claim that the latest unemployment figures are a little “phony”).
What’s most striking about the increase in disability is how out of character it is given the changing nature of the economy. Feroli notes:
The long-run increase in disability benefit payments, as well as their acceleration during times of weak labor markets, is puzzling along two dimensions. First, improving aggregate health outcomes and an increasingly service based economy would suggest a trending down in disability insurance rolls. Second, health outcomes are countercyclical, improving as the economy worsens (fewer workplace injuries, etc.) while disability recipiency appears to increase when the labor market is weak.
One thing that might be driving this spike? While Charles Murray’s latest book looks at the decline of industriousness among certain segments of American society, here’s another factor—network effects:
Income support programs may be susceptible to network effects—benefit growth may beget more benefit growth, as increased program usage generates learning among neighbors and others within a social network about the benefits that are available. Judging the magnitude of these effects is difficult, but one thing that can be said with more certainty is that the recent data show little letdown in the growth of the number receiving federal disability benefits.