There are real-live North Carolinians, people in positions of authority or influence, who believe you can stimulate economic growth by paying people not to work.
They are the liberal politicians, lobbyists, and pundits who contend that extended unemployment-insurance benefits strengthen the economy by propping up consumer demand. They are the liberals who defend North Carolina’s expensive Medicaid program from necessary reforms by arguing that it circulates money through the state’s hospitals and doctors’ offices, and who advocate the expansion of Medicaid under Obamacare because it would route still more tax money through health care markets.
The idea isn’t new. It’s warmed-over Keynesianism from the 1930s. It is a classic example of the broken-window fallacy – of seeing a rock thrown through a window as an economic blessing, because it results in a flurry of window-repair expenditures, rather than as an economic curse, because it breaks a perfectly good window.
Politicians don’t lead their communities to prosperity by making it easier for people who lose jobs to remain on public assistance in perpetuity. The UI system, for example, was intended to give those laid off without warning some time and space to find another job. It was never intended to supply cash assistance for people remaining unemployed for years at a time. Some of these recipients may have personal problems needing an entirely different kind of intervention. And many other recipients, particularly in states such as North Carolina with relatively generous benefit amounts and terms, pass up opportunities to take jobs – often, admittedly at lower pay than they would like – in hopes that things will be different next year.
That’s not the picture of a healthy labor market. You want to maximize the number of people working, supporting themselves, and paying taxes into the government’s coffers. You shouldn’t be constructing incentives for extending the length of unemployment spells.
One of the most pernicious recent developments is the broadening of Social Security Disability Insurance. Created during the Eisenhower administration, SSDI was originally intended to provide supplemental assistance for U.S. workers who developed severe disabilities, making them unable to work at all, but were not yet old enough to receive retirement benefits. The program remained relatively small until 1984, when Congress rewrote the eligibility rules to make it easier for individuals to qualify. Instead of having to match up with a preapproved list of severely debilitating injuries or conditions, applicants would qualify if they had several less-severe conditions, or if their reported pain or discomfort was deemed serious enough.
“Not surprisingly,” writes John Merline in the magazine of the Federal Reserve Bank of Richmond, “more and more workers were awarded disability benefits based on ailments that relied more on patient self-reporting and that often were not easily diagnosed independently.” The chances of getting on the SSDI rolls substantially improved. About a third of all SSDI applicants get approved within the first four months. Among those who are initially rejected, more than half appeal to the courts, where judges typically reverse 75 percent of the initial rejections.
Thus we have 6.6 people on SSDI today for every 100 American workers, a disability rate twice as high as it was 20 years ago and three times what it was in 1972. Here’s a telltale sign of abuse: There is a noticeable uptick in SSDI applications after individuals use up their maximum UI benefits. Essentially, they are using disability as another form of unemployment compensation. Add Medicare coverage to the monthly SSDI benefit, which now replaced an average of 86 percent of what lower-income recipients made while working, and you can see why the system breeds unwelcome, costly dependency.
SSDI, UI, and other public assistance programs need immediate reform. Some need clear time limits. Others need firm job-search requirements and tighter eligibility requirements, so that those who can find employment will do so and the remaining caseload can be financed without more fiscal pressure on Washington and the states.
Policymakers should focus on the supply side of the economy – on the public and private investment that makes work more productive, entrepreneurs more successful, and investors more likely to take risks – rather than fiddling around with stimulus tricks and dependency schemes.
Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Plan for North Carolina’s Economic Recovery.